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Microunits: A Tool to Promote Affordable Housing

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Microunits: A Tool to Promote Affordable Housing

September 30, 2016
Urban PolicyOther

Editor's note: The following is the third chapter of Retooling Metropolis (2016) published by the Manhattan Institute.

Introduction

Tiny living”—living in very small spaces by late-20th-century U.S. standards—is a hot topic in American urban policy, as the revival of demand for urban living has collided with mid-20th-century rules and regulations on urban growth, sending rents soaring in many U.S. cities.

Tiny-living arrangements include “microunits” (apartments smaller than traditional studios), “microsuites” (individually rented and lockable bedrooms that share kitchens and common areas), modernized boardinghouses, and tiny houses (detached cottages much smaller than traditional homes). Tiny-living accommodations are often illegal or so heavily regulated that there is little (legal) supply of them.

Today, the highest-productivity U.S. cities face a housing-supply crunch. Tight land-use regulations have weakened the traditional link between high metropolitan-area incomes and new housing permits.1 Before 1980, metro areas with higher incomes generally saw faster population growth, as people moved to such places for better opportunities.This is no longer true—largely because restrictions on building in some markets make it harder to build more housing to keep up with demand. Instead of more population growth, higher incomes in regions with restrictive building rules are increasingly capitalized into higher rents and property prices. This reduces the incentive for all but the highest-skilled workers to relocate to such areas.3 As a result, regional convergence in median household income has begun to reverse after a long period of convergence up to 1980.4

Additionally, in some cities there is a mismatch between household sizes and apartment sizes. The growth in demand for single-person urban households—especially among seniors and young people— in recent decades has not been matched by the growth in the supply of small, single-housing units.5

There are 1.9 million one-and two-person households in New York City, for example—but only 1.25 million studio and one-bedroom apartments. Seniors often find themselves unable to downsize and still remain in their home city at a reasonable price, while young singles find themselves sharing space (sometimes illegally) with unrelated roommates in apartments intended for families.

House prices have risen far above the marginal cost of construction in many cities,6 creating unearned windfall gains, formally known as “economic rents,” for landowners7—at the expense of productivity and income growth for the economy as a whole. As Harvard’s Edward Glaeser notes in City Journal, “When Americans move from New York to Houston [because of high house prices in the former], the national economy simply becomes less productive.”8

Across America, there is a huge need to increase the supply of housing to ameliorate rising rents. There are two basic ways to legalize more housing supply: allow bigger buildings; or allow people to live in smaller units within buildings of a given size. Various strategies can be used to boost housing supply, including “upzoning” (such as allowing multiunit buildings where currently only single-family homes are allowed), relaxing caps on height and floor area ratio, and legalizing “accessory-dwelling” units (such as basement apartments).

Broader permitting of microunits and microsuites would be one useful strategy. Both allow more housing units to be created inside the physical floor area of what is currently allowed. Both also work in conjunction with other strategies, such as increasing maximum floor area ratios (which would allow more building on a given amount of land).

Microunits are not a panacea for high housing costs. Nor should they be seen as an effort to compel people to live in smaller units. Rather, the microunit is one tool among many that can add supply to a segment of the housing market that is underserved.

I. Why Microunits Are Good for High-Rent Cities

Microunits can help stabilize per-capita housing costs in high- rent cities. In neighborhoods where microunits are economically viable, they will not only provide relief for adult roommates who would prefer privacy at the right price; they will also help release three-and four-bedroom apartments currently occupied by unrelated millennials for use by actual families.

New construction in NYC is typically unaffordable for middle-in- come singles. The rent affordable9 for an individual earning 100% of area median income (AMI) is roughly $1,500 per month in 2015, while a prime 400-square-foot Manhattan studio built in the last 10 years is difficult to find for under $2,600 per month.

New York University’s Furman Center estimated in 2015 that rental buildings constructed in Manhattan south of 96th Street over the last 10 years require average annual residential rents of $80/sq. ft. Rental listings for recently built luxury studios are consistent with this estimate. For example, Avalon’s Clinton building on 52nd Street, built in 2007, currently offers studios for about $84/sq. ft. and one-bed- rooms for about $62/sq. ft.

At these rents, brand-new 300-sq.-ft. microunits would likely be viable for $1,900–$2,200/month. As microunits age, they would become relatively cheaper, too—just as studios with kitchens and finishes from the 1980s today can be found for less than $2,600/month in core Manhattan.

