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Think Before Converting Small Units Into Larger Units

March 10, 2015 Featured, Planning & Design, Real Estate 10 Comments
ABOVE: My 3-room flat in Old North at 1422 Sullivan
In March 1991 I moved from the CWE to a 3-room flat in Old North at 1422 Sullivan

The other day I saw an article that caught my attention: Preserving micro units in Norman, Oklahoma: A small infill builder tests a new housing type in a neighborhood next to a university, generating a win for housing diversity.  My first three years as an undergrad at the University of Oklahoma I lived at home and drove 17 miles each way to campus daily. Residential dorms & fraternities weren’t of any interest to me, nor were either affordable.

During my last two years I lived in two different 4-unit buildings. Both were older buildings, the first in poor condition The rents were affordable, they were spacious, and I could live alone.  I was evicted from the first after complaining to the city after the slumlord painted our windows shut. Both have since been razed — the first for a campus parking lot. At the time new apartment complexes were being built on the edge of town — these would require multiple roommates and driving to campus.

In August 1990 I moved to St. Louis, quickly taking an efficiency apartment on Lindell. Six months later I moved to a 3-room flat in Old North, my rent going from $330/mo to $75/mo.My landlady had moved into the building as a child and lived there until her kids convinced her to go to a nursing home. One day I came home from work and the front shutters were removed and workers were painting the 19th century brick dark brown. I moved one block North to a slightly larger 3-room flat, a 2nd floor unit entered from an exterior rear stair.  Both flats were in 4-unit buildings.

These smaller housing units in 4-unit buildings can be good options, especially for the 20-something crowd. Back to the article, a developer intended to convert a 4-unit building into two 3-bedroom units:

I asked Keith about the cost and return comparison for the fourplex versus duplex approaches. He told me that if he had renovated the building into a duplex, like he had planned before talking to me, that he was expecting to get $600/month per bedroom and each unit would have been 3 bedrooms for a total of $3,600 in revenue per month for the two units. He was happy to tell me that he is now renting each of the one-bedroom units for $1,000 each for $4,000 in total monthly revenue. That is an 11% increase in monthly revenue! In this one project Keith has blown the top off of this market and is getting $1,000 per bedroom for these small, well-designed micro units located in a walkable context. We see much of the same happening with other Missing Middle Housing types in walkable neighborhoods across the country.

In order to compare apples to apples, I then asked him about renovation costs of converting to a duplex versus simply renovating the fourplex. Keith said the renovations cost about 20% more, due to having 2 additional kitchens, bathrooms, and HVAC systems, in addition to installing sprinklers that the building code requires on buildings with 3 or more units. It will take Keith several years to make up this cost difference, which makes me even prouder of him for taking this risk. (Better Cities & Towns)

The demand had existed for these type of units but nobody knew it or offered a nice product, everyone just did what everyone else was doing — saying the market only supports larger multi-bedroom units. Despite what many may think, the free market isn’t always up to speed on demand, trends, etc. — it often takes fresh thinking to show the free market other options besides the status quo.

What does this have to do with St. Louis?

Glad you asked! Developers shouldn’t assume our 4/6/8-unit buildings are better off converted into larger units.  The total building revenue might be higher as smaller units while allowing people to not have to get a roommate(s). I’ll be able to hear the author next month at CNU23 — more on this in the coming weeks.

Right now my alma mater is currently dealing with other problems.

— Steve Patterson

 

Currently there are "10 comments" on this Article:

  1. guest says:

    All a matter of perspective. In stable neighborhoods, the smaller units rent; in rebound neighborhoods, often the new residents want fewer units, more homeownership, so combining units is an option. It’s like a pendulum swing. Recall that in the days of overcrowding, large homes were carved up into rooming houses, creating affordable units and cash flow for owners, and running down the quality of life in the neighborhood.

     
    • Yep says:

      Good points; I may add the quality of life in any neighborhood is often affected for better or worse particularly by the land lords and their screening out of problem tenants. That is true even in areas of more home ownership in older areas, as where I live in St. Ann.

       
    • One of the qualities that make a neighborhood stable and attractive is a variety of housing types. Keep the houses for larger units and keep the flats for smaller units.

       
  2. KevinB says:

    St. Louis has no lack of available housing stock — if an individual or family wants to buy an underutilized 4-unit and put some t.l.c into a single-family (or 2-unit) conversion, I’m all for it!

