Real Estate Law & Industry Report | Industry Spotlight

Micro-apartments, one of the latest trends in the multi-family housing asset class, are being built, proposed, or studied in such high-cost cities as New York, San Francisco, and Chicago. Are they the wave of the future? Only if they’re done correctly, says one Chicago developer. The ‘‘living room’’ has to be extended to the street and even down the block. Jay Michael, a founding partner and chief creative officer of Cedar Street Co., has redeveloped over 1 million square feet of space, and is buying failed single room occupancy (SRO) hotels and converting them into micro-apartment buildings. Michael spoke to BNA’S Kevin Lambert about micro-apartments, how a key fob from one of his buildings gives entry to all of his others, and how a few retailers are starting to shrink their dimensions to keep up with what might be the sign of the times.

CHICAGO DEVELOPER CONVERTS SROS INTO TINY APARTMENTS; LIVING ROOMS GO OUTSIDE

BNA: You are turning failed single room occupancy (SRO) hotels into units with micro-apartments.What dimensions do you consider to be the most workable?

Michael: It is not necessarily the dimensions. We have an asset that has a great deal of former efficiencies. They are 275 square feet, they are long, and they are usable in a way that is different than some of my 400 square foot spaces, [units] that I think are actually less favorable on the design side. So it is not just a matter of the square footage. It is . . . also where the window line falls and the shape of the apartment as it relates  to the shape of the building. Oftentimes studios have long window lines—or several windows—allowing us to create separate sleeping quarters. [This] isn’t possible with narrower, single-windowed studios.

I think everyone’s kind of hung up on the number, and, in this case it doesn’t really matter all that much. It is certainly a matter of placement and how the space can be used. I have some apartments in the 400 square foot range, but they have long window lines and they are narrow, so it is harder to make separated spaces in that. So it really depends on the space, there’s not one number that’s best. In fact, I would say that some of  my favorite units in the portfolio are some of the smaller ones square foot-wise, but they just turned out to have a floorplate that was more flexible for resident use.

Big Style. Small Space. BNA: Can you give me an average low and high in micro-apartments, square foot-wise?

Michael: I would say the low is in the 275 foot range and we make a lot of larger studios into what we call smart one bedrooms. They are about 400 to 420 square feet, and to me they are quite perfect. They have separated spaces . . . and it feels very comfortable. In the portfolio, these buildings have larger units in them. But a good chunk of the portfolio—in the 70 to 80 percent range—is in the big style, small space category.

BNA: Are micro-apartments the most practical solution to the current urban housing crunch?

Michael: I’m always fearful about talking about micro-apartments. For us, we are kind of packaging it into a lifestyle play. The truth is, I think you are going to be cramped inside of 250 square feet no matter what. So we try to sell a lifestyle play within that. In my opinion, there are certain things that you always have to have. Things that give you a living room that extends outside of the apartment. Every building has a gym, outside of the unit. You can use the key fob to open any of the other buildings to use any of their amenities. The reason that those buildings worked in the past is that those buildings had common areas. If you look at the big SROs, they were really kind of living hotels and they had big dining rooms and they had living spaces. They had gyms, oftentimes. They had basement pools—one of which we are restoring—it’s from the 1920s. So there are really big amenities that are really a part of the package. But over the years those amenities became too costly and they just pulled away. And I think that micro-apartments won’t work unless you offer someone more than just the 275 square feet within their four walls.

BNA: What is the average rent for a one bedroom in Chicago? And what will you charge for a micro-apartments?

Michael: A one bedroom can be anywhere from $850 to $2,000 depending on what you are looking for. And obviously there are one bedrooms that [cost] far more than $2,000. We start at $750.

Non-Conforming Status. BNA: What should building owners expect to gain and to give up if they bought a building with micro-apartments?

Michael: In New York and in Chicago, what is advantageous about these micro-apartments in existing buildings, is these buildings have non-conforming status (a zoning status that allows the continued use of real property for uses that are forbidden for surrounding plots of land). So the zoning permits more density than would be the case if you were to build new. Taking advantage of that existing real estate, the way it stands,  with its nonconforming status, I think it’s advantageous to any developer who knows how to use the space correctly. You [can’t] go into it trying to slap up garbage finishes and do what we call lipstick renovation . . . and [not] do the infrastructure, and [not] add the lifestyle component. I think that everything that takes place outside of your building [should] be part of your living room in our buildings. I believe strongly that if you don’t bring that back to life, then you can really get burned.

Most of the buildings that we acquired,
the owners were just sucking dollars out of the buildings
and weren’t putting money back in to them.
And so now everybody has got their hands up in the air [asking]
why are we repositioning this housing?

—

BNA: Was there a mandate to provide affordable units within your buildings?

