Cities Pricing Out Their Own Density

luxury downtown condominiumThe success of a thriving downtown hinges on achieving a critical mass of businesses and homes inside a given radius. The allure of the city is built around having quick access to a myriad of amenities just a short trip away. Having public space, shopping, cultural institutions and employment all within minutes of your front door is the boon of urban living–made possible by tens of thousands of people in close proximity in order to support all of those individual destinations. The value placed on that access translates into higher home prices that tend to shrink the average size of urban residences by shedding “extra” uses.

But some of our cities are becoming the victims of their own success. As a finite amount of land becomes more desirable, prices begin to migrate outside the realm of accessibility for a larger portion of the population. The degree of socio-economic diversity begins to wane and lower-income residents are forced to move farther to the urban edge. The very density that defines the city is beginning to run counter to the forces of its own market inertia.

Micro Units

nyc micro unit competition winner

Image from the winning entry to the NYC adAPT Competition

One thought is that if we make apartments smaller, we will re-open the possibility of both rental and ownership up to a wider audience. New York’s Mayor Bloomberg has been a proponent of “micro units” or studio apartments that are smaller than 350 square feet. The city held a design competition for a development featuring micro unit construction that was won by the partnership of nARCHITECTS and Monadnock Development LLC. Featuring pre-fabricated housing blocks built in the Brooklyn Navy Yard, (not unlike SHOP’s pre-fab tower at Atlantic Yards) the pilot project building should be constructed in the years to come.

Multifamily housing continuously proves its superiority in efficiency over detached, single family homes. The Energy Information Administration recently released new statistics saying that multi-family homes with more than 5 units typical use around half of the energy per household than other types of residential buildings (single family, mobile homes, apartments with 2 to 4 units). That doesn’t even include the amount of energy and materials require to travel around a suburban environment or network utilities out to a less dense web of customers. Micro units would only improve these numbers.

The micro unit argument sounds like a good deal and I have touched before on why smaller units point to a more sustainable development pattern.  As a resident of a small New York City studio apartment, I can attest to being able to fit a lot of the basic needs into a small space. For a city that is on-the-go or out-on-the-town, how much space at home does one really need?

Micro Units Bring Micro Numbers

However, even if the zoning code in New York can be changed to allow these smaller homes, there is a good chance that the market won’t be grabbing at the opportunity without some outside help. The problem is that the demand for space, even lots of space, is extremely high in metro New York. Even with the breath of the recession still on our necks, high rise development in New York has already catapulted back into action with buyers seeming to be more hungry than ever. The new high-end condo building, 150 Charles, on the edge of the West Village recently pre-sold for nearly three quarters of a billion dollars–and this building isn’t even finished yet. There remains an unmet demand for expensive, large apartments from owners not just in America, but the entire world.

While this is great for the building industry, it’s not great for micro units. The reason is because sales prices in the city do not have a linear relationship to unit size. As units get larger, the premium to purchase more space increases. In terms of price per square foot, there is more money to be made selling a five-bedroom apartment than a studio. The sale numbers from Wired New York’s 2010 statistics reveal that selling an apartment with more than three bedrooms can rake in 70% more per square foot than a studio.

New York Sales Price per Bedroom type

When thinking about building a new building, each design team throws in the ingredients of zoning, building code, budget, client goals and a dash of creative flare before letting it cook for a while. No matter what the outcome, there is a finite amount of buildable area to work with. So when a developer is weighing the numbers on profitability, business sense would push for trying to build the largest units he thinks he can sell. Despite the fact that a five-bedroom, duplex penthouse might be able to be chopped up into 10 micro units, what is the incentive to do so? Their combined value will still be worth markedly less than the one larger apartment. Building the smallest units possible to sell to the upper-middle class is throwing away potential profit.

Given the fact that demand for owning property in New York is so strong across the globe, it faces a rare problem of price appreciation so strong that it risks turning into an enclave of the rich. This trajectory also runs counter to that of a more sustainable cityscape. Having larger apartments that fewer people live in depreciates the density that fosters the lifeblood of the city itself. Energy usage per household rises. Transit becomes less productive. The unique character of artisan shops is put at risk of fading into the diluted wash of gentrification.

