by: Tony Bertoldi
Underpinning the affordable housing industry is one simple, yet complex objective: solving the housing crisis by increasing the supply of housing. According to the National Alliance to End Homelessness, homeless rates have increased by 6% annually since 2017.[1] Figures like this are exacerbated by rising living costs and shrinking living options.
When it comes to low-income housing tax credit (LIHTC) developments, investors, syndicators, and developers all face the same dilemma of stretching tax credit dollars further to cover the nation’s housing needs.
One possible solution: micro-units.
What is a Micro-Unit?
As the name suggests, micro-unit apartments are compact, space-efficient units, usually less than 350 square feet.[2] While smaller than your average studio apartment, they utilize the same open concept design where living, bedroom and kitchen spaces are functionally blended, while still having a private bathroom.
Why Micro-Units?
Micro-units present several positives:
For developers, micro-units offer lower building costs per unit and the ability to leverage more rentable units within fixed developments.
For residents, benefits include lower rent and utility costs, easier cleaning and maintenance, and more privacy since they are designed with individuals in mind.
For the community, many micro-unit developments still offer a large set of shared amenities like pool and exercise facilities, onsite laundry, and business centers. Plus, there is added appeal for many who see micro-units as better for the environment.[3]
While micro-units aren’t a fit for everyone, they still ease the demand for larger units more fitting for families. Going back to the objective above, this contributes to increasing the overall supply of housing – thus, driving down costs across the board.
What About Investors?
Micro-units are not a new concept themselves—but using them within LIHTC developments is an entirely new notion. The primary concern from institutional investors is whether the market will support this model for the federally mandated 15-year compliance period. In other words, there’s a fear that micro-units are a short-lived trend that the market won’t need or want throughout the compliance period, resulting in the potential loss of credits if the development fails.
While micro-units would not likely be viable in the suburbs or rural areas, the housing crisis is most accentuated in urban areas where limited space and rising costs are major factors contributing to both inflation and housing insecurity. However, this model has been thriving in Japan where units as small as 95-square feet have been developed specifically with twenty-somethings in mind. If there’s anything we can learn from their use in Tokyo—the largest city in the world, boasting over 32 million people—micro-units provide a plausible answer for the long haul.
Who Are Micro-Units For?
While we’ve established that micro-units aren’t for everyone in all locations, there are still several resident groups that they do appeal to. Micro-unit residents are mostly comprised of individuals, millennials, students, those wanting to reside in downtown areas and avoid long commutes, residents seeking sustainable living, as well as seniors living alone, empty-nester single parents and travelers⁴. And if real estate is all about “location, location, location” and micro-units can add more living opportunities (for less to developers, investors, and resident rents) within highly sought-after urban areas, it’s easy to see the benefits to a much larger group on a larger level.
And, yes, for investors and corporations - micro-units can also help them keep their promises to help address the housing crisis. Micro-units keep this promise to more people at a lower cost.
LIHTC is complex and the housing crisis is equally so. But when looking at it in terms of simple supply and demand, solutions become clearer. The time is here for micro-units to be embraced by the LIHTC community and see those homeless rates start to finally decline.
[1] Khristopher J. Brooks, “Homelessness rose in the U.S. after pandemic aid dried up,” CBSNews.com, June 21, 2023, accessed November 1, 2023, https://www.cbsnews.com/news/federal-homelessness-statistics-us-2023-data/
[2] Muriel Vega, “What is a Micro Unit?” ApartmentGuide.com, September 2, 2021, accessed November 1, 2023, https://www.apartmentguide.com/blog/what-is-a-micro-unit/
[3] Katherine McLaughlin, “Micro Apartments Are the Best Thing to Happen to the Planet,” ArchitecturalDigest.com, January 11, 2023, accessed November 1, 2023, https://www.architecturaldigest.com/story/micro-apartments-benefit
⁴ “Micro Apartments: Should Investors Jump on the Trend?,” Mashvisor.com, June 24, 2019, accessed November 29, 2023, https://www.mashvisor.com/blog/micro-apartments-investors-trend/
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