Micro-Apartments as an Emerging Real Estate Market

Does the “Small Space, Big City” Trade-off Work in Europe?


Master's Thesis, 2016

151 Pages, Grade: 2,2


Excerpt

Table of Contents

1 Introduction

2 What are Micro-Apartments?
2.1 Definition
2.2 Legal Requirements
2.3 Target Groups
2.4 Design
2.5 Location

3 Trends Supporting Micro-Apartments as a New Housing Market
3.1 Urbanisation
3.2 Rediscovery of the City Centre
3.3 Rising Rents
3.4 More Single Households
3.5 Less Physical Possessions

4 Advantages and Disadvantages
4.1 For Residents
4.2 For Developers and Landlords
4.3 For Other Stakeholders

5 Case Studies
5.1 Focus on Affordability: Pocket Living in London
5.2 Focus on Space-Efficiency: Spreedocks in Berlin
5.3 When do Micro-Apartments Pay Off?

6 Survey: Micro-Apartment Market Potential in Europe
6.1 Purpose and Approach
6.2 Respondents
6.3 Interest in and Requirements for Micro-Apartments
6.4 Differences between Demographic Groups
6.5 Differences between Europe and the US
6.6 Discussion

7 Further Research

8 Conclusion

Reference List

Appendix
Appendix 1: Average Rents in Large European Cities
Appendix 2: Explanations for Differences in Rent among European Cities
Appendix 3: Micro-Apartment concept “mnmm”
Appendix 4: Pocket Living – Photos
Appendix 5: Spreedocks – Renderings
Appendix 6: When do Micro-Apartments Pay Off?
Appendix 7: Survey questions
Appendix 8: Survey results
Appendix 9: Survey responses grouped by demographics and lifestyle
Appendix 10: Comparison of responses in Europe and the US

Table of Figures

Figure 1: Competing types of housing

Figure 2: Rent per m² for different apartment sizes in Germany

Figure 3: Rents and prices per m² for different unit sizes in Germany

Figure 4: Annual population growth in European cities compared to national growth rates

Figure 5: Historical rents and apartment prices in German cities and forecasts

Figure 6: Rents do not depend on the size of a city

Figure 7: Excess demand for single apartments in Germany

Figure 8: Micro-apartments combine the advantages of different types of conventional housing

Figure 9: Incomes and costs of living in exemplary European cities

Figure 10: Typical floor plans for Pocket apartments

Figure 11: The apartment types "Comfort", "Comfort XL" and "Double L"

Figure 12: Districts of Berlin (red = good residential areas, orange = medium, yellow = standard)

Figure 13: Profitability of micro-units in different locations

Figure 14: Incomes and rents of survey participants

Figure 15: Europe vs. US: Advantages of Micro-Units

Figure 16: Europe vs. US: Disadvantages of Micro-Units

Figure 17: Europe vs. US: Neighbourhood Amenities

Figure 18: Europe vs. US: On-site Amenities

Figure 19: Europe vs. US: Unit Features

1 Introduction

“Millennials are so spoilt with their smartphones & tablets. All we had at their age was the ability to buy property in Central London.”

- Twitter user @jamiesont, 18/10/2015, 3:02 PM

As large cities are increasing their population and urban living is becoming more popular, residing in a good location has become unaffordable for many. Micro-apartments are tiny apartments in desirable neighbourhoods that may offer a solution to the problem of high housing costs. Micro-apartments promise to enable residents to live in a central location for a lower total rent or price than a conventional apartment would cost, as long as the resident is willing to live with less space. Many people are willing to trade in apartment space for affordable city living and are prepared to treat the neighbourhood as their living room. For landlords, micro-apartments can be attractive as they often generate higher rents per square metre than conventional units.

Studio apartments used to be a “waste product” of the housing market. If the residual space on a floor was not enough for a “full-sized” apartment, it was often used to create a one-room studio. But recently, developers have created entire residential complexes that only consist of micro-apartments. Dozens of such tiny studios are placed next to each other in these buildings, and it is completely unrelated to holiday homes or social housing. Modern micro-apartments have underfloor heating and electric blinds, natural stone bathrooms and induction hobs, and even fitted wardrobes and wireless Internet are already installed and ready to use.

It seems like micro-apartments strike a chord not only with residents of international, expensive metropolises like New York City[1], Hong Kong or London, but are also a promising new housing market in other countries and smaller cities. In Germany, the developer Domus Vivendi finished its first micro-apartment building in Frankfurt in 2011, and within one month more than a hundred interested parties came forward (Oberhuber, 2014). Even though the apartments were designed for students, other demographic groups such as job starters, business commuters, and professionals who just moved to Frankfurt showed intentions to move in. Now, the company is producing micro-apartments in series, and so do other developers such as GBI, Eigenwert or Trei Real Estate. Thousands of such micro-units are being constructed in Germany alone, and a 2014 report estimated that there were already 25,000 existing units (Oberhuber, 2014). Many are sold or let (often for the long-term), but some are also temporarily provided by companies for their employees as serviced apartments.

The aim of this thesis is to have a look at micro-apartments as an emerging housing market in Europe and find out if the concept is sustainable. The research is focused mainly on Germany and the United Kingdom, as they are the two most important real estate markets in Europe. Chapter Two will give an overview of what micro-apartments are, which demographic groups they target, and how they ought to be designed. Chapter Three explains some of the trends that have led to the emergence of micro-units, followed by an overview of advantages and disadvantages in Chapter Four. Chapter Five discusses two examples for recent micro-unit developments in London and Berlin. Finally, Chapter Six covers a survey that was conducted in order to find out if the “small space, big city” trade-off is finding favour with Europeans. The chapter begins with an overview of the questionnaire and the demographic composition of the respondents, followed by findings concerning the interest in and expectations for micro-apartments and what amenities and features these flats should include. Finally, differences between the various demographic groups are identified and the European survey results are compared to previous findings from the United States.

