A Guide for Multifamily Design
Design for Efficiency
Multifamily housing is a competitive industry with several constraints applying pressure from all sides. While some are universal to any developer competing in the space, such as cap rate or municipal fees, others are variable within a given range such as rates at which a developer may borrow, required investor returns or market rental rates. Each of these applies its own pressure on the developer’s proforma restricting what kinds of deals can be financed and which cannot, and the developer control over any of these is extremely limited. Therefore, the best way for a developer to attain a competitive advantage is to develop an efficient product. Our hope is that he following article will provide you the necessary concepts to help you develop an optimal prototype or refine your existing product should you already have one.
Optimize Unit Mix
It is relatively easy to exploit a given design’s unit mix to increase a its efficiency. The hypothetical example below shows how this can be done. Generally speaking, smaller units always command more rent relative to their size. While much of the industry focuses on rents per SF, what matters more is “chunk price.” Renters tend to value utility more than square footage. This is best illustrated here by comparing a studio unit to a one bedroom. The studio units are often the most inexpensive way to live in a given location. For renters who are price sensitive, this means the alternative to not renting the studio is to not have housing. though the one bedroom may be more comfortable and does provide some additional utility with its bedroom being private from its living space, this added utility is not valued by the marketplace at a 1:1 ratio (the one bedroom is 42% larger but only commands 9% more in rent).
Another way to think about this is that, using these numbers, you can increase the unit count within the same building envelope to generate the 5.5% more revenue than Design A.
This certainly may be taken to an extreme mathematically, and we recommend developers conduct their own market study to ensure that such concentration not go too far. That said, as the US housing industry continues to face headwinds from regulatory constraints, NIMBY-ism and construction inflation, we anticipate that the housing market will remain underserved for decades to come. These pressures will ensure that smaller, more affordable units will continue to be in greater demand for the foreseeable future.
Upon deriving a unit mix for a particular design, it is also recommended that the developer maintain that unit mix for that particular product, rather than varying the unit mix on each project. Often, the developer’s property manager (whether internal or external) will express a desire for more of one sort of unit vs. another to fit that particular market. However, these recommendations are often based on hunches or feelings rather than on hard data. And obtaining hard data that can prove out the need to increase one unit type count by 5% vs. another in any kind of scientific way is impossible (unless the developer wishes to build two nearly identical projects to see how they fair against one another). Making arbitrary unit mix changes to a product can have significant design impacts, and especially where one hopes to gain construction efficiency over the long term, can ensure these savings are not realized. Therefore, it is generally better for a developer to set a standard unit mix for all projects of a given type and then, if necessary if there are leasing challenges, adjust asking rents for certain units to compensate.
Where a developer may wish to vary unit mix widely (for instance, between a product to be built in a student community vs. an over 55 community), it is recommended the developer create separate brands with wholly different designs and their own set unit mixes.
Stuff Costs Money
Once the unit mix has been solidified, the second major way to increase efficiency is to reduce unit size without trading utility. As we have stated earlier, renters make their decisions primarily based on “chunk price” comparing utility and price, not square footage. For example, two communities offer a two-bedroom apartment. The renter is a single mother and needs a two-bedroom unit for her pre-teen daughter. The one at Community A is priced at $2,100 and is 1,200 SF. The one at Community B is priced at $2,000 and is 1,100 SF because the living room and bedrooms are slightly smaller. All other amenities and functional utility being equal, she will select Community B. Assuming the cost per SF is the same between the two projects, the developer for Community B has given up 5% of potential rent, but their costs are nearly 9% less. In many cases, renters may not even notice the difference in square footage and rental software may even recommend pricing the smaller unit at the same price as the first. Therefore, for any design, the developer should engage their design team in an exercise to shave square footage wherever possible. We recommend this be an iterative process and not to take the team’s first pass. Constraints often lead to better design outcomes. While this may sound harsh, there is a tendency in human nature to be lazy and to accept well enough as the final answer. The time constraints of a project may not lend itself for this process, but if the time can be afforded, it is highly recommended that the team be pushed. On the third iteration it is likely that the team will find new and creative solutions to reduce square footage without sacrificing utility. Even moving an exterior wall in by 6” when multiplied over dozens of units can significantly reduce a project’s cost.
Will Pulling In Walls on Certain Units Create Costly Jogs?
Many designers will state that the most cost-effective design is a simple box, and that the more jigs and jogs one introduces to the exterior facade, the more the costs will increase. While this may be true in some abstract manner, the fact of the matter is that most trades (carpenters, flooring installers, drywallers, etc.) base their numbers on square footage. Therefore, even if a building has several insets, if the square footage is less than the simple rectangle, it will likely price at a lower cost. Second, unless the design is highly inefficient (rooms far larger than needed), it is highly unlikely a design will allow for a variety of unit types to line up perfectly to enable an exterior without undulation.