In the outer boroughs (i.e., outside Manhattan), where land prices and construction costs are lower, microunits would be economically viable at much lower rents. According to Furman Center figures,10 microunits would be viable at $1,100–$1,500/month in Astoria (Queens) and Williamsburg (Brooklyn), for example.

This shows the potential for microunits to create housing supply at more affordable prices. (Across the U.S., microunits tend to rent for, on average, 20%–30% less than comparably located conventional units, according to the Urban Land Institute.)11

Despite lower total rents, microunits typically command higher rents per square foot than larger apartments. Why? This is simply an extension of the same premium per square foot that normal studios command over one-bedrooms, that one-bedrooms command over two-bedrooms, and so on.

This is not true everywhere, however. In parts of Manhattan, for example, buyers will pay more per square foot the larger an apartment is, reflecting the space desires of high-end buyers.12 In these areas, microunits would likely not be built even if they were allowed. But outside these super-affluent districts, developers would have an incentive to construct microunits if permitted because microunits would command premium rents on a per-square-foot basis, even while being cheaper on a per-apartment basis.

“Ground-up” (i.e., new) construction of microunits and microsuites would provide the opportunity to raise construction quality to mitigate any quality-of-life sacrifice traditionally required by tiny living. Chris Bledsoe, cofounder of Ollie, a microunit and microsuite start-up, says that his design specifications for a development partner on one ground-up project in the NY/NJ/CT area initially evoked sur- prise:13 Bledsoe requested sound-dampening double-insulated walls between bedrooms—not just between apartments, as usual—in addition to better elevator performance.

Thicker walls, Bledsoe points out, help mitigate the privacy loss associated with moving to small apartments. This makes the microsuite format more desirable—both for co-living adults and for families in need of affordable shared space—by reducing the likelihood of “audible indignities.”
In short, microunits could provide a valuable source of new affordable housing supply for singles (or even couples) in cities that badly need it, while providing better construction quality than current impromptu apartment subdivisions (which are frequently illegal and sometimes unsafe)14 provide.

II. Legal Barriers to Microunit Development

Microunits are either illegal or heavily restricted in many U.S. cities. Barriers come in three principal forms: direct bans on microunits, such as by minimum-unit sizes; zoning maps that geographically restrict where microunits can be built; and other de facto restrictions, such as overall-density limits or bans on shared facilities, such as kitchens.

Several cities, including Boston, Chicago, New York, San Francisco, and Seattle, have taken steps toward permitting microunit housing (see Appendix). San Francisco and Seattle now permit apartments as small as 220 square feet. New York now allows apartments as small as 300 square feet.

In practice, various rules continue to limit the quantity of microunits that can be built in these cities. For example, New York has an overall density cap that restricts the number of microunits that can be put into a building. The vast majority of Seattle is zoned exclusively for single-family homes (Figure 1) with traditional apartments banned.

The experiences of NYC and Seattle suggest that even technically legalizing microunits may produce only a limited impact on housing supply if a city’s zoning map heavily restricts where microunits can be built. Consider Seattle, which had a boom in microunit construction following the subprime-mortgage crisis.

The late entrepreneur Jim Potter discovered that Seattle’s zoning code counted dwelling units by the kitchen, without a limit on the number of bedrooms attached to said kitchen. The code allowed these “as-of-right,” without the design and environmental reviews usually required for big multifamily projects. This meant that a Seattle townhouse that “on first sight appears to have eight apartments might actually contain 64 units.”15 Says one prominent anti-density activist in Seattle cited by POLITICO, “I just don’t think [boardinghouses] belong in a low-rise zone where someone has invested half a million in a townhouse and then 56 people move in next door.”16 This particular 56-person dwelling was built in a low-rise zone in Seattle’s Central District, within walking distance of downtown.

In Seattle, the resulting blowback from such developments resulted in tight restrictions on so-called congregate housing (housing like Potter’s 64-unit development, in which people live in private rooms but share facilities), including a ban on shared kitchens, although 220-square-foot microunit studios are still allowed in (somewhat) broader zones. Similarly, NYC discourages tiny living by requiring all microsuite residents to share a single lease, which reduces much of the flexibility and, thus, the attraction of such accommodation.

This is not to say that there are no valid public-policy purposes for these restrictions. But it means that even where tiny-living development is permitted in theory, other restrictions often make it infeasible in practice.