2 What are Micro-Apartments?

2.1 Definition

There is no official definition of micro-apartments or micro-units. In addition to that, apartments that could be classified as “micro” are rarely marketed as such, because the term might be associated with confinement, poverty, and claustrophobia. Generally, micro-apartments are very small studio[2] apartments with sizes no larger than 40 m², and can be as small as half the size of a conventional studio (Much, 2012). Some definitions are even stricter, and only include units smaller than 30 m² or 20 m². These definitions also depend on cities and countries (Wong, 2013). For example, the average living space per capita is 77.3 m² in the United States and only 13.9 m² in Hong Kong (Haden, 2014, p. 15). Therefore, a definition that classifies all apartments below 40 m² as micro units would be very unfitting for the Hong Kong housing market. On the other hand, apartments that are 46 m² in size are already deemed “micro” in the US (Anderson, 2014). The average house sizes in the world range from 214.0 m² in Australia to 42.2 m² in (again) Hong Kong (Haden, 2014, p. 15). In Germany, the average living space per capita is 42.2 m², and the average flat has an area of 86.4 m² (Destatis, 2008).

Despite their tininess, these apartments include a full (albeit small) kitchen and a full bathroom. Often, the available space is used very efficiently, for example by using convertible furniture such as sofa beds or wall beds. Because of the special circumstances, micro-apartments are often pre-furnished by the developer or landlord. The kitchen equipment often is very limited in order to save space; for example, there might be no baking oven or dishwasher, and only a mini-refrigerator or a small sink.

The unique selling proposition of micro-apartments comprises three advantages: the opportunity to live in a great neighbourhood of an attractive (and hence expensive) city, the lower monthly rent compared to a conventional studio (even though the price per square metre is usually higher), and the possibility to live alone (instead of sharing the apartment or even bedroom). In short, micro-apartments offer a trade-off between living space and location: “small space, big city” (Haden, 2014, p. 15).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Competing types of housing

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Figure 2: Rent per m² for different apartment sizes in Germany

The closest competitors for micro-apartments are rooms in shared apartments and normal-sized studios or one-bedroom flats. Competing variants of small flats are boarding houses or serviced apartments, business apartments, and student accommodations (see Figure 1) (Bulwiengesa, 2014, p. 8) Boarding houses or serviced apartments have larger rooms than hotels (about 30-40 m²), are fully furnished and include a kitchen as well as areas for dining and living. They are 10-30% cheaper than hotel rooms; the main target group are business travellers. Often, boarding houses are located in the centre of large cities. Business apartments are similar, as they are furnished as well and include a small kitchenette with fridge, stove and sink. Both boarding houses and business apartments offer services and amenities such as a laundry room or a fitness centre, which is the case for a typical micro-unit development as well. Lastly, student apartments are a growing market and they are also in demand by professionals, as many cities have a lack of small apartments (Bulwiengesa, 2014, pp. 8-10).

From the landlord’s or developer’s perspective, micro-apartments usually offer higher net rental incomes per square metre than conventional units. There can be exceptions, though: Manhattan is an example, as higher prices per square metre are paid for large luxury apartments (Disbrow, 2013). However, from Figure 2 it appears that the “Big 7” cities in Germany have large premiums on small apartments and small premiums on large apartments (Immowelt, 2016c). Hence, micro-apartments should be economically viable.

2.2 Legal Requirements

Existing literature emphasizes that there are minimum apartment sizes in many US cities. These limits have recently been lowered, for example from 41.8 m² to 34.8 m² in Boston or from 26.9 m² to 20.4 m² in San Francisco (Romney, 2012). The reason that these minimum requirements were established was the bad living conditions in the early 20th-century single-room occupancy units. The urbanist Alan During criticized the minimum size requirements:

It’s a coalition of the greedy and the well-meaning that led to the banning of private-sector affordable housing in our cities. . . . The well-meaning folks were appalled by the living conditions of poor and working-class families. The greedy folks were appalled by the prospect of living next to them. Together, this awkward alliance helped advocate laws that established minimum living conditions not simply for safety, but also to define how much space an individual should reasonably be expected to live in. (quoted in Haden, 2014, p. 15)

Been, Gross, and Infranca (2014) are critical of legal requirements that prevent the construction of micro-units, too, and add that:

Zoning regulations, buildings and housing codes, and other municipal ordinance serve important interests. However, as building technologies and the urban environment change, cities must be willing to carefully evaluate these regulations and consider the potential they have to prevent or limit . . . micro-units, and thereby potentially drive up housing costs, reduce housing options for new households, encourage sprawl, and exclude new residents. (p. 67).

In addition to minimum size requirements, there can be other legal obstacles for micro-apartments, such as minimum parking standards, inclusionary zoning requirements, rules regarding the unit-mix, and outdoor open-space as well as indoor common-space provisions (Gabbe, 2015, p. 223). These rules limit the areas where micro-units can be developed and add costs to the development of small units, hence privileging larger ones (Gabbe, 2015, p. 232; Infranca, 2014, p. 89; Post, 2014; Wong, 2013). Infranca (2014) therefore urges municipalities to carefully re-evaluate these regulations with respect to their influence on micro-apartments and affordable housing. Consequently, in New York City, mayor Bloomberg waived certain zoning regulations for the micro-apartment competition “adAPT New York” (Disbrow, 2013; Much, 2012).

In Germany, there is no legally required minimum size. Already in 1931, the Imperial Fundamentals for the Construction of Small Apartments (Reichsgrundsätze für den Kleinwohnungsbau) determined that apartments which were part of government-sponsored council housing should have a size of 32 m² to 45 m², or 60 m² for families with children (Bergius & Lampmann, 1931) – a size that would definitely be “micro” from a contemporary North American perspective. Today, a single person who is dependent on welfare is entitled to a living space of 45 m² in Germany. The norm DIN 18011 from 1967 recommends 40-50 m² for a single household (Hotze, 2016). Nevertheless, there is no law that would prohibit the construction of very small units (e.g., 20 m² or smaller). However, it is settled case-law that flats are overcrowded if each resident has less than 8-10 m², in the sense that a landlord can limit the number of people living in his or her apartment (Marsch, n.d.). In addition, there are other standards that must be met for a unit to be classified as habitable or residential, for example ones regarding the ceiling height or the supply of natural light and air.