    If there was a sudden (and massive) influx of apartment-seekers, the market would most assuredly self-correct. As is, I’m happy seeing multi-unit buildings being converted down and further stabilizing areas. The new owner (assuming he/she/they live there) is not only more invested in the rehabilitation of the building, but the betterment of the neighborhood in which it’s located.

     
  3. Brian says:

    I think quality is the key. In Dutchtown/ Mt Pleasant, we have an abundance of 4-plexes. On the streets near public transport, or with parking, I can see how these can be renovated to a high standard. However, without parking for 4 cars, or away from a bus line, I think converting these into houses is more sensible. I think in this area, the sheer quantity of these units keeps rents down, which attracts absentee landlords and problem tenants, which makes it difficult to justify the expenditure of quality renovations in many streets around here. I also wonder if there is a market for larger units that are not meant for families- say a 4 plex knocked into 2 1800 sqft units as live/work space rather than as a 3/4 bed duplex. Although homes are very cheap to buy in this area which is leading to owner-renovations, there is a lack of high-quality rentals aimed at professionals. Young people, even on good salaries, tend to be less keen to tie themselves down to a property regardless of how cheap it is, but still want a nice place to live that is in keeping with their aspirations.
    The majority of rentals in this area now seem to be either ok quality section 8 family homes/apartments, or substandard rentals that attract unscreened tenants, and have high vacancy rates. The latter is what we need to get rid of.

     
  4. JonCarter says:

    “the free market isn’t always up to speed on demand, trends, etc.” That is at time true, but what is the alternative? Some lady in the basement of City Hall going to make these decisions and impose them?
    Also, it is the arbitrary “3 or more units require sprinklers” government rule that makes some of these rehab choices more expensive and poorer investments. Far from being evidence of a non-responsive market, it is evidence that government rules, no matter how well intentioned, can have unintended consequences. It doesn’t take a Ph’d to realize that rules that make 3 or more unit buildings more expensive will lead to more two unit buildings.

     
  5. JZ71 says:

    “Despite what many may think, the free market isn’t always up to speed on demand, trends, etc. — it often takes fresh thinking to show the free market other options besides the status quo.” I agree that “fresh thinking” is required around St. Louis, but that is needed on both the supply and the demand sides of the equation. You can’t buy something that isn’t being offered (duh!), yet many buyers and renters continue to choose “safe”, “familiar”, “comfortable” alternatives over “fresh thinking”. Look at downtown – there’s been a market, albeit a heavily-subsidized one, for loft conversions in historic structures; what there hasn’t been is a lot of new, “creative”, “cutting-edge”, infill residential loft structures, like you see in many other cities. The former Roberts Brothers project near Culinaria is the biggest and best example, but has faced multiple starts and stops and financial hurdles. The “free market” happens on an individual level – most of us can afford only one residence (we can’t build a collection), so choices matter – if 10 or 20 or 50 family units choose to buy or rent suburban ticky-tacky for every one family unit that chooses a “good” “urban” unit in the city, the “free market” is going to respond accordingly.

    And part of the equation, as is everything in real estate, is location, location, location – building new “lofts” in Kirkwood, Creve Coeur or near St Charles Community College (as has been done) or building a dense, walkable, new-urbanist community in the middle of a St. Charles County farm field (as has been done) doesn’t really appeal to someone who wants to live in the city. Building “suburban” apartment complexes in the city appears to be a “safe” answer to developers because they rent quickly and maintain high occupancy levels – there’s really no reason to “break the mold”. I’m not sure how to change that paradigm, short of importing some out-of-state developers, and for that to happen, the transaction price-per-unit will have to increase, significantly, to catch their interest . . .

     
    • You conveniently ignore how, for decades, people have left the St. Louis region for others. Seattle, Chicago, Austin, etc regions have all gained. Suburbia is subsidized too — take off your rose colored libertarian glasses.

       
      • JZ71 says:

        Yes, suburbia is subsidized. My point was/is that it’s far easier, ecomically, to do lofts in existing buildings downtown than it is to do new construction. First, an old warehouse can be purchased for far less than its replacement cost. Second, the use of historic tax credits can reduce project costs by 20% – 25%. And third, tax abatements on residential property taxes offer significant, additional savings. As JonCarter points out, the Law of Unintended Consequences kicks in, distorting both supply and demand. We need “fresh thinking” – converting old buildings to residential uses shouldn’t the only economically viable option downtown. And if the government subsidies continue to favor that option (and only that option), guess what? We’ll continue to get the same, old, stale thinking . . . .

         

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