III. Common Objections to Microunits

The current debate over legalizing small apartments may appear surprising. After all, historically, the boardinghouse, a type of microunit building, has been an iconic American model of economical living for artists, intellectuals, immigrants, and others of modest means seeking the opportunities of urban life—from Ben Franklin’s first independent dwelling as a Boston teenager in 1720, to the home of the eponymous protagonist from the popular 1990s cartoon “Hey Arnold!”17

Best practice in regulatory theory also restricts intervention only to areas where there is a measurable market failure that outweighs the risk of government failure from intervention. As an economic matter, there are no obvious market failures particular to small units.

Multifamily buildings typically generate varying positive and negative externalities, depending, among others, on whether the residents of such buildings are transit- or car-oriented (if the latter, negative externalities could include more air pollution and greater street and parking congestion). In general, though, there is no additional increment of external benefit or cost for allowing smaller units beyond what exists for multifamily buildings in general.

Will Microunits Attract the Mentally Ill?

America’s experience with deinstitutionalization of the mentally ill helped poison the well of public sentiment against tiny living. During the peak of deinstitutionalization (1960s–1970s), single-room-occupancy (SRO) hotel housing (a type of tiny living) was the first stop for those who were well enough to stay off the streets.

The loss of mental institutions as the bottom rung of the housing ladder turned SROs into the new bottom rung: 7,000 mentally ill men were moved into Chicago’s Uptown neighborhood SROs in one year alone.18 During 1955–85, 125,000 mentally ill people were released into NYC, even as the city lost some 100,000 SRO units during the same period after a ban on new SROs and regulatory pressure to remove existing ones.19

In theory, most people would like to help the homeless. But few homeowners want the homeless—and the threat of disruptive behavior that such people often bring—living next to their own homes (typically a person’s largest financial asset). Unfortunately, America’s political backlash against this influx of mentally ill people went further: the new restrictions on tiny living wiped out housing for working-class singles.

Today, most discussion of microunits revolves around housing for educated young adults; but this background stigma still affects how many people think about microunits. Indeed, subsidized SRO-style tiny living may encourage the present-day homeless and mentally ill, among others, to pursue such housing. The similarity between subsidized SRO-style supportive housing and microunits/microsuites that target middle-class residents thus creates political and policy challenges to the broad legalization of tiny living.

Yet careful analysis of land prices and construction costs can circumnavigate these hurdles by permitting studio-style microunits only in neighborhoods where projected market-rate rents exceed what’s affordable to individuals earning, say, 30% of AMI or more.20 This kind of targeted geographic legalization of working- and middle-class tiny living should be coupled with sufficient supportive-housing tiny living for the mentally ill in politically acceptable areas.

Will Microunits Attract College Students, Vagrants, and Other Sketchy People?

In community meetings where new microunits are under review, residents often express concern. Consider the testimony in Manhattan’s Community Board 6, regarding the approval of New York’s experimental all-microunit building, as reported in the Wall Street Journal:

“No matter what anyone says, we’re worried that these are going to be SROs that are run as hotels,” said Toni Carlina, the com- munity board’s district manager. According to Ms. Carlina, the community board is also concerned about an eating-and-drinking establishment being allowed in the building, since she said the public plaza that it will be facing has had a problem with vagrancy in the past, and residents worry that if there is a bar or restaurant open late into the night, vagrancy will once again be an issue.21

There was more at DNAinfo.com:

“You’re putting people into places where they’re not going to take ownership of their homes. We’re going to be stuck with the fallout from this [said a neighborhood resident]…. I know that’s not what you’re [sic] intentions are going to be, but that’s how it’s going to be,” Thompson [a real-estate agent] said. “Management is not going to be able to keep up with who’s coming and going, and it’s going to be a free-for-all.”22

Such comments reflect a distaste for college students, who have an often deserved reputation for rowdy, drunken behavior at late hours. The comments also reveal a fear of vagrancy. Because the building in question was built on city-owned land, 40% of the microunits were required to rent below market rate, starting at $914/month (although $914/month would likely outprice real “vagrants”).

Similar concerns were shared in Seattle regarding microunit townhouses, where totally unsubsidized market-rate microunits were proposed to start at $500/month in Seattle’s prime Capitol Hill neighborhood:

“I think this is going to be a magnet for very sketchy people.” … [A neighbor] was bracing for 46 low-income renters in the space where he’d been expecting six new homeowners instead…. “Anyone who can scrape up enough money to live month-to-month can live there,” he said, worried that low-income interlopers would jeopardize his chances to sell his own house. “I don’t think most people want to live next to a boarding house with itinerant people living in it.”23

A challenge posed by naturally affordable housing emerging in expensive, underbuilt neighborhoods is that many existing wealthy residents bought into their properties expecting poor people, or transients, to be unable to live nearby. From the perspective of incumbent homeowners, affordable unsubsidized housing is not a solution; it is a problem.

