Microproduct: Necessity is the Mother of Invention

In the home building industry, we have historically innovated only in the higher price ranges – building ever larger homes and adding more interior and exterior appointments to them. And let’s be honest, innovating in the high end is fun! But the rising costs of land, labor, lumber and materials are pushing new home prices beyond the reach of most consumers. The result of this rising “floor” on new home prices has been a moderation in new home sales across country. As our distressed lot supply disappears and costs continue to rise, every builder in the US is being funneled into price points with fewer and fewer buyers. We are not all going to fit.

One way to bring prices down is to build smaller in locations where it is feasible in terms of both demand and the regulatory environment. We are just beginning to see some true innovation in our industry aimed at getting price points lower.

Townhomes are an obvious answer for builders and developers looking to supply product at lower prices, but townhomes aren’t the only small or micro product we are seeing today. The square footage of condos, townhomes and single-family homes is shrinking to meet the demand (and pricing) of entry-level buyers. This is not necessarily bad news for builders as it often means a much higher price per square foot.  We have seen small product garnering as much as $450 a square foot!

So, what’s the back story? Well, it is simple. Homebuyers don’t always want to drive until they can buy. Many buyers want to live in trendy intown locations where they can walk to restaurants and entertainment options.  For many of today’s DINKs (duel income no kids), the major concern is not local schools or how they are ranked. They want to live somewhere convenient to work and lifestyle, where they can easily walk or grab an Uber. For the home building industry, this is a potentially huge market now mainly being served by the apartment industry. We just need to offer them the for-sale product they want, where they want it, and a price they can afford!

The apartment industry has shown us the way, if we are willing to listen. Most housing experts truly believed that the apartment industry was going to over build beginning three or four years ago. Conventional wisdom stated that rental rates would become too high, chasing renters out of apartments and back into home ownership. We were all wrong. The old rules in housing simply do not apply anymore.

Millennials and move down buyers are paying rent rates today that older generations would deem exorbitant.  In some of the “more hip” parts of Atlanta, monthly rental rates range from $1,300 to $1,700 for as little as 500 square feet. One study predicts that Gen Z will pay $1,700 per month in rent for 11 years before they finally buy[1]. For that same $1,700 per month with 10 percent down, they could own a $400,000 new home, townhome, condo, or dare I say, tiny home? A quick check of the rental rates and square footage in your core areas will surprise you. Evidently, Millennials and others are willing to pay higher prices for smaller spaces in their preferred locations.

Some pioneering builders and developers are taking notice of this and choosing to compete. We are beginning to see new cutting edge for-sale product breaking onto the scene; product at square footages we have never seen, presented in new ways. Let’s look at a few examples from around the Southeast:

Thinking Outside the Box:

Condos

Urban Eco Group in Atlanta has proposed a stacked flat condo on the desirable BeltLine near Ponce City Market. Studios will start from 400 square feet (a first for Atlanta) and sell for $180,000, or $450 PPSF. That would be a $750 monthly mortgage, compared to the $1,600 a month rent for 560 square feet across the street at Ponce City Market. Isn’t this how we used talk renters out of apartments, “It’s less expensive to own than rent”? That same argument still works; it simply requires building product we’ve never built before in areas where they want to live.

The truth? A Millennial could take that same $180,000, drive 46 miles out from Downtown Atlanta, and buy a 2,000 square foot single-family home on a quarter acre distressed lot. But will they? The data says no.

Townhomes

Moderns at Sugar Creek is a new townhome community in the popular area of Reynoldstown, just southeast of Downtown Atlanta. In order to meet a work force housing zoning requirement, they needed to hit a certain price point. Not finding any available plans that fit the required formula, they went back to the drawing board and innovated. The result was an 11-foot-wide townhome product (another first in Atlanta). These 16 three-story townhomes with rooftop terraces sold in the mid $200,000s before they even broke ground. They are now looking to build similar product in additional locations.

Re Development/Re Purposing

The Franklin is a condo conversion of a building in Birmingham, AL that is over 100 years old. Ingram and Associates partnered with developer John Chapman to meet pent-up demand for residential living in Birmingham’s downtown area. The 14 condo units in the building include studios with 500 square feet and three-bedroom units with 1,800 square feet. Units range in price from $159,900 to $509,900, with the 500 square foot lofts selling for $159,000. That is a whole dollar First Time Buyer Price…..but at $320 per square foot!

Tiny Homes

Downtown East Point, a community near the airport in southwest Atlanta, recently rezoned 7.69 acres for Atlanta’s first dedicated tiny home community. It will have 40 homes, a communal garden, and will be priced from the high $100,000s for 500 to 1,000 square feet. There are currently 650 people on the waiting list!

We are beginning to see similar innovation across the 19 cities in the Southeast that MarketNsight serves. Millennials are willing to live in and potentially buy small spaces in their target area. They are not alone. Baby Boomers are vying for the same homes. Their kids are gone, retirement is around the corner, and they want to live where the action is. For many of today’s potential new homebuyers, experiences and location trump square footage.

Order it Online

You can make your dream of living in a tiny home a realty by ordering a tiny home from Amazon! The MODS 40-foot tiny home, pre-fabricated from a new shipping container, comes fully furnished and insulated. It includes a bedroom, shower, toilet, sink, kitchenette, living area and double doors. Owners of these tiny homes and just drop the home into an outdoor living space with a patio. All you have to do is hook the tiny home up to sewer, water and electrical and move in! An Amazon tiny home can be yours for $36,000 plus $3,754.49 shipping.

If You Don’t Innovate, You Die

Maybe it’s time to think outside the same housing box we’ve been building for the last 40 years. Building smaller allows us as an industry to meet market demand for lower prices. It also helps us push the innovation envelope.

We can simply look to the retail sector to see the desperate need for innovation. We are witnessing a complete reset in retail, with some 8,600 brick and mortar locations closing last year[2]. That pace is quickening this year. Changes in shopping habits, driven by technology and Millennials, have caught traditional retailers unprepared. We would do well to take note of this in our own industry.

The housing industry’s last major innovation was also brought about by a technological revolution – sewer. As sewer lines reached farther out from city centers, we saw the 1950’s and 1960’s brick ranches on a half-acre give way to the Five, Four and a Door homes of the 1980s. And there we stopped. We didn’t innovate from 2000 to 2006 because there was no need. You could sell anything to anyone with a subprime loan! We couldn’t innovate from 2006 to 2016 because we were all broke! If we want to recapture some of the missing first-time buyer demand in new homes, we will have to innovate. Necessity is the mother of invention and it is driving some to begin to think outside the box.

About the Author

John Hunt with MarketNsight performs market assessments to determine feasibility of product, price point and place.  His firm currently operates in 19 cities located in six Southeastern states.  He is known for consulting with Senator Isakson during the second tax credit and consistently provides accurate projections related to housing growth. For more information visit MarketNsight.com or call 770-419-9891.

[1] Michaels, Matthew. “The average millennial will spend over $200,000 on rent before buying a house—but gen Z will spend even more.” http://www.businessinsider.com/how-much-millennials-gen-z-renters-spend-expensive-cities-2018-5. Business Insider, 26 May 2018.

[2] Wattles, Jackie. “Stores are closing at an epic pace.” http://money.cnn.com/2017/04/22/news/credit-suisse-retail/index.html. CNN, 22 April 2017.

This article first appeared in Sales & Marketing Ideas Magazine in October 2018.


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