Reducing Everyday Costs for Affordable Neighborhoods

Whether it’s a city competing for residents or a developer filling a property, the focus of the future may be competing for millennials, or Americans aged 18-33, give or take depending on who’s doing the defining. But millennials are a tricky bunch to connect with because the Great Recession hit them hard and left them with less money to do the things they’d like to do.

Why so strapped? Millennials are more educated than prior generations, and many have gone deep into debt to fund their education, according to 2014 data from the Pew Research Center. Then there’s the job market. The overall unemployment rate for workers aged 18-34 peaked at more than 13 percent in 2010, according to White House data. As of September 2014, the most recent tracking period, it had come down to 8.6 percent.

Many millennials simply have to do more with less, so they’re increasingly making tradeoffs. “They seem more willing than other cohorts to trade space for access to transit and a walkable, mixed-use lifestyle,” says Stockton Williams, executive director of the Urban Land Institute’s Terwilliger Center for Housing in Washington, D.C. “It doesn’t necessarily mean they’re all saying they want to live in downtown central cities. It can be smaller towns or suburban towns that have these features.”

Still, millennials want perks, even if that means having to share them. “I think the major trend is that anything that’s shareable, millennials are fine with it being shared,” contends Kiyoko Fujimura, a millennial herself and New York City-based executive vice president of BuzzBuzzHome, a residential construction listing service.

That willingness to shrink or share to pursue a higher quality of life overall is butting up against long-standing regulations, such as minimum size requirements for residential units. Yet change is in the air, and the biggest question today may be how far it will go.

No car? No problem

Millennials are a big group, so generalizing about them can get dicey, warns Williams. That said, some generalizations fit. They don’t covet cars like their elders did, instead favoring vastly less expensive public-transit and ride-sharing options like ZipCar and Uber.

In 2010, 21- to 34-year-olds bought just 27 percent of all new vehicles sold in the United States, down from a high of 38 percent in 1985, according to The Atlantic. In addition, the average number of miles driven by 16- to 34-year-olds dropped by 23 percent between 2001 and 2009, according to “Millennials in Motion,” a 2014 report by Calpirg, a public interest research group. The report also notes the percentage of high school seniors with driver’s licenses dropped from 85 percent to 73 percent between 1996 and 2010.

“There’s reason to believe millennials are a little less enamored with car technologies and a little more enamored with communications technologies,” contends Todd Litman, executive director of the Victoria Transport Policy Institute in British Columbia, Canada. “If they’re financially constrained, which they are, a nonsignificant number would rather have a nice computer or mobile phone than a car.”

Millennials are also big into wellness. They’re exercising more and eating smarter than previous generations, reports Goldman Sachs in the 2015 analysis “Millennials Coming of Age.” They’re looking for more fresh, natural, and organic foods, according to a 2012 Jefferies Alix Partners study.

With their thin wallets mismatched with their bold lifestyle desires, millennials are seeking to live in cities that might surprise you. “If you pull up lists of the top 10 cities for millennials, they all include New York and San Francisco,” says Williams. “But they also include places like Raleigh, N.C.; Austin, Texas; Denver; and Salt Lake City — places that 5-10 years ago wouldn’t have been actively competing or successfully getting recent college graduates. Part of the reason they’re competing is because the cost of housing — whether it’s owning or renting — is often lower. That becomes one important strategic economic development tool.”

Today’s motto: Small is big

Millennials are also downsizing to make ends meet, something REALTOR® Scott Turner has learned first-hand. Scott owns Riverside Homes, which specializes in urban infill development, and is broker-owner of the 10-agent Turner Residential, both in Austin. He recently built four homes on two lots in East Austin — two were 1,600 square feet, and the other two were 850 square feet — which he organized into a condo association.

“The demand for the smaller homes was enormous, and millennials bought them,” he says. “Millennials are much more willing to make the location-over-space trade-off than prior generations. They’re happy with less space and less stuff. We found that 850 square feet with two bedrooms and one bath is fine if it’s in a good location.”

Turner’s bungalows are within walking distance of a light rail station and bars and restaurants popular with 20-somethings. “There’s also a grocery store within walking distance, which is very important in Texas, where we like our cars,” he says. “There’s a city-designated bike lane going in right next to these houses, too.”

The homes featured off-street parking — meaning a driveway — but no garages or covered parking. “I got no pushback from the market on that,” says Turner. “The car just isn’t as important to millennials, nor is the need to use the garage for storage.”

The biggest surprise for Turner? A millennial buyer for one of the two larger homes wanted to be sure pre-purchase that she could post her home on short-term rental sites like Homeaway and Airbnb. Perhaps because Homeaway is based in the city, Turner notes, Austin permits it. But owners have to register their home, and a limited number of permits are issued in each zip code. “We had to amend the condo documents to include the provision, so we had to ask the two smaller-unit owners for permission,” he recalls. “They already assumed they could do that.”

Small goes large scale

Joining Turner in thinking small are developers around the country creating all forms of compact housing. Micro housing is popping up in cities nationwide. According to a 2013 ULI report, “The Macro View on Micro Units,” there’s no standard definition, though a working definition is a studio apartment typically less than 350 square feet with a fully functioning and accessibility compliant kitchen and bathroom. (It doesn’t include single-room-occupancy units with communal kitchen or bathroom facilities.) The target market is under-30-year-old
professionals — skewed slightly more male than female. Most sign up to swap lower rent for a desirable location and the ability to live alone.