In the United Kingdom, the Technical Housing Standards generally require a minimum gross internal floor area of 39 m² for one-bedroom apartments for single persons and 50 m² for one-bedroom apartments for two persons (Department for Communities and Local Government, 2015). These are standards for social housing, but legally there are no minimum regulations (de Castella, 2013). The only exception is London, which has recently adopted a minimum space standard of 37.2 m² (Kelly, 2013). Nevertheless, one-bedroom flats in the UK are the smallest in Western Europe, with an average size of 46 m² (Royal Institute of British Architects, 2013). Accordingly, a recent survey from the Royal Institute of British Architects discovered that 47% of Britons did not have enough space for the furniture they owned, and 57% complained about insufficient storage space. Lack of space (32%) and lack of natural light (20%) were among the most widespread reasons for dissatisfaction with the home; likewise, 80% of respondents said their next home should have a certain minimum space (Royal Institute of British Architects, 2013). One reason for this could be the fact the flats and houses in the UK are advertised and sold on the number of bedrooms instead of the floor area, which results in a lot of small rooms and small apartments being built (de Castella, 2013)

2.3 Target Groups

The main target group for micro-apartments are those that are not earning enough to buy or rent a conventional studio in the city centre, but are too wealthy to be eligible for social housing. At the same time, these people want to live in a trendy downtown location and want to avoid long commutes. This means that young people are the most interested in micro-apartments (Much, 2012). Typical tenants in this market include (relatively well-off) students and (relatively high earning) young professionals[3] (Much, 2012), while minor target groups include couples, seniors living alone, single parents, and business commuters (Hotze, 2016).

Bulwiengesa (2014) has identified six potential target groups for micro-apartments. Weekend commuters, who work in a different city than where they reside, could be interested in a micro-apartment close to their work as a temporarily used second or third home and would appreciate the flexibility that micro-units offer. Expats could also be interested in micro-apartments, as many of them only work in a country for a limited amount of time. The advantages they would see in micro-units are their flexibility and the fact that they are already furnished and ready to move in. Career entrants starting their first job are the third target group; especially those who move to a new city or who still have an insecure employment due to probation periods would appreciate the flexibility of living in a micro-apartment as well as the liquidity advantage that arises as no investments for furniture need to be undertaken. Agency workers are a similar target group and could benefit from renting a fully furnished micro-apartment for a limited amount of time. Students are a large target group, as they demand flats with low rents and there is a shortage of university-run student accommodations in many cities, which means that many of them need to fall back on the private housing market. Finally, singles and young professionals in general are a large, although rather unspecific, target group. Micro-apartments are especially interesting for those that prefer a central location with good public transit links to a larger living space.

American studies have identified certain demographic groups that are most interested in micro-apartments:

- Age: between 20 and 34 as well as over 65 (Disbrow, 2013, p. 36), or people younger than 25 years (Urban Land Institute, 2015)
- Sex: 26% of men said there are “very interested” or “interested” in micro-apartments compared to 23% of females, possibly due to women being more tolerant of or interested in roommates (Urban Land Institute, 2015, p. 22)
- Household status: usually singles, sometimes couples (Urban Land Institute, 2015, p. 22)
- Occupation: mainly young professionals, who often consider the micro-apartments “‘launchpads’ for new careers and lives in a new city or place” (Urban Land Institute, 2015, p. 22)
- Ownership status: renters (Disbrow, 2013), especially first-time renters (Urban Land Institute, 2015, p. 22)
- “Social animals, but ones who do not want or need to socialize in their units” (Urban Land Institute, 2015, p. 22)

A survey (Urban Land Institute, 2015) showed that single persons who are currently living with roommates are the most interested group (40% are interested), followed by singles living alone (27%). Regarding age, people belonging to the generation Y (alias millennials) seem to be a good target group due to various factors:

First, generation Y is highly mobile and tends to move frequently to follow opportunities and jobs. Many millennials choose where they want to live first and then look for a job. This generation has demonstrated a renewed interest in urban and urbanizing “authentic” locations – transit-rich locations are a plus, but walkable is a must. . . . . Gen-Yers have significantly lower incomes [than the previous generation] and much higher student loan debt loads, and therefore less disposable income to spend on things like expensive apartments. All of this has contributed to delayed household formation and delayed marriage among members of the millennial generation. Many of these same factors are what makes micro units so attractive. (Urban Land Institute, 2015, p. 23)

Moodie (2015) agrees that millennials are the main target group for micro-apartments, as they are “looking for smaller, more affordable and more sustainable living spaces” (p. 4).

Minor market segments include people using the micro-units as a crash or party pad, as an in-town second home, or a part-time residence close to their family (Urban Land Institute, 2015, p. 22).

2.4 Design

A great micro-unit design is crucial. A micro-unit can become quite chaotic if it is not well-designed (Barhat, 2015). Due to the space limitations, there are two main problems: fitting in all the furniture and equipment of a conventional flat as well as designing the apartment in a way that makes long-term living comfortable by preventing psychological stress and the feeling of being confined. Two exemplary micro-unit projects will be presented in Chapter Five and analysed regarding their design. Besides micro-apartments, there can also be detached micro-houses (Hildebrandt-Woeckel, 2016).

In order to fit everything a normal apartment has into a micro-apartment, convertible and multipurpose furniture is necessary (Anderson, 2015; Barhat, 2015; Post, 2014). For example, the bed is only needed for sleeping. Hence, there are space-saving and multipurpose designs such as beds that can be folded up into a wall (“Murphy bed”), sofas that can be converted into a double bed (sofa bed), or beds that can turn into a dining table during the day (“TableBed”). However, they should be designed in such a way that residents do not need to make and unmake their beds every day (Anderson, 2015). An extreme example for convertible furniture is the micro-living concept “mnmm” (which presumably stands for “minimum”) by Scheidt Kasprusch Architekten. Here, a single piece of furniture that is located in the centre of the room can be converted into a bed, a dining table, a study table, a kitchen, a dressing room, a vanity table, and a bathroom. See Appendix 3 for pictures of this concept. However, Oberhuber (2014) warns that the process of converting furniture should not be a hassle. While it might be interesting at the beginning, it will soon become a nuisance to fold out table or bed every day. Hence, all furniture items that are needed daily should be given space on the main area without any need for conversion. Generally, micro-units are fully furnished and often include bespoke furniture that was designed specifically for the apartments. Furthermore, all residual areas should be used as storage space; and suspended ceilings can be used as additional storage space (Post, 2014). Another idea to save space is underfloor heating instead of space-wasting radiators. Some micro-unit designs also include moving walls that can be used to temporarily create a second room (Grecu, 2013, p. 23)

