Reversing Pandemic Trend, Apartment Sizes Shrink As Developers Try To Boost Yield

Rising interest rates and the proliferation of build-to-rent contributed to a decrease in the average size of U.S. apartment units in 2022 as developers chased yield, after two years of pandemic-driven upticks.

“Cost-to-develop has played more of a factor in the decrease than market location,” Yardi Matrix Senior Analyst and Manager of Business Intelligence Doug Ressler told Bisnow.

The average size of new apartments started in the United States last year came in at 887 SF, a 30 SF year-over-year decrease, according to RentCafé calculations, based on Yardi Matrix data.

It’s the first decrease since the pandemic spurred development of slightly larger units aimed at people working from home. But now, developers are figuring out how to build remote workspaces while keeping overall floor plans small, motivated by the need to outsmart a high interest rate environment.

“Smaller apartment units can largely be attributed to changing floor plans and unit mixes,” Ressler said. “These two factors and minimalist living explain the decrease in apartment size across markets and cost trends.”

Counterintuitively, work-from-home office space can shrink or at least not increase a unit's overall size, especially when it is built in lieu of larger bedroom or storage plans. Access to green space or other nearby amenities can also mean that tenants don't want or need large units.

“Two-bedroom units have decreased from about 40%-plus of the total share of units to 30% of total units,” Ressler said. “The introduction of the single family build-to-rent product, which accommodates larger families and three or more bedrooms configurations, may be influencing this trend.”

But the decrease in unit size isn’t the same across the board, with some surprising changes coming in the country’s highest-cost markets like New York City and San Francisco, where unit sizes crept up.

Apartments in Manhattan, for example, grew 19 SF, or 3% compared with a decade earlier, in spite of the borough’s reputation for minuscule domiciles. In San Francisco, average units size grew 52 SF, or 7%, from 2013, according to RentCafé, and in Los Angeles, renters had an average of 45 feet more space.

Still, the U.S. average is down, as developers up the proportion of studios and one-bedroom apartments that they develop. Indeed, 57% of the apartment units developed last year were either studios or one-bedrooms, RentCafé reports. In 2013, studios and one-bedroom units represented 50% of multifamily units.

“There is definitely a trend for smaller units as developers try to squeeze out more yield in the same amount of space given the current challenges with interest rates and hard-cost pricing,” NRP Group Vice President of Development Jason Mochizuki said.

“On our projects, so far, we haven't been doing that yet, but as this year progresses and pro formas continue to get tighter, I can see some developers increasingly shrinking unit sizes,” Mochizuki said.

In early February, NRP Group broke ground on South Tryon, a market-rate community in Charlotte, North Carolina, that will bring 310 units, including a mix of one-, two- and three-bedroom apartments, with den floor plans available in one-bedroom units to accommodate post-pandemic work-from-home.

PTM Partners Managing Partner Michael Tillman said his company has been building units that are “more efficiently sized” since its inception, typically averaging 5% to 10% smaller than comparable developments. PTM is active in Florida and the mid-Atlantic.

“Our primary motivation for smaller unit sizes is to create a Class-A building that's price-accessible to a larger percentage of residents within a 1-mile radius of the property,” Tillman said. “But we also realized that the next generation of renters was spending more time in the common areas and utilizing those amenities. Thus we typically provide amenity spaces that are significantly larger in size and variety.”

Given the sharp rise in the cost of debt and continued higher costs of construction and labor, one possible way to reduce costs is to reduce unit sizes, Tillman said. Still, not all markets are the same, and smaller unit sizes may not be commercially acceptable in certain markets where land is more readily available. Also, he noted, merely shrinking unit sizes doesn't automatically mean cost savings.

“You need to consider unit layouts, appliance sizing, storage and lighting,” Tillman said. “For example, a smaller unit may reduce the ability to have walk-in closets or larger furniture pieces, so built-ins and millwork might be necessary. Smaller units just to reduce costs may not be the best solution.”

Some developers say they aren't reducing their unit size yet, but acknowledge that market realities are increasingly requiring more attention to design and construction details rather than geography.

“We haven't seen apartments shrink in size, either during Covid or continuing to the present,” Diversified Properties Managing Partner Nicholas Minoia said. “As a matter of fact, the outer ring markets we serve are still seeing demand for somewhat larger units that include either a den or — minimally — a work-from-home area for employees working a hybrid schedule.”

Active in most property types, Diversified Properties' multifamily development is focused on metro New York City, including both outer ring communities but also dense urban cores. Minoia acknowledges that supply chain delays still persist, and overall development costs are high.

“Still, we also recognize the need to balance these construction and financial realities with the space needs of renters in our markets,” Minoia said. “Looking ahead, developers will need to be even more hands-on in understanding the specific demands of the renters in their respective markets.”