“Our diverse households – predominantly single people – are trying to fit themselves into homes and apartments not designed for their needs. And our housing is unable to evolve because the size, shape, and even occupancy requirements of our homes are governed by old-fashioned laws and codes.” (CHPC)
Micro-units are currently illegal to build in most cities due to various zoning or housing codes.
In New York, the two regulations waived for Mayor Bloomberg’s design competition were density limits and minimum apartment size. (adAPT 2012, 11) In San Francisco, the minimum living space was just reduced from 220 to 150 (total from 290 to 220 square feet including bath and kitchen). (Neisner 2012) Boston’s was recently reduced from 425 to 375 square feet. In New York, the regulation sits at 400 right now and reducing it to 300 has been discussed. Other regulations to which developers of micro-units must pay special include caps on the number of units, floor-to-area ratios (FAR), setbacks requirements, contextual zone designations, lot coverage, parking, building height, minimum unit height, locked interior door regulations, square footage per room minimums, and size of largest room minimums. (CHPCb) The specific within-building issues the adAPT NYC competition pointed out to prospective developers are:
• Room size minimums (currently 150 square feet)
• Room width minimum (currently eight feet)
• Requirement of a kitchen within the unit
• Rules regarding the proximity of sleeping areas to kitchen / kitchenette
• Accessibility requirements
• Light and air requirements
• Common bath and toilet allowance
• Common kitchen allowance
The competition stated that changes to the first four regulations may be considered while changes to the last four (accessibility, light and air, common bath and kitchen) will not be.
(adAPT 2012, 28)
As discussed above, the regulations banning micro units (more specifically, setting an apartment minimum square footage) have been argued on both sides. The arguments against them are both normative and objective, ranging from fear of negative externalities and excessive developer gains at the cost of humane living, to assertions that they are only catering to single, wealthy, young professionals.
There is a body of research from the field of urban economics which addresses very similar topics to this. Classically, the problem of optimizing profit on a unit level basis (price per square foot, or price per acre) has been applied to subdivision developments in order to determine the optimum number of lots for a particular development. In subdivisions, the economic condition that occurs when developers make a greater profit per square foot from combining land parcels is called “plottage” (people want big lots). The opposite effect, when subdividing lots creates more value, is called “plattage” (people want small lots).10
The theory for apartment size can be thought about in the same way; there is an optimal size at which developers receive the most revenue on a per square foot basis. Take the following example: if a developer has a building envelope that is 2,000 square feet, will be make more money from building one 2,000 SF unit, five 400 SF units, or ten 200 SF units?11
In short, the main question regarding optimal apartment size essentially looks at what is the highest and best use for residential land: will developers have an incentive to build large units for rich people and/or families, or small units for single people and/or perhaps lower income residents?
10 For Subdivision Literature See:
Cannaday, Roger E., and Peter F. Colwell. 1990. “Optimization of Subdivision Development.” The Journal of Real Estate Finance and Economics 3 (2): 195–206.
Guntermann, Karl L., Alex R. Horenstein, and Gareth Thomas. 2007. “Parcel Size and Land Value: A Comparison of Approaches.”
http://www.public.asu.edu/~ahorenst/Docs/Parcel%20Size%20and%20Land%20Value%20-%20November%202010.pdf.
Thorsnes, Paul. 2000. “Internalizing Neighborhood Externalities: The Effect of Subdivision Size and Zoning on Residential Lot Prices.” Journal of Urban Economics 48 (3): 397–418.
11 This example is ignoring the additional square footage required for more units in the form of circulation and common space, the percentage of which increase with a higher number of small units.
Each market will have its own equation for price/square foot as a function of unit size. Some might be a perfectly parabolic U shape as shown in the top graph; others might be an inverse parabola as shown below. Still others could be linear and flat, or linear with an upward or downward slope. Perhaps a market might even have something that more closely resembles a couple periods of a sine wave.
This study looked at both Manhattan and Brooklyn in New York City, attempting to learn how various submarkets within the city regard small units. If they are parabolic and open upwards (if the coefficient on the quadratic variable for unit size is positive, as in the first graph) then the market rewards both large and small units, but discourages mid-sized units.