Monadnock Development, working with modular housing developer Capsys, will open by 2016 My Micro NY, a nine-story modular building in Manhattan with 55 units, reports Tobias Oriwol, the project developer. Units will range from 260 to 360 square feet and feature nine-plus- foot ceilings, Juliette balconies, high-end interior finishes, and accessible bathrooms. The building will also host a fitness room, a business center and study area, bike storage, storage lockers, an outdoor ground-floor patio, and an outdoor sundeck on the eighth floor attached to a salon where residents can gather. “Residents aren’t going to host a 12-person dinner in the salon every day or every week,” says Oriwol. “But they should have the opportunity to do that.”

Rents aren’t set yet. Oriwol says neighborhood units with comparable amenities would come in at about $3,200 per month, but My Micro NY rents are expected to be below that. “The whole point is to open a new level of affordability by expanding the size options,” he says. “There will be millennials for whom this is a good fit. We also think the need for these types of units is so great in New York City that the appeal will be across all ages and neighborhoods.”

A similar project created by WeWork and Vornado Realty Trust is underway in the Washington D.C. suburb of Crystal City, according to a December 2014 Wall Street Journal report. WeWork is reportedly expanding its micro-office-plus-shared-common-space concept to a 252-unit residential building — presumably rentals — expected to open in mid-2015. On the drawing board is a 12-story building with many shared kitchens, an arcade, an herb garden and a library.

“I’ve seen micro-unit developments taking out en-suite laundry and putting in shared laundry,” says Fujimura. “There’s a smarthouse in Toronto reducing the size of dishwashers by including half-size dishwasher drawers. It’s all about reducing the size of the private space but providing all the amenities you’d have in a normal condo. Millennials don’t need private space, but they like amenities and convenience. Developers are definitely listening.”

Tiny houses also fit the trend, but they may be more of a fad than a true housing alternative. “They’re not common, and I doubt they’ll ever be a substantial part of the housing market,” says Matt Kelly, a policy analyst and researcher at Florida State University in Tallahassee. “I see
them as a sign of the times rather than an actual, substantial trend. They’re a sign young people are strapped with debt, and the McMansion has become much less appealing.”

Kelly is careful to distinguish between micro-housing and tiny houses. “In places like Seattle, more microhousing units are popping up, and that does seem to be a viable option,” he says. “Smaller and smaller square footage seems to be viable for short-term year apartment leases because there needs to be a low-income housing alternative.”

Cities slowly getting on board

Who’s to say millennials shouldn’t live in compact quarters? “The zoning authority is who,” says Kelly.

There’s the rub. The biggest impediments to developers responding to millennials’ needs are local zoning rules. “The tragedy is that because current development polices make it very difficult to build accessible, affordable housing, millennials are often faced with either paying more than they can afford or choosing housing in a location they don’t really like, such as in the suburbs,” says Litman. “Or they get too few amenities. It would be good for everybody if developers were able to develop more accessible, affordable housing.”

The challenge remains current residents’ antipathy to uses they perceive would change the character of their neighborhood. “In many areas, there’s still huge, huge resistance to changes that permit increases in density, such as allowing a mix of multifamily and single-family units and building higher than three stories,” says Litman.

That’s changing, but ever so slowly. In August 2014, Spur, Texas, removed its square-footage regulations and proclaimed itself a “tiny-house friendly town,” notes Kelly.

Other cities are making limited exceptions to zoning requirements. New York City waived its 400-square-foot minimum space requirement for the adAPT competition, from which emerged My Micro NY. “The building is meant to be a pilot project to assess things like how well this concept is received and the quality of life for residents,” says Oriwol. “If all goes well, the idea is that planners will revisit the city’s zoning laws so developers can build smaller units as of right.”

New York City is actually behind the rest of the country, says Oriwol. San Francisco passed legislation allowing apartments as small as 220 square feet, according to the ULI micro-housing study, if 70 square feet is allocated to a bathroom and kitchen. Seattle and Portland have no minimum size requirements, which ULI says probably explains why they’re “two of the best examples of cities demonstrating a tremendous amount of experimentation with very small units.”

In Austin, Turner was able to develop four homes on two lots in part because the two smaller homes qualified as accessory dwelling units, also called garage apartments, granny flats, or guest houses. “On one lot, by zoning I can build a single-family home plus an accessory dwelling unit (ADU), but it is limited to 850 square feet,” he explains. “ADUs are key here to affordability. They’re a way for millennials to afford to live in neighborhoods where they’d otherwise be priced out.”

While cities are making progress, none are doing everything they can to permit more affordable housing, contends Litman. “Vancouver is very aware of housing and affordability, and it has a program called eco-density,” he says. “It’s encouraging creative infill development, like homeowners building accessory suites above their garage. But there are only a few hundred of those. It’s also encouraging multifamily housing, but it still requires fairly generous amounts of parking.”

There are also spot instances in which cities are leaving unenforced other restrictions on trends that attract millennials, particularly urban gardening. Kelly predicts the future may also see cities formally exempting urban farms from zoning requirements.

“In Tallahassee, which is very much a college town, there are three urban farms,” says Kelly. “All operate outside the law because they’re on residentially zoned land but technically need to be zoned for agricultural use. So far, everyone has turned a blind eye because most people in town, especially in the 20-30 age range, see these as big assets to the community. What may happen in the future is that there will be some kind of a zoning exemption for urban farms. I see that as more likely than an exemption for tiny homes.”

Such changes may only be the beginning as competition heats up for millennials choosing the perfect place to plant roots. “Millennials really care about location,” asserts Fujimura. “They’re saving a lot of money by not buying cars and paying for gas, parking, and insurance, and they bike and walk more. They won’t compromise on location because they already have less mobility. And developers are responding to that.”

G.M. Filisko is an attorney and freelance writer who writes frequently on real estate, business and legal issues. Ms. Filisko served as an editor at NAR’s REALTOR© Magazine for 10 years.