To increase the wellbeing in micro-units, there should be large windows to let in lots of light and high ceilings to create a feeling of space (Sweeney, 2013; Wong, 2013). It is also recommended to have a nice view from the windows, if possible, for example a park or other green areas (Oberhuber, 2014; Post, 2014). A balcony would also increase wellbeing; however, it should be a proper balcony where one can go outside, and not just a Juliet balcony. Alternatively or in addition, a rooftop terrace serves the purpose of having some outdoor space for the residents (Sweeney, 2013). Other design features that result in better perception of the accommodation include high quality interiors and equipment (Anderson, 2015; Barhat, 2015), soundproof walls (Sweeney, 2013), an optical separation of living, sleeping, and dining areas, and avoidance of monotonous colours and too homogeneous rooms (Oberhuber, 2014).

Moreover, micro-apartments should have a regular bathroom with shower stall and countertop instead of just a wetroom (Anderson, 2015; Disbrow, 2013, p. 94), a convection oven in the kitchen, a standard-sized kitchen sink and as many in-unit amenities as possible. There should also be privacy to dress: Disbrow (2013) suggests a sliding shaded glass door. Micro-units should have high ceilings (2.70 m or higher) and be at least 3 m wide; the bathroom should be large enough for two people to move around in it (Disbrow, 2013, p. 94). To save construction costs, micro-unit buildings should be planned starting from the inside, with standardised floor plans and with bathrooms and kitchens located next to each other (Hotze, 2016).

2.5 Location

From a resident’s point of view, location is one of the most important incentives to live in a micro-apartment (Hotze, 2016; Much, 2012). A US report recently found out that 97% of micro-apartment tenants deemed location a top priority for their rental decision (Urban Land Institute, 2015, p. 21). Hence, new units must be located in a desirable, central neighbourhood, and in the immediate vicinity of public transit and stores for daily needs. Living in small units only makes sense in dense and attractive cities (Grecu, 2013, p. 22).

From a developer’s point of view, the main question is if it is more profitable to build micro-apartments or conventional ones. Ignoring legal restrictions, this mainly depends on the prices or rents per square metre that can be achieved for small versus large apartments, the number of units that can be built on the site, and the construction costs, which are higher for micro-apartments on a per square metre basis (Much, 2012). Micro-units are only viable if there is a premium on small apartments, meaning that the common assumption that unit size has an inverse relationship to price/rent per square metre holds. An example for a market that puts a premium on large units is Manhattan, where luxury buyers outbid all others and it makes more sense for developers to construct large apartments instead of micro-units (Disbrow, 2013). For a real estate developer, there has to be an optimal unit size at which the most revenue per square metre is generated.

However, not only the rent or price per square metre matters, but also the construction costs (Hotze, 2016). According to Disbrow (2013), the extra costs that arise from having more kitchens and baths add up to approximately 25% of the total unit cost (p. 35). Thus, only when there is a premium on small apartments and this premium is large enough to offset the high costs associated with constructing and operating more units, it will be optimal to develop a micro-apartment building.

In addition to financial considerations, other neighbourhood attributes such as socioeconomic characteristics, zoning regulations, and parking requirements need to be kept in mind when identifying a location for a micro-apartment development (Disbrow, 2013, p. 112).

Figure 3 shows the rents and price per square metre for Germany as a whole, the largest 15 cities, and various districts of Berlin and Frankfurt. The data was taken from Immowelt (2016). While both small units (<40 m²) and large units (>120 m²) have rent premiums of about 25% in Germany, large condominiums are generally sold for a higher price per square metre than small ones. In fact, buyers (instead of renters) seem to universally prefer large units. Hence, micro-apartments should be let instead of sold in Germany. Stuttgart is a great example for a city that has a rent premium on small apartments (+28% compared to the average rent per square metre) and a discount on large ones (-30%). However, the micro location matters as well. For example, Frankfurt-Innenstadt is an area where is seems to be more profitable to build and rent larger units, whereas Frankfurt-Westend-Süd is an area in which smaller units are preferable.

In Chapter 5.3, I will give exemplary calculations from a developer’s point of view. I will look at five locations in Berlin with realistic assumptions and analyse where it is more profitable to build micro-apartments and where conventional units are preferable.

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Figure 3: Rents and prices per m² for different unit sizes in Germany

3 Trends Supporting Micro-Apartments as a New Housing Market

3.1 Urbanisation

Urbanisation, the population shift from rural to urban areas, is a global megatrend. As of 2015, 73% of Europeans lived in cities, compared to 81% in North America and 53% worldwide (Statista, 2016a). The degree of urbanisation in Europe is expected to increase to 80% in 2020, and even more than 90% in some countries (Uhel, 2008). This increase is not due to population growth, but changing lifestyles (Uhel, 2008). According to a United Nations (2014) report, the urban population in Eastern and Eastern Central Europe stood at 69% in 2014 and is expected to increase to 78% in 2050. For Northern Europe and the British Isles, the degree of urbanisation will increase from 81% to 87% in 2050. In Southern and South Eastern Europe, urbanisation is expected to increase from 70% to 80% in the same time, while Western and Western Central Europe will reach an urban population of 86% in 2050, up from 79% today. Germany currently sits at 75% and will reach 83% in 2050; France will increase from 79% to 86%, the United Kingdom from 82% to 89%, Italy from 69% to 78%, Spain from 79% to 86%, Poland from 61% to 70%, and Russia from 74% to 81%.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: Annual population growth in European cities compared to national growth rates

Figure 4 shows how unequally the population is growing in Europe. Germany is a great example: while the overall population decreased between 2000 and 2015, the “Big 7” cities were still growing and will continue to do so. In France, the total population grew in the last years, but the growth was more pronounced in the large cities. In the United Kingdom, not all cities were growing faster than the overall country, but growth was positive in all large cities, and the two largest cities, London and Birmingham, grew at an above average velocity. In Italy, only Rome and Milan (the two largest cities by far) fit into the picture, while other large cities were even losing inhabitants. Population decline in European cities can be caused by low fertility and emigration; even capitals such as Bratislava (Slovakia), Sarajevo (Bosnia-Herzegovina), Riga (Latvia), and Yerevan (Armenia) did experience population decline since 2000 (United Nations, 2014).