Any Hope for Micro Change?

The state of things begs the question of whether or not there is a solution. One option (though rarely very popular) is through regulation. There could be requirements for certain unit mixes in certain areas that promote smaller apartments, effectively keep the average unit cost somewhat depressed. Making it more enticing to build smaller is another possibility. New York provides developers with square footage benefits in exchange for a certain percentage of a building to be marketed as affordable housing for low-income owners.

The perfect scenario would be a depression in demand for luxury apartments while maintaining local demand for smaller ones–a tall order for a city that has been attracting foreign wealth every time a new condo building comes on the market.

A more reasonable option is to target less wealthy areas that have yet to see the boom of more popular neighborhoods. For New York, this could be parts of the outer boroughs or the northern end of Manhattan: Harlem, Inwood, Washington Heights. New construction in these areas could help lay the foundation for their development path rather than the leapfrogging to luxury development that has happened in Tribeca and the East Village. Even still, the prospect may be a difficult sell for developers that can probably make more in a hot market by focusing on the largest pockets of wealth in the city. It is great to run the design exercises of a more sustainable housing model for our urban cores, but the demand structure will need to evolve in order to make it culturally viable.

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4 Responses to “Cities Pricing Out Their Own Density”

  1. As someone who lives in Williamsburg I can attest to cramped living arrangements like cramming 3 people in what is technically a 1 bedroom apartment. Primarily to stay close to the city and avoid a 40 minute subway ride. But also to live in a booming populated area and maintain a realistic division of rent.
    The bubble is blowing up again. I really wonder if people buying these luxury condos even intend on living there. Or is it a game of monopoly? Flipping over priced condos to make a few extra million here and there. Meanwhile, who is suffering? (Lower Income Citizens.)
    The “affordable housing” in many of these new developments which are subsidized are “affordable” as compared to what? (The overly bloated prices of Market Rate Housing.)
    It’s all very cyclical and unrealistic for the positions of the majority.

    • I agree that NYC housing is relatively very expensive but I would disagree that it is blowing up again. The rebound in housing prices in has been pretty muted. Over the last decade, Case Schiller index has housing prices only up 9%. Hardly blowing up again. A lot of the very expensive real estate is owned by the ultra affluent around the world as a second, third… home. You can view that as unfair but the market is there.

      This NYC info graphic is awesome. It came out back in March. Very fun to play around with.

  2. The average cost per square foot graph is quite surprising. At first glance, it appears that the market is inefficient. If 3+ bedroom apartments sell for more per square foot, why would any builder build anything less? Why wouldn’t all builders build 100% 3+ apartments, increasing the supply and driving the price down until the average square foot price was at parity across all apartment sizes? I actually think something else may be going on here. Could it be that the larger apartments are more expensive because they are also tend to be in more expensive locations and have more expensive construction and amenities? If this is the case, the limited supply of small units might not be entirely an economic issue. Do you think building codes or other restrictions may be suppressing small unit construction?

    • I think that to a certain extent builders do try to get larger units in there, but there end up being design constraints that can make a 3+ bedroom unit difficult to fit sometimes. Some new construction is in infill locations, tall “sliver” buildings that can essentially only have one unit per floor. The economics may not work (or even be available) to buy adjoining sites to end up with a wider floor plate.

      The same is true for the some of the basic results of zoning in NYC. The base lot dimension is 100′ (half a short block). With a 30-40′ rear yard setback you often end up with the 60′ module of building with. You need a window within 30′ for a room to be habitable. This usually leads to a +/- 25′ deep apartment, a corridor, then an apartment. The point is a 3+ bedroom can start to be very long and thin unless you start cutting holes in the floors and creating duplex apartments (which can eat up square footage in tough ways in the wrong layout).

      In my building I think that I live in a studio that is part of only about +/-10% of the total unit make up.

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