Jul 012011

July 2011
BuilderNews Magazine
Feature: Construction Market Analysis


Lost Illusions

How the Real Estate Jitters have Reshaped Rental Housing


In early 2011, New York City interior designer Darren Henault, owner of Darren Henault Interiors, was working on two different development projects in the city. The first, for the developer Vanguard Investors, is the re-imagining of a six-story apartment building in the East Village. The second, for Cogswell Realty LLC, is the new construction of a seven-story apartment cooperative in Harlem. One of the key differences between these two projects, besides their locations, is that the East Village project, once completed, will remain rental apartments, while the Harlem apartments will be sold at market rates. What makes these projects remarkably similar, however,  is just how much the current real estate market and a shift in urban demographics have influenced Henault’s designs.

Henault is a New York City designer. He also works in LA. Urbanity is his canvas. And for the fifteen years he has worked as a designer, space has always been at a premium. It is the consequence of having more than eight million people crammed into a city the size of Austin, Texas — population 790,000. Designing small is what Henault does. “I think New York designers and architects have become very adept at using every square inch of space that is available to them,” Henault says, “because of what the cost per square foot is.” This has made New York city apartments the epitome of small, and yet, says Henault, he’s recently noticed a change in the market. New York city apartments, it seems, are getting even smaller. And New York is not alone. Across the country, as foreclosures increase and home sales decline, forcing a rise in the demand for rental apartments, the average size of those apartments appears to be shrinking.

Tom Shoup is the eastern director for Wood Partners, one of the largest builders of multifamily housing in the US, and Shoup points to one leading factor now currently driving Wood Partners’ development goals. That factor is the anticipated arrival of echo-boomer generation, or more precisely, the estimated 80 million baby-boomer children, born between 1980 and the mid-90s, who will over the coming years graduate from grad schools, colleges and high schools and be looking for a place to live. The last time the real estate industry saw a boom of this magnitude was in the late 60s and early 70s with the coming of age of the baby boomers. And it is this boom that we just recently seen the end of.

But, as Shoup notes, not even that tells the whole story. If this surge in home-buying population were viewed through the rosy lenses of just five years ago, we may well have seen a continuation of the sprawling suburbs and an increase in the demand for the once-coveted single-family home. But, as it goes, it is not five years ago, and a lot has changed since then. The housing market has taken a wallop. New home starts dropped to a 70-year low in 2009, with just 580,000 new homes built nationwide. The average price of a US home fell by nearly a third since 2006. The echo-boomers, like many of us, are skittish. The home was once the gold nugget of a family’s net worth, but for many that confidence is gone. As of May 2011, Zillow Inc., a Seattle-based real estate listing company, reported that 27 percent of US homeowners owed more on their home than the home was worth. Add to this the nation’s pockets of depression-level unemployment and the immobility of homeownership, and Shoup predicts than many one-time or potential homebuyers will simply opt out of the market and choose to rent instead.

Architect Mark Humphreys, CEO of Humphreys & Partners Architects and a recognized authority on multifamily housing, shares Shoup analysis of the market. Humphrey’s estimates that if the percentage of homeownership in the US dropped by just 10 percent over the coming years, this would add over 7.4 million new renters to the market. He also estimates that because of the economic downturn there is a significant pent up demand from renters who have stayed out of the market and will enter again as the economy improves. To this, Humphries then adds an estimated nine million echo boomers entering the market a year, together with the potential for their parents — the 74 million baby boomers— to downsize from the family home and into apartments, condos, and senior housing, all of which he expects will drive up demand for rentals.

And still there is more. Humphries, whose firm is headquartered in Dallas but works throughout the country, has also noticed an important shift in social attitudes, which he predicts will have an equally important impact on US housing. Humphries calls this shift in attitudes the “Manhattanization of the United States,” and he sees it as characterized by an increased demand, especially among the younger demographic, for a more urban lifestyle. The reason for this shift, according to Humphries, is due to a number of factors, the most important of which are the spike in fuel prices and increasing environmental concerns, along with the fading panache of a suburban life. This too, says Humphries, is driving up the demand for apartments, while helping to drive down the average size. “What we are seeing,” he says, “is that younger people coming out of college want to be in the cool hip areas and are willing to take much smaller apartments to get their rents down to an affordable range.”

