Me and my partners are developing a new 200 unit multifamily project in the Southeast region. Historically, we've only done 1 and 2 bedroom apartments, but are considering adding some 3 bedrooms. The economics of developing 3 bedrooms are not great given the increased construction cost compared to the all in $/Square Foot that you rent a 3 bedroom at. Although there is a larger chunk rent total.
Anyways, we are trying to come up with a list of pro's and con's for 3 bedrooms. I was hoping some of the more experienced people could help us out here. Thanks in advance.
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General rule of thumb for including 3-bedrooms in the unit mix depends on what class of property the apartment is going to be.
If it's a project that's either luxury, hard class A, destination area (ie. near the ocean, ski area, heart of downtown area) it makes sense to include a couple in your development.
If it's straight class B, workforce housing don't include 3-bedrooms. At that price point, people who could afford a 3 bedroom generally could just get a mortgage on a house in the same area, making lease up period longer.
You are correct in that the economics disincentvize building 3 bedroom apartments for workforce, garden style apartments (especially in the sunbelt)
Really good points. We are struggling to decide whether to do workforce or Class A. And we're also unsure whether or not we are going to build and hold or sale.
You’ll get better debt terms through agency route for a long hold scenario if you go the workforce route as it will fit in their mission. Same concept would go for next buyer in a shorter hold so people may be willing to pay up given tighter debt spreads on work force in todays environment.
Why do you think the construction cost is greater? Theoretically, on a per bedroom/sq ft basis, it should be cheaper to build a 3 bedroom, since you reduce the number of fixtures and appliances you need to install. Especially considering that once you've built the foundation and building envelope, which are fixed costs, a large part of your remaining budget will be in such line items. Smaller units are more efficient, of course, and it generally makes economic sense to design tighter units, just wondering what the specific justification for that statement was.
The absolute reason may be that your market doesn't have a lot of family-sized units, and has a lot of demand for them, and thus you'll be able to charge a premium. Maybe it doesn't get you quite to the efficiency of a small studio on a per square foot basis, but getting close could make it worth it. Hard to answer questions like this without doing a ton of research into the specific geography.
I think the point they’re making is that, in an ideal world, you would maximize rent $/sf for every sf of building you construct. Since smaller units command greatest rent psf, you would want to maximize the amount of those units you build in a project. 3bd’s tend to have the worst equation…ie you might see some efficiency on the cost side (to your point about fewer number of certain fixtures, etc), but not drastic. Meanwhile, your income for all of those additional gsf you’re constructing (ie rent psf) could be significantly lighter than that of your studios and 1bd’s.
Hypothetically, you would want to build all studios. Of course, unit mixes target the renter demographic in the submarket, so we include 1bd’s, 2bd’s and (sometimes but rarely) 3bd’s in our unit mixes as well….but only because/if the market demands it.
Sure, and I noted that in my post.
There is the market demand factor. If you're in an area which is almost all single family homes and newly built market rate rentals which are studios and 1 bedrooms, there might be strong demand for family sized rental units. In that case, you might ameliorate some of that efficiency loss by building bigger units in markets that have strong demand for it. You'd look at the discount in annual rent versus the savings you get from building bigger units and cap it out and see if it makes sense. Probably doesn't, but that would be the argument in the Pro column
Thank you for explaining this even better than I could.
Rarely makes sense unless you have a hard cap on per unit count and lots of land or something. If we're building them, we usually only build a token few in a unique stack of the building. I will say that I have seen 3 beds outperform other unit types on a PSF basis in rare cases where there are only a handful in the entire submarket.
Very interesting. Could you go into depth about where this market was? Any idea who the tenants were renting these three bedrooms - 22-27 year old college buddies that wanted to live together or families?
Agreed with this. In the right areas, I've found that 3BD's have much less of a cap on the rents that I can achieve. Our 3BD's are very popular with empty nesters who are less price sensitive and tend to want larger units because they are used to a home. There's been some instances where our 3BD's outperform 2BD's on a PSF, and the tenants tend to be much stickier (so less turnover costs).
Are you able to confirm your comps’ unit mix’s lease-up velocity and occupancies? Do any of them have 3bd’s and how do those perform? If there’s demand for 3bd’s and the market is under supplied, perhaps it makes sense. But I wouldn’t go crazy. It’s the least economic as you mentioned in your post. My firm does a lot of Class A suburban garden-style and 4-5 story apartments. We limit the 3bd’s to 5-10% of the unit mix.
I haven't done anything super analytical in the market research other than some CoStar comps and print outs. We just hired a market study consulting company. I'll follow up on this post later since I think it's something super relevant. We all want to maximize $/SF rent while minimizing $/SF build costs.
This should be determined relative to market comps. Take a look at what recent completions/under development projects are offering for 3 bedrooms as a % of unit mix, and compare that to what was built of similar quality (at the time) 5-10 years ago. Is it relatively similar? Trending up/down? Use that to guide your decisions.
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