Even progressive-minded Seattle, with its socialist city councilors and its $15 minimum wage, passed new minimum-unit-size rules in 2014, as well as tight restrictions on congregate housing near sin- gle-family-home neighborhoods. This puts much of the land near the city’s high-priced core off-limits to microunits.24

Not all areas are so unfriendly to microunits. Many commercial/industrial areas in low-density “inner suburbs” would permit low-income, affordable, high-density construction without affecting existing residential areas.25 Meanwhile, high-density, cosmopolitan inner-city areas26—where socioeconomic diversity isn’t a perceived social or political threat—provide ripe opportunities for legalizing microunits, too.

IV. Targeted Rezoning: A Reasonable Compromise

America’s late-20th-century implicit housing bargain holds that we either restrict new market-rate construction in the best neighborhoods to push out (or keep out) the disorderly poor and generate land rents for homeowners, while allowing the poor to live elsewhere, in a predictable, politically controlled fashion; or, in jurisdictions that subsidize mixed-income “inclusionary” developments, we limit the number of low-income people to a certain population share while still leaving the new-supply restrictions (and high prices) in place.

In suburban communities, this is achieved through minimum lotsize restrictions for detached houses instead of minimum-unit-size restrictions for multifamily buildings. And to the extent that microunits reduce this class stratification, they will tend to generate political opposition.

Public concerns about microunits could be addressed in various ways. As noted, residents’ concerns about the income of future neighbors could be allayed by targeting specific areas for rezoning. This could be done implicitly, by extending microunit legalization only to the highest-rent neighborhoods; or explicitly, with designated AMI thresholds.

Feasible legislation will depend on local context. Plausible reform proposals must acknowledge that the political dynamics that produced today’s rules cannot be expected to simply disappear. We do not necessarily endorse the sort of social engineering inherent in targeted rezoning; we merely note that existing land-use rules are already a form of community-driven social engineering.

In short, targeted rezoning is not ideal; but it is a reasonable strategy for obtaining political acceptance of incremental improvements. In cities and neighborhoods skeptical of affordable market-rate microunits, targeted rezoning could help rehabilitate the latter’s image, thereby making microunits gradually acceptable to a broader spectrum of neighborhoods.

Conclusion

Legalizing microunits presents an opportunity to add affordable, safe density to expensive urban cores and inner-ring suburbs. Combined with looser restrictions on height and floor area near underutilized transit corridors, microunits could help stabilize per-capita housing costs in expensive urban areas (with the side benefit of boosting ridership on public transportation, raising public-transit revenue, and cutting carbon emissions).

Even in Sun Belt cities with plenty of available land, downtown amenity-rich microunit buildings could represent an attractive lifestyle choice for young singles looking to replicate the social and urban benefits of their former college-town shared apartments. As the enthusiasm for new microunit buildings, such as Carmel Place in NYC,27 demonstrates, many young people would eagerly trade square footage for in-building cleaning services, a game room, a gym, and a dynamic, centrally located neighborhood with an easy commute.

For the elderly, the ability to stretch their retirement incomes further by downsizing to stay in the cities in which they worked is a compelling value proposition. For the middle-aged, microunits offer an intriguing alternative to newly free empty-nesters curious to live in trendy, youth-oriented neighborhoods, such as Williamsburg, Brooklyn;28 or to the recently divorced (perhaps with alimony-slimmed pocketbooks) looking to reenter urban areas, where dating markets are thicker. In other words, the potential market for microunits is vast.

In addition, purpose-built microunits with specialized “supportive housing” services for the homeless or other marginalized individuals would potentially reduce the burden on taxpayers without sacrificing— and indeed, likely improving—living conditions for such people.

In the absence of legal microunits—which would be required to meet fire codes and local building rules, such as mandating that every apartment has a window—the market demand for smaller, more affordable living spaces in high-cost areas means that landlords and tenants will continue to subdivide their apartments anyway, often in illegal and unsafe ways. Instead, developers should be allowed to provide safe, legal, and attractively priced alternatives.