Efficiency Ratio
The third way to maximize efficiency is with a design’s efficiency ratio. This is the ratio of rentable SF to total SF. Square footage dedicated to circulation should be minimized at all costs, as generally, you cannot charge rent for this square footage, but it still costs money to construct. There are a few strategies one can employ, but the table below outlines targets your design should meet for a variety of product types. If your product fails to meet these targets, we recommend sending your designer back to the drawing board.
Garden Style 3 Story Walk Up
One of our clients had developed a three story walk up building with 30 units per building, 10 units per floor. This building had a central corridor with two egress stairs at either end. Generally speaking, circulation space should be eliminated or minimized, if at all possible, as this area has real construction costs without providing any rentable space, merely access to spaces to be rented. While this design made a certain amount of sense, as a doubly loaded corridor with egress stairs at either end is an efficient design for the circulation space and two exits are required for this configuration, it was less than optimal. Current residential codes currently allow four units to be served by a single staircase. Therefore, we recommended modifying the design to a 36 unit building with three staircases, but eliminating the central corridor. This design dramatically improved the efficiency ratio
We find the E-Stak design, developed by Humphreys & Partners to be a highly compelling concept. While we have never built this particular design, nor are we aware of any specific project utilizing its design, we believe that this solution would in fact reduce the amount of corridor square footage to as little as one third as would be needed on a traditional double loaded corridor building. This increase in efficiency ratio would significantly increase a projects ability to pencil.
Chunk Price vs Price per SF
Another concept it is important to understand is how to think about chunk price vs. price per SF. Often Developers become obsessed with their price per SF numbers. You often hear “we build for $XX per SF in our market” but this can often be misleading when comparing your internal numbers to another builder’s, even when they are building very similar product. Aside from the numbers potentially not being apples to apples (hard costs vs. hard and soft costs), unit mix will also have an impact. For instance, a project with more studio or one-bedroom units will have a higher cost per SF, because cost density increases with a greater concentration of kitchens and bathrooms (the most expensive portions of any unit to build) spread over fewer square feet. However, invariably a project with a greater proportion of smaller units will more often have higher yields. Similarly, prioritizing low cost per square foot may encourage the construction of large two- and three-bedroom units for whom the market is limited. Therefore, it is often better to think in terms of chunk price per unit. This is another reason why a consistent unit mix will improve the Developer’s ability to compare past projects to future ones and better understand their profitability with a simple measure of yield per unit (revenue or NOI per unit).
Reduce Number of Unit Types
Another priority of any multifamily design should be to reduce the number of unit types. We have seen too often products with dozens of unit types, where the units even within one category (one bedroom for example) have a myriad of minor differences. While some oddly shaped sites may make this unavoidable, more often we see this variety being generated by the architect’s desire for a particular exterior aesthetic. Not only does this lead to unnecessary complexity in the field, it can also wreak havoc on the leasing side who have to keep track of each unit type and its, often, subtle differences as well as produce the exponential marketing materials for each unit type. It is highly recommended that Developers keep their designers on a short leash and clearly communicate up front that as few unit types are desired as possible as unnecessary variety produces no benefit to a project’s returns.
Prioritize Utility
Too often we also see Developers who have certain preconceived notions about what their customers desire, how people live, or allow their ego to dictate the product they wish to build. It is best, though often difficult, for Developers to shed these notions. In multiple customer surveys conducted by our clients, they consistently yield the fact that renters generally fall into two major categories: Approximately 75% are driven by utility while the other 25% are driven by amenities and aesthetics. Those driven by amenities and aesthetics, often where Developers focus 90% of their time, do care about higher end finishes and cool amenities that they may or may not use, but they enjoy showing off to visiting friends and family. Those driven by utility care far more about whether their unit is secure and functional. Therefore, Developers should consider whether their own biases of needing to live in an aesthetically pleasing space with high end appliances and finishes is really necessary for their average customer. This 75% will take higher end finishes if offered, but do not value them nor are willing to pay a premium. Therefore, it is recommended to down spec up to 75% of units in a project in order to save costs (with Formica countertops and black appliances in lieu of quartz and stainless steel gourmet appliances for example). This can result in considerable savings that can be the difference between a project penciling or not. In addition, another way Developers should prioritize utility over aesthetics is to think about what could be added to a unit in exchange for savings on finishes. For instance, can a kitchen island providing more storage and work-space be added in exchange for a less costly countertop?
Ultimately, it is our advice that Developers not try to be too clever. While some of the counterintuitive practices advocated here have not yet taken over the market, we have seen their success. That said, Developers should be wary of inserting their own desires into a project based on how they believe their customers live their lives, when they themselves are often far removed from the lifestyle of the average apartment dweller.
