The unit mix by size and type should be based on the results of a market feasibility study. Unit types most often range from studio apartments through to two- and three-bedroom units with two baths; some include extras, such as sunrooms, dens, and lofts.
In many markets, apartment developers are seeing increased demand for luxury units for downsizing empty nesters.
In projects designed for lower-income renters, family-sized units should predominate.
If the target market is young singles just starting out, demand will likely be strongest for a mix of split two-master-bedroom roommate units and one-bedroom units for singles.
In very-high-rent urban locales, studio units are popular, but in suburban areas, demand is almost nonexistent for such small units.
Unit mix is simply the different number of bedroom apartments in asset. Apartments range in sizes from efficiency to four bedrooms.
An efficiency apartment is usually occupied by a single person and combines the sleeping, living and kitchen areas.
Studio apartments are larger versions of the same footprint but generally have a larger kitchen. We tend to shy away from these types of apartments because the resident base can be transient, which means the residents move in and out and create a high turnover.
One of the largest expenses that an apartment developer incurs is resident turnover. This is because the apartment has to be prepared for the next person to move in and, in the meantime, the apartment remains unoccupied.
The next size up in the unit-mix hierarchy is a one-bedroom unit, which can also have a higher turnover rate, but not as high as the aforementioned smaller styles. Typically, municipalities allow two residents to occupy an apartment for each bedroom, and in turn, it shrinks the resident pool.
However, it all depends where the units are located.
One-bedroom units are favourable for college students, senior citizens, and couples. We have seen a 36-unit property that contains all one-bedroom units, and have no problem maintaining the occupancy at 95 per cent.
In our experience, one-bedroom apartments are the most popular among renters in most markets now, but demand for multiple-bedroom units could be on the upswing by the start of the next decade.
Developers and apartment owners like one-bedroom units because they provide more rental revenue per square foot than larger units – but they also favour today’s demographics. Those in their 20s are delaying marriage and children longer, and these young singles prefer renting, especially in urban core areas that feature restaurants and retail tailored to their tastes and lifestyles. Because many of these renters are older, they’re less likely to want to live with a roommate.
Eventually though, most 20-somethings will get married and have children, resulting in them needing larger accommodations. Many will choose to buy a home, but others will still be saddled with debt from student loans and/or credit cards and find it hard to obtain a mortgage loan.
Still others will prefer to rent and use the money they would use for a down payment to send their children to private school.
In terms of unit mix, large buildings are weighted to apartments with fewer bedrooms. In fact, one-bedroom units account for more than half of the multi-family inventory in properties with 50 units or more.
From a developer’s standpoint, the best unit size to work with are two-bedroom units. They’re perfect for most demographics yet larger families can’t occupy them.
Larger families tend to cause more deferred maintenance on a unit, another costly expense for apartment developers. Two-bedroom units are usually the most cost effective for residents and are the easiest to lease for an asset owner.
Larger units: Three and four bedrooms
Four-bedroom units are found most often in student housing assets. The demand for this unit type among other demographic groups is fairly low and these unit types will fill with younger roommates regardless of whether they are built specifically for students.
Increasingly, municipalities across Canada are mandating developers include a proportion of three-bedroom units within new rental apartment buildings. In Toronto, for example, 10 per cent of units in new assets must be three-bedroom units.
This legislation aims to increase the supply of rental units available to families. Three-bedroom units will be attractive to families with children, and also some wealthy downsizers looking for multiple bedrooms to accommodate family when they come to visit.
When it comes to apartments, the more bedrooms a unit has, the higher the achievable monthly rent, so investors should try to include some three-bedroom units within their unit mix, or if not possible, some two-bedroom plus dens.
Summing it up: Figuring out your unit mix
Certain niche markets play a role in determining unit types. For example, apartments housing students require special floor plans that include three- and four-bedroom units, because typically the majority of students share a unit.
More difficulty in getting approvals because of neighborhood opposition to higher density and increasing land and permitting costs also contribute to larger units as developers are forced to pursue higher-income residents.
The key to unit mix is to develop an asset that has a favourable number of two-bedroom units in relation to one-bedroom units. The ideal ratio is two two-bedroom units for each one-bedroom unit.
For example, on a 100-unit apartment community, we like to see two-thirds (66) two-bedroom units and one-third (34) one-bedroom units. This type of unit mix makes the asset more valuable, and will make it easier for the apartment developer to lease the units as well as choose from a larger potential resident base.
Residents also have the option of moving up or down a size without having to leave the asset, which also benefits the developer in that it reduces vacancies.
Looking broadly across Canada at new rental apartment buildings, before 2012 the number of studio/one-bedroom floor plans and the number of two-bedroom floor plans were relatively equal, comprising an average of 45.5 per cent and 46.1 per cent of a property, respectively. The remainder of a property’s offerings were units of three bedrooms.
Since 2012, however, the scales have been tilted toward studio and one-bedroom units, which made up an average of 54.4 per cent of the unit mix. The percentage of two-bedroom units has fallen to 38.9 per cent.
The shift can be broadly explained by new development occurring in the urban centres of Toronto, Vancouver and Montreal where smaller unit types and sizes appeal to a younger demographic.
SVN Rock Advisors Inc., Brokerage is an Ontario-based commercial real estate, consulting and new construction lease-up company with an exclusive focus on the apartment sector. We are a boutique brokerage firm that specializes in multi-residential properties (apartments). Our specialty is in delivering institutional-quality services to private capital owners and investors while representing buyers and sellers of apartment properties in the transaction process. With this exclusive focus on apartments, we have developed world class systems and processes that allow us to handle every type of apartment transaction with efficiency.