In transit-oriented neighborhoods, for instance, we need to legalize denser living in ways that allow incredibly expensive and valuable public-infrastructure investments to be put to their fullest use. The alternative: stuff the land rents created by said infrastructure into the pockets of the lucky few low-rise building owners, as trains and buses rumble past underbuilt transit corridors. Microunit residents, like everyone else, should be socially and legally expected to respect their neighbors’ right to live in peaceful conditions. Yet in a country that still values individual autonomy and self-determination, Americans should also be able to economize and live in as little space as they desire, so long as requirements for minimum-unit quality and safety are followed. Microunits that satisfy these basic requirements should be allowed to flourish.

Appendix

Endnotes

1. Peter Ganong and Daniel Shoag, “Why Has Regional Income Convergence in the U.S. Declined?” HKS Working Paper no. RWP12-028, Mar. 28, 2013.
2. Ibid.
3. Ibid.
4. Ibid.
5. “Housing New York: A Five-Borough, Ten-Year Plan,” Office of the Mayor of New York City, 2014, p. 24.
6. Edward L. Glaeser et al., “Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices,” NBER Working Paper no. 10124, Nov. 2003.
7. Stephen J. Smith, “Land Prices Rapidly Increasing Deep into Bushwick: Permits Filed at 311 Melrose Street,” NewYorkYIMBY.com, Jan. 26, 2015.
8. Edward L. Glaeser, “Houston, New York Has a Problem,” City Journal, 2008.
9. For our purposes, a person’s rent is affordable if it is less than 30% of his pretax income.
10. Furman projections are based on a reauthorization of New York State’s 421-a tax-exemption program for new housing construction. For more on 421-a, see Howard Husock and Alex Armlovich, “Mend It, Don’t End It: NYC’s 421-a Affordable Housing Tax Exemption,” Manhattan Institute Issue Brief 34, May 2015.
11. “The Macro View on Micro Units,” Urban Land Institute, 2014.
12. Rebecca L. Disbrow, “The Economic Viability of Micro Units in New York City: When the Market Wants to Build Big,” Department of Urban Studies and Planning, MIT, 2013.
13. Conversation with Chris Bledsoe.
14. See, e.g., Mark Santora, “The Fall of Temporary Apartment Walls,” New York Times, July 16, 2010.
15. Sara Solovitch, “Scrunched in Seattle,” POLITICO Magazine, Oct. 14, 2014.
16. Ibid.
17. “Hey Arnold!” Wikipedia.com.
18. Carl Watson, “Men in Cages: Reflections on Skid Row Society,” Chicago Reader, Nov. 5, 1992.
19. Brian J. Sullivan and Jonathan Burke, “Single-Room Occupancy Housing in New York City: The Origins and Dimensions of a Crisis,” CUNY Law Review 17 (2014): 113–43.
20. In NYC, individuals with incomes below 30% of AMI are classified as “extremely low income.”
21. Gabby Warshawer, “New York City’s Kips Bay Makes Most of Big, Small Spaces,” Wall Street Journal, May 3, 2013.
22. Mary Johnson, “Residents Fear ‘Micro-Unit’ Building Will Become Student Dorm,” DNAinfo.com, Oct. 12, 2012.
23. Dominic Holden, “The Fight Against Small Apartments,” The Stranger, May 8, 2013.
24. Mike Podowski, “Micro-Housing—What & Why,” Seattle.gov.
25. “Inner-suburban” malls, for example, could be converted into mixed-use developments, with housing above the commercial space. Yet traditional zoning in much of the U.S. typically forbids mixing residential and commercial use.26. Manhattan is a famous example of rich and poor living in close proximity—for instance, the old housing projects in Chelsea bisect the trendy High Line park and ultra-luxury condos. Nonetheless, neighborhoods where living with roommates and/or (illegal) apartment subdivisions are the norm should be able to politically accommodate microunit legalization.
27. Some 60,000 people applied for 14 subsidized microunits that rented for $914–
$1,873/month. The building’s unsubsidized microunits went for $2,670/month or more—higher than anticipated, thanks to strong demand. As of August 2016, the building was 91% leased. See Eustacia Huen, “Inside New York City’s First Luxury Micro-Apartment Building, Where Units Start at 265 Square Feet,” Forbes.com, Aug. 30, 2016.
28. Constance Rosenblum, “New York Boomers on Hipster Turf,” New York Times, Apr. 11, 2014.
29. Adam Hengels, “Why No Micro-Apartments in Chicago?” Market Urbanism.com, Apr. 15, 2016.
30. Holden, “The Fight Against Small Apartments.”
31. “Homelessness,” SPOA.com.

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