Apartments are getting smaller, yet renters are paying more. This troubling trend could become a growing problem for younger and lower-income individuals, especially those who wish to save up for a down payment on a house.
According to a recent report from CNBC, the average size of newly built apartments in 2018 is 941 square feet, which is 5 percent smaller than it was a decade ago. Studio apartments saw an even more significant decrease; they are now 10 percent smaller than they were 10 years ago. However, the cost of rent has increased 28 percent over the same time period. This information comes from RENTCafe, a nationwide apartment search website.
“Changes in renters’ in renters living habits are literally redrawing floor plans,” wrote Nadia Balint, senior marketing writer for RENTCafe. “The largest share of apartment dwellers, millennials, prefer living in locations close to restaurants and entertainment, rather than having a large kitchen or living room to cook or entertain at home.”
It wasn’t clear where RENTCafe got this data, but another likely explanation for smaller units could have to do more with the potential for higher revenue for builders, rather than floorpan preferences for millennials. As the demand for rental housing rises, developers could be seeing the potential to make more money by volume by constructing more units in each building.
For renters, it’s likely more a question of affordability. Smaller units, although they are higher priced than they were a decade ago, remain cheaper than larger units available in today’s market. So are builders really making units smaller because they think that’s what millennials want? Or are they making units smaller because they know that’s all millennials can afford?
Micro-units are becoming more popular, following the tiny house trend, as the millennial generation is more environmentally-conscious and more embracing of minimalistic lifestyles. Additionally, apartment complexes seem to be trying to compensate for smaller units by increasing their common space, in which renters can work or entertain.
“Across our 72,000-unit portfolio we have seen an increasing demand for relatively smaller units,” said Toby Bozzuto, CEO of apartment developer the Bozzuto Group in the CNBC article. “We attribute this to a lifestyle shift that is based on our residents’ desire to be less encumbered by things. Our residents value flexibility and convenience, and appreciate a thoughtful approach to unit design.”
While this is all well and good, the affordability issue remains a problem. Despite an apartment construction boom over the last several years, demand remains high and rent gains haven’t slowed. What’s more troubling, rents are rising fastest for those who can least afford it. Rents for low-end properties, defined as those with rents less than 75 percent of the regional median, are rising at a faster rate than luxury rentals, according to data from CoreLogic.
“We’ve seen a slight uptick in rent prices over the past few months as strong employment growth continues,” said Molly Boesel, principal economist at CoreLogic. “The strength stems from the low-to-middle price tier, which has seen monthly average growth of 3.2 percent since January 2018.”
Apartment sizes varied by region and by individual market. According to CNBC, Seattle had the smallest apartments of all large cities, with an average size of 711 square feet. Manhattan and Chicago had the second- and third-smallest apartments. Tallahassee, Florida had the largest units on average at 1,038 square feet. Marietta, Georgia and Columbia, South Carolina had the second- and third-largest units.
Although all floorpan types are shrinking, new studio apartments are decreasing in size the most, at an average of merely 514 square feet this year. Perhaps not surprisingly, studio apartments represent a shrinking share of the rental market, at just 5 percent of all units nationwide. One-bedroom apartments are most prominent at 43 percent of the market, but their size has reduced 4 percent over the last 10 years. Two-bedroom apartments have also shrunk, though not significantly, at just 0.5 percent smaller on average.
For renters who dream of one day owing their own home, this trend could present a challenge. As rents continue to soar and wages remain stagnant throughout the nation, it could be difficult for many lower- to moderate-income renters to save money for a down payment. Fortunately there are some mortgage options for lower- and moderate-income home buyers, many of which require low or zero money down; however, potential borrowers could also face the challenge of rising interest rates and home prices. Still, it’s not all bad news. Homeownership remains a serious goal for many Americans, and while the current real estate climate tends to favor sellers, that’s not to say buyers are doomed. The market could balance out soon, as more inventory appears.
The post Apartment Size Shrinks While Rent Soars appeared first on Mid America Mortgage, Inc..