If it opens downwards (thus has a negative variable), the market does the opposite: pays developers a premium for mid-sized units. If the function is mostly linear, a positive slope indicates “the bigger the better”
and a negative slope indicates the opposite: that small units command a per square foot premium. The last graph shown is of Brooklyn as an entire borough, demonstrating a slightly concave, downward sloping function. This implies that in Brooklyn, in most areas, developers would want to build as small as they are allowed. Price/SF as a funtion of Unit
Size Price/SF as a funtion of Unit
Size
Regulating apartment size manipulates the market in a very direct way. Returning to the earlier example of what to do with a small 2,000 square foot space, consider the impacts regulations would have on such development decisions.
The example at the right shows a graphic display of how a price/square foot optimization function might look. In this instance, developers receive the highest profit (and thus are most willing to develop) when the unit size is around 1,000 to 1,200 square feet, shown in green. Outside of that window, as apartment sizes rise or fall, the price/square foot a developer receives drops off.
Rent regulations, at their most restrictive, could look as the graph at the right does. Here, the red lines represent 1) a minimum unit size regulation (solid red line) that is to the right of the market’s optimum unit size, thus requiring developers to build larger than they would choose and 2) a maximum size regulation (dashed line) that is requires units smaller than is optimal. The latter is not so common, but could become a possibility as some cities become increasingly wealthy, they may try to preserve some housing units at an affordable price or
scale. This may actually someday be the case in New York, as this thesis will demonstrate in subsequent chapters.
Today however, the regulation mainly under debate regarding micro units is the solid red line, or the minimum apartment size. The second solid line shows how such a restriction could require developers to build larger than the market wants. In New York City, that minimum is 400 square feet. Reducing this regulation implies there is the assumption of some kind of demand, in some neighborhoods, for units smaller than this.
The hope is that many outdated regulations that city governments are talking about removing look something like the example graph. In this case, removing the regulation would spur
Unit Size Price/SF Price/Unit 200 40 $ 8,000
Optimum Unit Size and Regualations
smaller development, allowing developers to achieve a greater profit while providing the city with a product it has decided it has a great need for: tiny, affordable units.
Unfortunately, however, most neighborhoods in Manhattan do not have that shape. Instead, they have an almost linear curve with a positive slope, seemingly demanding ever bigger units in some of the most expensive areas of downtown. This trend is unsurprising, given the steady rise in average rental rates in the city for large units as well as the recent luxury condo building boom.
It also means that for the unsubsidized, market-rate housing market, the dismantling of the minimum
apartment size will not create any real changes in many of the most desirable areas of the city. If the rule is you have to build bigger than 400 SF, but developers are still seeing ever greater profits at 2,000 SF and up, they will not be encouraged to change their building patterns.
This research did not take into account the additional cost of micro units, which is the added cost of more units in the same space. Most important are the extra costs associated with adding more kitchens and baths, which can be around 25% of the total unit cost of construction. This thesis seeks to find a necessary but not sufficient condition for micro units: a development environment that pays a premium in revenue for small units. If this criteria is not met and there is no additional revenue for building more densely, the additional costs of construction of this type of building on top of that are irrelevant.12
Unless the government steps in to specifically encourage micro units through zoning bonuses, FAR allowances, or tax subsidies, getting rid of the minimum size regulation is not going to cause many waves, at least not in most central areas of Manhattan. But can we find areas where this is not the case? Somewhere that a negatively sloped function exists or at least where there is a slight upward turning tail on bottom end? To answer this question, a more fine-grained look at both Manhattan and Brooklyn will provide greater insights.
12 The per unit cost of residential construction for the submissions to the adAPT competition was around $150,000, ranging from $100,920 to $168,243 per unit. On a per square foot basis, cost of total construction was around
$265/SF. The total average cost of development for the project was around $14 to $15.5 million. On a per square foot basis that came out to a mean of 455 and median of 439 – or $230,398 on average per unit.
Gramercy - Kips Bay - Murray Hill