New York’s Runaway Luxury Trend:  What Micro Unit Research Says about the Housing Market

New York’s Runaway Luxury Trend: What Micro Unit Research Says about the Housing Market

We are pleased to introduce Rebecca Disbrow, project planner at CivicMoxie, who is making her CivicMoxie blog debut today.  We are lucky to have her working with us; her sharp research skills, joie de vivre, and analytical mind are indispensable, particularly in real estate advising and development.  Welcome Rebecca!

Recently I wrote an op-ed that was published in Crain’s New YorkThe Wrong Market for Micro Units.  The article explains my research and findings which, simply summarized, are that micro units are not economically a strong product in Manhattan.  This is a bit of a shock as smaller units are usually valued more highly than large units in expensive city centers; these small units are more profitable for developers and more efficient and affordable for residents.  Usually people will pay more per square foot to live in the smallest size unit that can reasonably accommodate their household.  Once the necessities are met, additional space is not worth the added cost.  Thus, developers will fit as many units into one building as they can, maximizing profit and density by minimizing apartment size.

This economic logic is the common assumption backing the recent national push for micro units:  our cities are expensive, many people including singles and young adults cannot afford housing, and large apartments built for the 1960’s nuclear family don’t meet modern city housing needs anymore.  Micro units are at the center of Mayor Bloomberg’s plan to decrease the minimum apartment size from 400 square feet to 250 or 300.  The steps Mayor Bloomberg in New York, Mayor Menino in Boston, and developer Patrick Kennedy in San Francisco (among many, many others) have taken to legalize smaller apartments and spark innovation in housing design are laudable and exciting.  But here is the catch: no one questioned that first assumption– that the micro unit is an attractive product to developers in the areas city leaders are envisioning they will be built.

If I had to guess, I would say that in Boston and San Francisco that assumption will hold.  But in New York, in Manhattan specifically, I was skeptical – and my research supported that doubt.  I analyzed over 70,000 data points to find that in Manhattan, price per square foot revenues INCREASE as apartment size increases.  Every extra closet, extra bedroom, extra square foot in the living room makes the whole apartment worth more on a per square foot basis, not less!  This reflects the super-wealthy class that has moved into Manhattan, purchasing second homes and investment properties and skewing the market upwards.  Large, luxurious, newly built condos are what the market is demanding and, when analyzed over time, the price premium large units have commanded over small ones has increased for every one of the past ten years.

Economically, Manhattan is not the place developers are naturally going to want to build micro units.  I worry that if existing zoning is changed to allow these new, smaller units, some outer-borough neighborhoods – where lower prices will reduce the quality of design and increase the likely occupancy – is where micro units will land.  Some of these neighborhoods could be great locations for the new units.  From an economic perspective, Prospect Heights is one I believe could work, offering affordable-by-design housing to young folks priced out of Manhattan and who can’t even afford a ($1,600+) studio in Brooklyn.  But in other neighborhoods, I worry developers might abuse the regulatory changes to take advantage of poorer residents or immigrant families who are looking to get the lowest possible price point on a unit, ignoring safety and occupancy regulations.

I worry more, though, about what the trend says about our city. The globally wealthy covet an address on the island, believing it to be a safe investment and a point of pride.  When housing is purchased not as a place to call home or as a typical investment to rent out for income but as a trophy property or second (or fourth) home, fewer and fewer people actually reside in an increasingly built up city.  The New York of storybooks and movies is not one of half full skyscrapers.  I worry that “average” people will not be able to reside in Manhattan, or perhaps soon, even the other boroughs of the city, and that the character of those places will not be the bustling, eclectic, harried place so many millions of people have come to know and love.

This is one of the intersections of economics and placemaking.  These economic trends predict a future decrease in street vibrancy that we should be aware of and poised to address.  Real people (not investment dollars) want to live in busy, diverse areas with strong gathering places — and they will pay to do so.  Increased property values in New Urbanist communities point to the monetary value people place on community and living in or near a real and vibrant “place.” Diversity is also a strong driver of value, particularly in cities.  Mixing small and large units, as touted in many of the plans for micro units, brings a range of ages and incomes to a neighborhood.

Developers who are aware of this, who can add housing product outside of the large and luxurious market, and who can incorporate great gathering spaces as well as small and large units into development plans will be in a win-win situation.

Photo courtesy of Apartment Therapy/ flickr, used under Creative Commons license