Micro Apartments Good For REITs: Equity Residential (EQR), AvalonBay Communities, Inc. (AVB), UDR, Inc. (UDR)

Big cities have been a draw for many years, with people willing to cram into apartments the size of shoe boxes. While that used to be a joke, New York City, Boston, and San Francisco are taking the legal size of an apartment ever closer to that mark, with San Francisco going as small as 220 square feet. Such desirable and property constrained markets have long been the focus of a select group of real estate investment trusts (REITs). The properties they own clearly have a lot of value and plenty of rent growth potential.

The Lure of the City

Young adults have always flocked to major cities, looking for culture, fun, and people their own age. On that front, you can’t beat New York City, Boston, San Francisco, or Chicago. The opportunities in these cities are second to none, with enough wonderful museums, restaurants, bars, and dance clubs to fill up a social calendar for years.

If you want to be in the middle of the action, however, the cities are all space constrained. There simply aren’t enough apartments for everyone who wants one, particularly if someone is on a budget. This is why these cities regularly see young folks banding together and sharing apartments. Complicating matters for these aspiring city dwellers is the fact that many wealthy baby boomers desire the same lifestyle and are moving back into the cities while they can still enjoy them physically.

This makes finding an affordable apartment that much harder. Apartment hunting in New York City, in fact, is often a matter of seeing an apartment once and making an offer before walking out of the door. It is such a competitive market that real estate agents can charge prospective tenants exorbitant finder’s fees. Landlords in other markets would usually pay such fees.

A Solution

Solving a space issue in a land constrained city is a tough issue. You can build up, of course, but cities are now thinking that allowing smaller apartments would be beneficial, too. New York City is set to allow apartments as small as 250 square feet, with San Francisco going even smaller at 220 square feet. That really is close to the size of a large closet.

New York expects the smallest apartments to go for around $1,000 a month for low-income residents. The larger units, at around 370 square feet, will likely rent for as much as $1,875. That’s a huge cost that shows the value of rental real estate in these space constrained cities. Luckily for investors who think the trend toward urbanization has some legs to it, a collection of high-quality REITs offer access to these very types of markets.

Equity Residential (NYSE: EQR)

Equity Residential describes its portfolio as “concentrated in high-barrier, high-growth markets.” Although its total portfolio includes over 400 properties across 14 states, it has material exposure to Southern California (20.2% of 2012 net operating income), Washington, DC (15.9%), the New York Metro Area (13.6%), Boston (8.0%), the San Francisco Bay Area (7.4%), and Seattle (7.3%). Note that two of the three micro apartment cities are included in this list. A recent yield of over 5% makes this one of the higher yielding apartment REITs at present.