Downtown News: Think Small - Are 'Micro-Units' in Downtown's Future?

Downtown News: Think Small - Are 'Micro-Units' in Downtown's Future?

Published Monday, April 30, 2018
by Nicholas Slayton

The Downtown Los Angeles residential scene has exploded, more than tripling to 65,000 inhabitants since 1999. The population is slated to double again in a decade, according to the Downtown Center Business Improvement District.

All those people will need somewhere to live, and with demand heavy, dozens of projects are in construction or in the planning pipeline. Nearly all of those are multi-family developments, with condominiums or apartments ranging from studios to three-bedroom units.

Yet with costs also rising, a new option is being considered: going small.

The Central City Association, a business and lobbying group in Downtown, recently published a report exploring the feasibility of "micro-units" in Downtown. They have appeared in other cities, notably Seattle, and locals are exploring whether it is time to augment the standard 600- to 1,500-square-foot residences with a collection of units ranging from just 140-350 square feet.

"We have great market-rate apartments and condos, so we were trying to see what was missing," Jessica Lall, president and CEO of the CCA, said in an interview. "The micro-unit idea came to be one of the best opportunities to expand housing in Downtown."

The report, "Micro-Units in DTLA: New Housing Choices for LA's Fastest Growing Neighborhood," found that while most large open lots in Downtown have been snapped up by developers who plan to build big projects, a number of smaller parcels remain. At roughly 8,000-15,000 square feet, they could be ideal for micro-unit buildings, said Lall.

The big question is if developers see the benefit of the investment. Downtown is full of mega-projects, such as South Park's Metropolis and Oceanwide Plaza. Lall noted that developers might not be able to charge seven figures for condominiums, as is happening in some new projects, but there is still plenty of profit potential with small apartments.

"If the right policies are in place, we can actually build more units and developers can make more on the price per square foot, but since units are smaller, it's still a savings for that renter," Lall said. "It's sort of a win-win for renters and developers."

Serving the 'Missing Middle'
While still just a minority of projects, market-rate micro-units have been developed in places such as Miami, New York City and Seattle. In the latter city more than 5,000 micro-units were built between 2012-2015. Those apartments generally rented for $800-$1,300 a month, even as housing demand increased amid a boom in the tech industry, according to the CCA.

Micro-units initially arrived in Seattle in 2009, when social services providers looking to house groups of people realized they could get around existing density requirements by building particularly small residences, said David Neiman, a partner at Neiman Taber Architects, a Seattle firm that has worked on a number of micro-unit projects. Two years later the city altered some density and parking mandates, opening the door for more of the small apartments. A new wave of development began.

"At that point, micro-units changed from something that was a workaround of the code to something that was explicitly allowed," Neiman said.

The CCA report details two kinds of micro-units: One is known as "Congregate Housing," where residents of apartments as small as 140 square feet often share communal kitchens. Then there are Small Efficiency Dwelling Units, which often measure 250-350 square feet and have their own kitchen and bathroom. The CCA report says these could be a fit in Downtown, as people who rent micro-units are motivated by a mix of the location of the building, the proximity of the unit to their job and price.

The CCA estimates Downtown micro-unit rents would go for $1,200-$1,600. Some developers also believe they could be a fit in the market.

"I think micro-units are a fantastic idea," said Simon Kaplan, development director with the firm City Century, which in Downtown is working on the Olympia and Vara residential projects.

Although City Century does not have any micro-unit buildings in the pipeline, Kaplan added, "I think with the rising rents, it's a really good thing for renters to have the optionality for the lower-dollar option, while still being in a new building."

A few local developers have waded into the field. In the 438-unit One Santa Fe project in the Arts District, some studios measure 343 square feet. In 2017, the Mikado Hotel in Little Tokyo reopened with 41 micro-units.

A larger project could be on the horizon. Developer Simon Baron is partnering with the micro-unit and co-living company Ollie to convert the residential units in the Hotel Cecil into very small apartments (the other half of the building would continue to operate as a hotel).

Ollie CEO Chris Bledsoe said he sees micro-units and co-living as a way to tap into what he calls Downtown's "missing middle," people who earn $40,000-$80,000 a year. He noted that this could fill a niche in a community where many studios in new buildings start at $2,000 a month.

Bledsoe said that in Ollie ventures in cities such as New York City, the core tenant mix includes a number of young professionals, with Millennials comprising two-thirds of renters. Not surprisingly, the units appeal mostly to single people.

"When it comes to the typology, the layouts of larger apartments tend to cater more to a nuclear family model," he added.

Money Matters
Developing micro-units comes with challenges. The biggest hurdle, Kaplan said, is convincing lenders that such projects are viable. Even with models that work in other cities, and some local interest, no developer has yet stepped up with a large micro-unit project.

Part of the concern for capital sources in undeveloped markets is the construction cost, according to Brent Schertzer, development director of Holland Partner Group, which has built multiple large apartment complexes across Downtown. In micro-unit projects, crews have to construct more bathrooms and kitchens than would be found in a traditional apartment building. That means they need to charge a higher per-square-foot price, even if rents are lower due to a smaller space.

Still, architect Nieman thinks it could just be a matter of time in Downtown L.A. He said projects have penciled out in Seattle, and that demand has proved strong despite the city's growth.

"Somewhere out there there's a limit, but the demand is so much greater than the supply," he said. Although he noted that banks and investors were skeptical early on, he added, "At this point, everyone's been really successful in the marketplace."

Another challenge is acquiring property. Downtown Los Angeles' Adaptive Reuse Ordinance, which paved the way for the conversion of many older office buildings into housing in the early 2000s, prevents properties being from converted into micro-unit structures. It dictates a minimum average size of 750 square feet, with no residence smaller than 450 square feet; those standards can be waived if the developer is not seeking a density incentive.

Ultimately micro-unit development will be driven by the market and demand. Kaplan believes that if rents continue to rise, tenants will look for more affordable housing, even if it means a smaller home. Schertzer agreed, though he also noted that Downtown still needs some proven success in order to get financiers to fund the concept.

The CCA said it will seek to encourage development of micro-units in Downtown. Doing that involves pushing the city to offer reductions or eliminations of parking requirements and density limits. Then there's the bigger challenge: convincing developers of the benefits of going small.