This shows that the divide is not just between the countryside and the large cities: in terms of both domestic and international net migration, “winner cities” and “loser cities” have emerged in many European countries. Italy is a great example, but the same can be observed even in Germany. For example, in the state of North Rhine-Westphalia, Düsseldorf and Cologne are growing and prospering (which implies rising rents and possibly a greater viability of micro-apartments), while nearby large cities such as Duisburg are losing inhabitants.

Nevertheless, the largest cities will continue to grow. Including the agglomeration, Moscow will remain the largest European city in 2030, with 12.2 million inhabitants, up from 12.1 million in 2014 (compound annual growth rate: 0.1%). Paris will have the second largest agglomeration with 11.8 million inhabitants, up from 10.8 million in 2014 (CAGR: 5.8%). London’s agglomeration will reach 11.5 million people in 2030, up from 10.2 million (CAGR: 7.4%). Madrid will grow from 6.1 million people to 6.7 million (CAGR: 5.5%), and Barcelona from 5.2 million to 5.7 million (CAGR: 5.5%), both including agglomeration (United Nations, 2014). Berlin (the city proper, without agglomeration), is expected to increase its number of inhabitants from 3.6 million to 3.8 million in 2030 (CAGR: 4.5%), although there is a lot of uncertainty due to the large number of asylum seekers currently arriving in Germany (Senatsverwaltung für Stadtentwicklung und Umwelt, 2016). Unfortunately, there are no official population projections for Rome.

Urbanisation is a general trend that affects most of Europe. While the countryside is losing inhabitants and infrastructure, the large cities are growing and becoming more expensive in terms of rent. The “lowest vacancy rates are in large, prosperous cities and their surround areas and in the economically strong regions” (Jones Lang LaSalle, 2015, p. 5). Housing prices and rents in the large metropolitan areas of Europe are expected to increase further. At the same time, less attractive regions and rural areas tend to lose inhabitants due to generally low, below replacement birth rates as well as the attractiveness of metropolitan centres for domestic and international migration. For example, German officials expect no more demand for any new residential construction in the East German countryside from 2024 on (Jones Lang LaSalle, 2015, p. 5).

3.2 Rediscovery of the City Centre

A more recent trend that needs to be addressed is that city centres have become desirable again in recent years (Bulwiengesa, 2014, p. 5; Disbrow, 2013, p. 10). Approximately 40% of Americans between 18 and 36 would rather live in urban areas instead of the suburbs (Barhat, 2015). In the UK, 54% of people between 18 and 24 said in a Knight Frank survey that they would consider living in a small studio apartment which makes central locations more affordable (Barhat, 2015). Over the past decades, European cities have expanded spatially much more than they increased their population (78% versus 33% in the period from 1958 to 2008), leading to urban sprawl (Uhel, 2008). The recent trend of people moving back from “suburbia” to the city centres allows for high density living environments and sets the stage for the construction of micro-apartments.

In Germany, young people are leaving the rural regions and move to the big cities. At the same time, these cities remain attractive for family, so that it is becoming less common for them to move (back) to the suburbs or the periphery (Siems, 2014). The most mobile age group are the 18 to 24 year olds, who are moving to university cities for studying and then stay because of job opportunities. But this is no new development; however, the 25 to 49 year olds are staying in the cities as well, even though it used to be common for them to move to the suburbs when starting a family. These two trends are amplifying each other and will necessarily result in a stronger concentration on core cities, and Berlin, Hamburg, and Munich in particular. However, in some cities such as Munich, the exurbs are growing as well, as the central boroughs have become too expensive for many in terms of rents or condominium prices and young families are forced to move out of the city centre (Siems, 2014). The Institute of the German Economy (Institut der deutschen Wirtschaft) predicts a continuing urbanisation due to both domestic and international migration and warns of an insufficient supply of housing and infrastructure in the largest cities (Siems, 2014). Micro-apartments could be a possibility to add more housing space and increase the density in the most desirable cities and neighbourhoods.

The attractiveness of the city centre strongly increases rents in the desirable neighbourhoods. For example, most of the people moving to Berlin took up their abode in central locations such as Prenzlauer Berg, Mitte, Neukölln, and Friedrichshain. Internationals coming to the city strongly preferred to live in Mitte as well (Schönball, 2014). This results in increasing rents and “gentrification”[4] of these areas, which could make micro-apartments more attractive as they offer relatively affordable rents in great locations. Micro-apartments in attractive neighbourhood would lead to a higher density of housing and more supply of residential units. While the rents per square metre are typically higher in micro-apartments than in conventional ones, they would release some pressure from the housing market.

