Multifamily W Minnesota

Are micro apartments the new trend?

Are micro apartments the new trend,ph01
The 590 Park apartments being developed by Kraus-Anderson are an example of the micro-apartment trend.

For years, renters have judged the value of their new rental home by balancing the price per square foot, its location and the quality of the construction. The larger the unit, the more the perceived value, as historically speaking renters have demanded more space for belongings, expanding families and entertaining needs.

However, renters’ expectations are undoubtedly changing. Over the past decade, shows on HGVT feature units where subway tile backsplashes and granite countertops are the norm. Student housing facilities across college campuses feature fully-equipped fitness centers and shared laundry facilities are no longer. This trend has formed a generation of renters who expect more, but who cannot afford $2,000 or more in monthly rent.

The solution? Ultra-efficient, high-end, more affordable apartments known as micro-apartments.

Developers in the Twin Cities have begun to meet this pent-up demand by building smaller micro units, both in number of bedrooms as well as in square footage. Instead of building large eat-in kitchens, entertaining space is reserved for common areas. Amenities like fitness centers and theatre rooms allow opportunities for renters to stretch their legs and host larger groups of friends. As a result, many micro-apartments have room only for what’s most important to young renters – a couch, television and bed.

In a competitive real estate market, building micro units comes with distinct benefits for developers, mainly the ability to maximize the number of units they can fit in a project, all the while keeping the cost of construction on a per-unit basis reasonable.

Banks are shifting their underwriting models to account for these new types of micro projects. Much like renters, banks have had to switch their mindset from underwriting rents on a per square foot basis and instead have had to compare rents on a “chunk,” or gross, basis. While $3 per square foot rents would have been unimaginable in the Twin Cities just a short time ago, they are now becoming a reality in submarkets like Prospect Park.

Location is critical in evaluating a project’s projected success. Bridgewater Bank is currently in the process of financing the construction of 590 Park Apartments, which Kraus Anderson is developing in the Capitol Heights neighborhood of St. Paul. Renters at 590 Park will benefit from proximity to employment drivers such as the State Capitol, Regions Hospital and downtown St. Paul. Not to mention the project is within two blocks of the Green Line. The allure for renters will be the ability to rent a high-quality Class-A apartment close to transit and jobs for $1,250 a month.

Micro units are not a fit for everyone. However, as land becomes scarcer in the Twin Cities and expectations among renters remain high, this is an asset class that will likely gain steam similar to larger markets like New York and San Francisco.

Patrick Craig is vice president of commercial lending with Bridgewater Bank in Bloomington, Minnesota.