Michael: When you are asking the governments to amend zoning for you there are going to be strings attached. We are taking existing buildings that were already apartments in non-conforming status and we are just reinventing them and making them like 2012-and-beyond-savvy. But I think that it is a fine line, we are obviously transitioning a lot of affordable housing out of these buildings and there is a demand for that inventory. We don’t have a formal rent control policy in Illinois. We do have, obviously, the Section 8 program and we also have different rent subsidies, and programs that subsidize rent. An owner will have x amount of set-asides or units that are affordable. But it’s not a rent control. Without any zoning changes or federal funding, we are not mandated to set aside any affordable housing. However, our entire brand identity—and our promise—is to always provide high quality, amenity-rich branded environments at approachable rents.

BNA: I understand you are resettling the SRO tenants. Could you tell me a little more about this?

Michael: [We are] working towards the positive economic development of the Uptown and Edgewater communities. Our in-house caseworkers are actively engaged with community leaders and organizations to provide thoughtful relocation to tenants who need it.

Public Transit Dependent. BNA: How dependent is your business upon public transportation?

Michael: I believe pretty heavily. For the FLATS product (Cedar Street’s current redevelopment project) . . . our attraction to that was some very big investment from the CTA (Chicago Transit Authority). They put $220 million into a station that is really a couple of blocks from several of our assets, and really sunk a lot of money into all the respective stations in those markets. To me that is very important. There are two big plays for us; one is public transit and one is bikes. We have a bike-sharing program that we are rolling out for all the new buildings . . . we believe that our residents bike regularly. They take public transit. They also use vehicles. We are speaking to a potential partnership [to] provide taxi and car service exclusively for residents of the buildings. But I don’t feel that our residents really have a need for a car.

BNA: The CTA improvements must have sent the land values zooming upwards?

Michael: I don’t know if they zoomed up. In New York everything is based around your public transit outlet. I was schooled in London. I didn’t know how to get anywhere by car . . . everything was dependent on that tube station it was near. And people are going back to that. Not only is it sexy to take a bike to work, it also happens to be quite practical in Chicago, many months of the year. All the different parts of the transit system are really tied in to where we are putting most of our inventory.

BNA: SROs, skid rows, and flophouses have been with us forever, but are they still sustainable, in and of themselves?

Michael: What is hard for me is that it is really . . . a societal problem. It’s a hard situation for me because it is not really the fault of the former owner—to some degree—because they weren’t offered the resources to help this tenant. Could they have kept the buildings in better standings? Yes. Most of the buildings that we acquired, the owners were just sucking dollars out of the buildings and weren’t putting money back into them. But the city let it happen for 20 years. And so now everybody has got their hands up in the air why [asking] are we repositioning this housing? Well, we are repositioning it because otherwise . . . it will be gone. We are not developing the space from scratch, it is all existing. Someone has to take care of it, and it isn’t the [previous] owners and it certainly isn’t the city. There was a lot of existing SRO inventory here . . . we are just trying to re-purpose it in a more thoughtful way.

More Thoughtful Use of Space. BNA: To you, what is the future of tightly packed urban centers?

Michael: I think the developers and building owners are going to be forced to develop a more thoughtful use of small space . . . even retailers are starting to play into it. We did some research on who would be the best retailer. If I were a consumer of our product and I was moving into a 200 square foot space, what store would . . . understand what I was doing? We are working with CB2 —CB2 is Crate & Barrel’s micro unit. We are doing some work with them, developing a model in one of our projects. It has been really wonderful to work with a company that totally understands it. And what is great is . . . I could furnish every inch of the apartment with pieces that not only fit but [fit] to scale with the kind of apartments that we . . . rent. I have seen the market change altogether. You go into a CB2 store and you can get the big style. It is just in bite-size pieces.

BNA: So retail has evolved to fit the new situation?

Michael: Some retail. CB2 has evolved. A lot of these buildings have former retail spaces [and] restaurant spaces that were kind of used by the ‘‘hotel’’ space. We are bringing very good operators into all these buildings—one of the buildings is getting a restaurant by a former top chef—we are giving these buildings sexy lifestyles. I think anyone could develop a great small space, but it is a lot more than that.

BNA: What condition are the buildings in when you buy them?

Michael: We usually buy them in a state of distress. Sometimes we will buy the debt. We really had our eyes on Edgewater (a reviving lakefront neighborhood on the North Side).

BNA: The living room is the street and the neighborhood. Could this work in a less interesting city than Chicago?

Michael: I don’t know about less interesting. I don’t know if that’s the way I would put it. But there is a demand for apartments and a demand for a big style perspective—people who want to live with . . . better amenities and are willing to compromise on space to have those amenities. If there is that demand I think it will be okay . . . markets like Boston could do very well; parts of Miami could do very well with a product like this. Even markets that have a glut of apartments, it doesn’t mean that those are the right type of apartments. I’m trying to give someone all they need in 275 square feet and then whatever they don’t have in that unit we should be able to give them access to within the building. And that’s what I think developers need to be more cognizant of. You can afford to give better finishings and better product in that square footage. I think any market that has a demand for people who want to live well, I think they can do well with micro-apartments.

Bloomberg BNA | Kevin Lambert

Copyright 2012 by the Bureau of National Affairs, Inc.  REAL ISSN 1944-9453

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