3.3 Rising Rents

Property prices and rents are directly and indirectly affected by the demographic development and the relative attractiveness of the regions, agglomerations, and cities. A main determinant of property prices is the net migration a municipality experiences (DiPasquale & Wheaton, 1996, p. 58). Besides actual population growth, it also influences the investors’ expectations for future growth and hence affects a city’s investment volume and new constructions (DiPasquale & Wheaton, 1996; Hernando et al., 2013). Research on several countries also showed that average income per capita is positively affecting real estate prices and rents (Capozza et al., 2002), and the same can be said about the initial size of a city (Capozza et al., 2002, p.2; DiPasquale & Wheaton, 1996, pp. 56-58; Eaton & Eckstein, 1994, p. 32). Real estate prices and rents are decreased by unemployment and the construction of new properties (Capozza et al., 2002; Cheshire & Magrini, 2002). As the supply of housing does not meet the demand in growing cities, the rents will rise (assuming no rent control laws), making the city or at least the more attractive neighbourhoods unaffordable to many. This is an opportunity for developers of micro-apartments, as these flats constitute more affordable housing for the city while at the same time generating a higher rental income per square metre for the landlords.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5: Historical rents and apartment prices in German cities and forecasts

Figure 5 shows how much housing costs have increased in German cities as of March 2016 and how much they are projected to increase (Osadnik & Haimann, 2016). From 2006 to 2015, Berlin’s average rents saw a compound annual growth rate of 5.6%. Munich had a CAGR of 5.1% and Hamburg of 3.5%, both for 2008 to 2015 (Jones Lang LaSalle, 2015, p. 7). According to Eurostat, every 7th person in Germany spends more than 40% of his or her income for rent; only Greece and Denmark have even higher rent-to-income ratios in Europe (Osadnik & Haimann, 2016). However, even in Munich, a one-room apartment only uses up 25% of the resident’s income on average, while this number is higher than 40% in cities like Rome, Madrid, and London (Bulwiengesa, 2014, p. 6). In London, the average price of a house rose by £170,000 from 2012 to 2016 (and is expected to rise by a further £100,000 in the next four years), while the average income increased by £10,000 in the same time (Durkin et al., 2016). These numbers are the necessary result of large cities growing in population and an insufficient number of new units being built. Micro-apartments could be a solution to the affordability problem that many people face.

Appendix 1 shows the average monthly rental cost for apartments in various European cities as of 2015 (Statista, 2016b). The most expensive city in Europe is London ($2,360), followed by Luxembourg City ($2,130), Oslo ($1,940), and Zurich ($1,770). Paris occupies the seventh rank ($1,610), while Munich is the most expensive German city ($1,370, rank 10) and Milan is the most expensive Italian one ($1,340, rank 12). The most expensive city of the former Eastern Bloc is Warsaw ($840, rank 20).

Interestingly, the city size, measured as the number of inhabitants, seems to be not significantly related to the average rent, even though one would normally expect large cities to be more expensive in terms of housing cost. The same is true for capital status: being a capital city does not imply higher rents (actually, there seems to be a negative correlation, but it is not statistically significant). The average rental costs across Europe were calculated in US dollars, so possibly the data was influenced by the local currencies. However, a dummy variable of “belonging to the Eurozone” is insignificant as well. Nevertheless, rents are significantly lower in formerly socialist countries[5], with a difference of about 800 USD per month. This is probably due to the lower average incomes that these countries still have today. Excluding all cities from the formerly socialist countries from the analysis results in a negative and significant (p < 5%) coefficient for the Eurozone dummy variable. However, even when only looking at Western European Eurozone cities, neither the city size nor the capital status become significant in explaining the average rental costs. See Appendix 2 for the regression results and Figure 6 for scatterplots.

Abbildung in dieser Leseprobe nicht enthalten

Figure 6: Rents do not depend on the size of a city

3.4 More Single Households

A second important trend that should benefit the micro-apartment market is the fact that more and more people are living alone in single households:

Human societies, at all times and places, have organized themselves around the will to live with others, not alone. But not anymore. For the first time in human history, great numbers of people – at all ages, in all places, of every political persuasion – have begun settling down as singletons. (Klinenberg, 2012)

In the United States of 1950, 9% of all households were single households, and 22% of adults were single (i.e., unmarried). Both numbers have steadily increased since then, and have recently reached new heights: 28% of all American households are single households, and a majority of adults are single (Klinenberg, 2012). The number of single households is even higher in large cities (Wong, 2013). In the European Union of 2015, 32.7% of all households are single households; the percentages range from 22.0% in Poland to 47.9% in Sweden. In Germany, 40.3% of households are single households, which is larger than the proportions in France (34.9%), Italy (33.1%), or the United Kingdom (31.4%) (Statista, 2015). There seems to be an increase in people living alone in Europe as well. In the previous 2011 census, single households only had a share of 37.2% in Germany, which corresponded to 17.1% of the population, or 13.4 million people, living alone. This made single households the most common type of household. Of these people living alone, only 17.6% were younger than 30 years (however, one needs to keep in mind the overall high median age in Germany), and 42.0% lived in cities with more than 100,000 inhabitants (Destatis, 2014).

Single households increase the pressure on the housing market in general. For example, in Germany there is an expected growth in the number of households, even though the number of citizens is decreasing. The largest decreases are expected for households with three or more persons (-19% until 2030), while the largest increases are expected for households with only one or two people (+5.3% and +7.1% until 2030, respectively) (Bulwiengesa, 2014, p. 3). These single households are especially dominant (more than 50%) in the large cities such as Berlin, Hamburg, Munich, Frankfurt, Cologne, Düsseldorf, and Stuttgart. However, not all of these single households consist of young professionals and students, but instead a large share is made up of older people (Bulwiengesa, 2014, p. 3; Hotze, 2016). An opportunity for micro-apartment arises, as there were 16.5 million single households in 2012, but only 5.2 million flats with one or two rooms in Germany at the same time (see Figure 7) (Bulwiengesa, 2014, p. 5). This development has also led to a willingness to invest more into rent or property (Hotze, 2016).