 Building to this New Market

When Henault’s clients, Vanguard Investors, first considered the redesign of their East Village apartments, the New York City rental market was still fairly strong, demand was high, and the expectation of renters was still in throes of the housing bubble. People wanted big and the bigger the better.  The original plans for the building laid-out a single, 1500-square-foot, three-bedroom apartment per floor.  “Not grand,” Henault says, “but a larger and more luxurious apartment that would command much larger rent.” The upsides to this, he notes, are that the units would fetch higher rents and be easier to managed and maintain with fewer tenants. But, before the project went into construction, much of that had changed. As Henault’s notes, the reality of the East Village market couldn’t be ignored. “This was the East Village and the real estate market had been tanking for years,” Henault says. This led Henault and the developers to reconsider their plans and to realize, as Henault explains, that “there will be, in the coming years, more people who can afford smaller, lower priced housing than there will be who can afford luxurious apartments.”

The developers decided  to scrap their original plans, and they chose instead to divide each floor into three smaller units: a 425-square-foot studio, a 500-square-foot one bedroom and, through an impressive feat of space efficiency, a remarkable 550-square-foot two bedroom.  “This is not low income housing,” Henault says. “We still use high-end finishes.” Rather, the apartments are being tailored to young, urban professionals — the echo boomers, with money and incomes, but not so much as to afford a large apartment.  The approach that Henault and developers took was to maintain a certain level of upscale appeal, while reducing the space for more affordability. Henault achieved this by centering the design around the main living space and minimizing the reduction of space where it mattered most—the kitchen and living room—while stealing space from the places he felt he could. “People want the main living area to be the bulk of the square footage,” he explains, “so they don’t feel like they are on top of one another when they are in one room. But when everyone goes to their bedroom at night, a 10ft by 14ft room is fine.”

On the national level, Shoup, whose company generally builds in smaller cities and suburbs, contends that if there is a statistical shrinking in the average size of apartments, it s not that the sizes are actually getting smaller, but that developers are building more studios and one bedrooms, versus larger, two and three bedrooms apartments. This, Shoup contends, is what is forcing down the overall averages. “Urban markets,” he says, “appeal to the 24 to 32-year-old range who don’t have a lot of possessions yet and who work better with these smaller types of units.”

Humphries, who often works in large urban centers, is not so sure. He has watched apartments shrink in size over the last 20 years. It makes sense, he says, real estate is expensive. “Twenty years ago, it was at about a 1000-square-foot average, then about 15 years ago, it was 900-square-foot average. Five years ago it was about an 850 average, and today we’re seeing it into dip into a 750 average. And I think it is going to get smaller,” Humphries says.

Whatever the reason for the shrinking, for Henault, Humphries and Shoup, the challenge is the same: How do you make these smaller, often tiny apartments, both cost effective and appealing to this new and trending market. Shoup says that the most obvious and important approach is the use of the open floor plan. Wood Partners eliminates kitchen wall in smaller apartment, replaces it with kitchen islands and half-walls, and other scraps altogether the hard definitions of living and dining areas. This, Shoup notes, not only increases the perception of space in an apartment, it also provides a greater degree of functional flexibility, which then opens the appeal of the apartment to a broader range of potential renters. “So,” he says, “rather than having really hard, designated areas, for example a dining room, we build a space that could be a dining room. It could be a den. It could be a home office.”

In The Woodlands, Texas, a multifamily development project just north of Houston, Humphreys & Partners Architects is working with Cambridge Development Group and USAA Real Estate and demonstrating that luxury and size are not, by any means, mutually exclusive.  The project, Boardwalk at Town Center, once complete, will contain 450 premium apartments, some of which will be highly space efficient, yet elegantly designed, 340-square-foot studios.

“Designing 340-square-foot units causes you to be very innovative,” Humphreys says, adding that the only truly fixed space in any apartment is the bathroom. In one studio design, Humphreys & Partners includes an electric fireplace (“for effect”) built in to the back, lower portion of a closet. The fireplace is open to the front and side, which creates a greater feeling of depth and space in the unit, as one looks from the living area, through the fireplace and into the far corner of the kitchen. In another, slightly larger unit, a 558-square-foot, one-bedroom apartment, Humphries & Partners uses an open half wall between the bedroom and the living area and a closed soffit above the kitchen island, both of which help divide the rooms without constricting the space.

“Just because it’s small doesn’t mean you are not doing something attractive,” Humphreys says, “These people are smart, and they want to live in something cool.”

Shoup agrees. The bottom line, he says is that “the things (echo boomers) are interested in is not the things their parents were interested in. What they really want is an interesting home in an interesting community that they can live in and that says something about them and their lifestyle.

“I think,” he adds, “that a lot of people have stopped measuring their success by the ownership of a home, and that certainly plays well into the apartment market… And it is why apartments are now the place to be.”