One (Unit) Size Does Not Fit All

By Noah Klika, McQuaid Agent

While every investor has their own personal objectives and criteria for acquiring apartments, one factor that seems to be very inconsistent among principals is the desired or best unit mix for a property. The majority of the principals I speak with are all looking for the same thing: well located, good condition apartments for sale below replacement cost, as close to neutral or positive leverage as possible, lowest GRM and highest cap rate possible, etc. However, introduce the unit mix variable into the equation and the answer varies dramatically. Like anything in life and not to sound vague but the best answer is “it really depends.” More specifically, it depends on the submarket of the property and the demand for specific unit types within that defined submarket. Every submarket arguably has a unit mix or unit type most conducive to that particular submarket and the demand of prospective and current residents within it. I remember when we were marketing a property recently in Pierce County with a very rare and unusual unit mix (all 4 bedroom/2.5 bath units). Despite the fact that the property was only a few years old, in great condition, performing strong financially and offering a new owner a great return on investment, some principals simply could not understand or believe that particular unit type was not only appropriate for that submarket but that there was a strong demand for it. Well, the eventual buyer of the property understood the unit mix and is earning an excellent return on his money especially compared to competing investment alternatives and returns available today.

This week we brought a new property to market on Capitol Hill. This particular property is in an excellent location, amazing condition, features tastefully renovated interiors and offers certain rare amenities such as parking and a pitched roof. It is being offered for below replacement cost, at nearly neutral leverage in light of current financing available, and at a price consistent with recently closed or pending properties on Capitol Hill currently. Some of the buyer feedback we have gotten is that there are no two bedroom(s) in the unit mix. For this particular submarket the unit mix most conducive for a building is studios and one bedrooms (both available in this particular property with a great distribution between the two). The Capitol Hill market, with its higher concentration of singles as opposed to families, should have investors preferring studios and one bedrooms over two bedrooms. As well, Seattle has one of the nation’s highest rates of single person households and with the trend of people preferring to live in the city over the suburbs for a multitude of reasons the demand for studios and one bedrooms is here to stay and will likely be greater moving forward. Long story short, the unit mix needs to fit the neighborhood. 4 bed/2.5 bath apartments may work well in Pierce County but would not fare well in close-in, urban neighborhoods where the demand is greater for studios and one-bedrooms.