Abbildung in dieser Leseprobe nicht enthalten

Figure 7: Excess demand for single apartments in Germany

What could be the causes for the trend towards living alone? Haden (2014) lists “women’s economic independence, shifting social expectations around marriage, technology and communications, social mobility and longevity” (p. 17) and also observes a “trend that suggests living alone allows freedom, autonomy, and strong voluntary connections with others” (p. 17). Women’s economic independence has led to a weakening of the traditional family model (as it becomes less necessary for women to be married), and shifting social expectations around marriage led to fewer and later marriages. In fact, the median age at first marriage in the United States has increased from 22 years for females and 26.1 years for males in 1890 to 26.1 years for females and 28.2 years for males in 2010 (U.S. Bureau of the Census, 2010). In Germany, the trend has been going upwards in the last few decades. The median age at first marriage for women currently sits around 31 years, up from the 1975 low of 23 and 21.5 years in West and East Germany, respectively (Destatis, 2013). However, between 1700 and 1945 this number has varied between 25 and 31 years (Knodel, 1986, p. 352), so the recent trend cannot just be blamed on women joining the workforce. Technology and new ways of communication enable people to be in contact with other people even when being physically alone. This has both reduced the need to meet other people and the feeling of being lonely when being alone, and hence, it could have made it more pleasant for people to live on their own. Klinenberg (2012) summarises the likely causes in society for the trend towards living alone:

Until recently, most of us married young and parted only at death. If death came early, we remarried quickly; if late, we moved in with family, or they with us. Now we marry later. . . . . We divorce, and stay single for years or decades. We survive our spouses, and do whatever we can to avoid moving in with others – even, perhaps especially, children. We cycle in and out of different living arrangements: alone, together, together, alone. . . . . for the first time in centuries, the majority of all American adults are single. The typical American will spend more of his or her adult life unmarried than married, and for much of this time he or she will live alone. Naturally, we are adapting. We are learning to go solo, and crafting new ways of living in the process. (Klinenberg, 2012)

This appears to be great circumstances for micro-apartments as well. People who want to live alone can do so in micro-apartments – in desirable locations, for an affordable rent compared to conventional flats, and without roommates or shared bathrooms and kitchens. A majority of the existing housing stock was built with families in mind and is equipped with multiple bedrooms as well as a separate living room. People living alone do not need and often cannot afford such apartments for themselves, but many do not want to share the facilities with flatmates either. Hence, micro-apartments could be an answer to the growing number of single households.

3.5 Less Physical Possessions

The obvious downside of a micro-apartment is the limited space. Especially, there is not much storage space available in a micro-unit. However, the target groups – young professional singles or first-time renters – do not have many physical possessions yet, such as clothes, books, and so on. Hence, these groups of people have a higher willingness to live with little storage space:

The vast majority of residents who choose micro units are young professional singles. They are typically first-time renters who have not accumulated much “stuff” yet and are, therefore, completely comfortable with limited space. Many consider these units “launchpads” for new careers and lives in a new city or place. (Urban Land Institute, 2015, p. 22).

Not only do these people have accumulated few physical possessions, it is also likely that they will need much less storage space in the future compared to what developers of the existing housing stock were expecting. Due to digitalisation, large physical collections of books, music, and movies are becoming a thing of the past. USB sticks, SD cards and the cloud will sooner or later replace the large cupboards filled with books, CDs, and DVDs that are still part of most homes today. Hence, a micro-apartment that has just enough space for furniture and clothes, complemented with some storage space in the basement or in suspended ceilings for bulkier items, would possibly be perceived as sufficiently sized.

Another related phenomenon is the decreasing car ownership rate, at least in big cities in Europe. Take London for example. There, car ownership rates have slightly decreased in the last few years (from 57% of households in 2005 to 54% in 2010). In absolute numbers, the number of cars licensed in London has decreased by almost 1% from 2005 to 2011, while it has increased by more than 4% in the rest of the United Kingdom. Furthermore, car ownership is higher in outer boroughs, in areas with poor access to public transport, in higher income households, and in households with children and it is also increasing with age up to around 50-60 years[6] (Transport for London, 2012). However, micro-apartments target young, single people who do not have high incomes yet, and are located in central locations with great public transport connections. Hence, the typical tenant of a micro-apartment will be less likely than the average to own a car. The negative correlation between city size and car ownership can also be observed in Germany: in cities with less than 500,000 inhabitants, there are 0.498 cars per capita, but the number decreases to 0.328 in cities with more than a million inhabitants and is only 0.289 in Berlin (Stockburger, 2012). Ferdinand Dudenhöffer, a professor of Automotive Research, added that the trend towards car-sharing and other mobility choices makes the wish for owning a car appear less important. These trends are set especially in large cities. . . . The urbanisation is continuing, large cities are becoming denser. Hence, the trend towards fewer cars will become even stronger in the future. (Dudenhöffer, as quoted in Stockburger, 2012).

4 Advantages and Disadvantages

4.1 For Residents

There are various reasons why micro-apartments are advantageous for tenants and might be preferable compared to sharing a large apartment, paying more rent for a conventional studio or one-bedroom unit, or living in the suburbs where the rents are lower.

First of all, micro-apartments have lower rents than conventional apartments marketed towards singles or couples, that is, studios or one-bedroom units. This must be the case obviously, because micro-units offer less space. However, in most cities and neighbourhoods one can expect the rent per square metre to be higher in small apartments than in large ones. Nevertheless, the total monthly rent will be lower in a micro-apartment, despite the higher rent per square metre. However, usually it will still be cheaper to rent a room in a shared apartment than to rent a (whole) micro-apartment.

Second, the relative affordability of micro-apartments makes it possible for potential tenants to live in a desirable neighbourhood, such as the city centre or a hip “scene district”. While a micro-apartment in a great location will still be more expensive than a conventional one in an unattractive area, it might be the only flat an individual is able or willing to afford. Related benefits of living in the city centre are the proximity to public transit and (usually) a short commute time to work.

Third, micro-apartments enable people to live alone in these great locations. Unsurpringly, singles currently living with roommates are the group that is most interested in micro-apartments (Urban Land Institute, 2015). While some people might prefer to share the apartment (or even bedroom) with others, the ability to live alone is definitely a selling proposition of micro-units (Much, 2012).

Minor advantages of micro-apartments are the minimal apartment upkeep (due to the small size), and possibly the community amenities and shared spaces (e.g., gym in the basement, rooftop terrace) as well as the similar lifestyles of the neighbours. In addition, micro-apartments usually offer a lot of flexibility, as they are fully furnished and already have working Internet and other amenities. A micro-apartment developer from California stated that “we wanted to build something that would allow someone to arrive . . . with a suitacase and a computer at 4 p.m. and be settled in and ready for action by 7 p.m.” (Patrick Kennedy, as quoted in Much, 2012)

Abbildung in dieser Leseprobe nicht enthalten

Figure 8: Micro-apartments combine the advantages of different types of conventional housing

In summary, as the Venn diagram in Figure 8 shows, micro-apartment combine low monthly rents, a good location, and the ability of living alone. In addition to that, most recent developments also offer services and additional facilities; hence, they can also be viewed as a cheaper alternative to other “value-added” living (e.g., hotels, boarding houses, serviced apartments).

A micro-unit should be let for a monthly rent that is 25%-30% below that of conventional units in the same location (Urban Land Institute, 2015, p. 25). However, not every micro-apartment is necessarily affordable. For example, the Manhattan micro-apartment building Carmel Place features 55 units, of which 22 are income restricted, and the others rented at market rates. The flats that are let in line with the market cost between $2,650 and $3,150 per month (Muñiz, 2016), compared to an average studio rent of $1,950 in the whole city of New York[7]. This also means that the rent would be 40% higher than what the median household in New York City can sustain (Epstein, 2013). In some super-desirable locations, it seems to be impossible to have “affordable” rents, even when the apartment sizes are decreased as much as possible.

Furthermore, some architects and psychologists are sceptical if micro-apartments can be a long-term home or if the lack of space would result in health risks, psychological stress and privacy issues (Post, 2014). Especially in the case of couples inhabiting a micro-unit, there would be no refuges where one can be alone, and living together in such a small space could strain the relationship (Epstein, 2013; Oberhuber, 2014). The forced social interaction in shared micro-units could possibly lead to frustration, anger, apathy or withdrawal, and thus one may not want to risk sacrificing one’s psychological basic needs for short-term economic optimisation (i.e., lower rents). However, a good micro-unit design can reduce the risk of stress (Oberhuber, 2014).

Nevertheless, micro-units are more suitable for people who do not spend much time at home and are willing to treat the neighbourhood as their “living room” (Much, 2012). Barhat (2015) quotes one such micro-apartment resident: “Between work and school, I’m rarely home. My suite functions as a place to simply store my possessions, and for sleeping, because I live in a neighbourhood that has plenty of coffee shops, restaurants and pubs.”

4.2 For Developers and Landlords

Developers and landlords will have one main incentive to build micro-apartments: profits. While the operating costs and construction costs are higher (e.g., because there are more kitchens and bathrooms per square metre than in a normal apartment building), the rental income they can generate is higher as well. Not only do more micro-apartments fit into an apartment building, but small units also generate a higher rent per square metre than normal or large units. A US report confirmed[8] that the smallest units tend to have lower vacancy levels and higher rents per square metre compared to larger units (Urban Land Institute, 2015, p. 15). There can be exceptions, for example Manhattan, where large luxury apartments sell for higher prices per square metre, but in most cities the inverse relationship between apartment size and rent per square metre holds (also see Figure 2 and Figure 3 again). Research by Disbrow (2013) showed that, generally, there is a rent-per-square-metre premium for large units in neighbourhoods which are predominantly comprised of either families or groups that prefer to live in larger households for financial or cultural reasons (e.g., roommates or certain groups of immigrants), and furthermore in neighbourhoods in which very rich residents want to live in large apartments and are able to outbid others, as well as in markets that attract wealthy speculative investors (such as Manhattan). Accordingly, there are premiums for small units in poor neighbourhoods where people can only afford a certain monthly rent even if the rent per square metre is more expensive, in neighbourhoods dominated by singles who prefer to live alone, and in neighbourhoods comprised of single immigrants who have moved away from their home country and families for work and who try to minimise their rental costs (Disbrow, 2013, p. 43).

On the other hand, developers have higher construction costs per square metre, and landlords also have higher management costs, as micro-apartment tenants tend to stay only for a few years. Many potential tenants are students that will move out after their studies or they are young professionals who took their first job in a new city and will move into a larger apartment once they can afford it.

[...]


[1] A recent micro-apartment development in Manhattan, Carmel Place, had more than 60,000 applications for its 22 “affordable units” ($939-$1,500 per month) (Muñiz, 2016; Wong, 2013).

[2] i.e., apartments with only one room, which serves as a living room, bedroom, dining room, and office room at the same time

[3] These groups have been called “class-rich, but cash-poor” (Disbrow, 2013, p. 51).

[4] An exemplary online rant reacting to an article about people moving to Berlin reads: “The article was written in a positive way, but is describing a very serious topic. It is the influx of wealthy families from southern and western Germany in particular, combined with students sponsored by rich parents and tourists from all over the world living in holiday apartments, which totally unhinges the price level of this city. . . . . Berlin has become uninhabitable and simply un-financeable for the natives. The senate MUST limit the number of people coming. It is unacceptable that rich yuppie families from Swabia are favoured and the own population is neglected more and more.” (online comment by user “kreuzbergerjunge”, in Schönball, 2014).

[5] Berlin was included in the formerly socialist bloc as well.

[6] Car ownership rates peak around 55 years (males) and 50 years (females), with rates of 68% and 48%, respectively. For comparison, only 6-7% of 18-year-olds own a car, and the 30% threshold is only reached at the ages of 25 (males) and 30 (females) (Transport for London, 2012).

[7] However, the average studio rent in Manhattan was slightly higher, at $2,092 (Much, 2012).

[8] This refers to units smaller than 55.7 m² built in 2012 and 2013. Unfortunately, the total stock of units built in these years was limited, so that it is hard to say if small units are just a niche or if they are indeed an opportunity for large future developments.

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Details

Title
Micro-Apartments as an Emerging Real Estate Market
Subtitle
Does the “Small Space, Big City” Trade-off Work in Europe?
College
EBS European Business School gGmbH  (EBS Business School - Real Estate Management Institute)
Grade
2,2
Author
Year
2016
Pages
151
Catalog Number
V351831
ISBN (eBook)
9783668404427
ISBN (Book)
9783668404434
File size
3270 KB
Language
English
Tags
Micro-Apartments, Micro-Units, Micro-Flats, Urban Living, Real Estate, Immobilien, Finance, Residential, London, Berlin, Market, Business
Quote paper
Florentin Rack (Author), 2016, Micro-Apartments as an Emerging Real Estate Market, Munich, GRIN Verlag, https://www.grin.com/document/351831

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