Manny Gonzalez, a principal at Irvine, Calif.–based architectural firm KTGY, remembers when 60 percent of the new units he designed were two-bedrooms or larger. Now, he’s designing communities consisting of 60 percent one-bedrooms or smaller, and that has him worried. “We’re building smaller units, we’re cranking up densities, and everyone seems to think that’s where the next generation will go,” Gonzalez says.

But will the move towards smaller units create a supply situation fraught with challenges when the current renters want to trade up or grow their families?

Demand Drivers
Conventional wisdom says the Gen Yers expected to flood the rental market over the next decade want to live in smaller units, or at least can’t afford bigger apartments. “[This trend to smaller units] makes logical sense,” says David Crowe, chief economist and senior vice president at the National Association of Home Builders (NAHB). “If you’re really heavily catering to the Gen Ys, and you figure that they’re postponing commitments and kids, and all of those things, and you need to build for them right now, it makes sense. But you do have to look forward to your demand for repeat business.”

Developers, who are often looking to make anything pencil out, are cutting space to make new developments more affordable. “We’re seeing studios and one-bedrooms at absolute numbers that we haven’t seen in a long time,” says Charlie Brindell, CEO of Dallas-based private builder Mill Creek Residential Trust. “Part of it is demand and part of it is embedded in the goal to deliver affordable rental housing.”

Sue Ansel, COO at Atlanta-based Gables Residential says she's seen the ration move from 55 percent one-bedrooms to 70 percent one-bedrooms and studios. "We've seen a lot of demand for the smaller units," she says.

Problems Down the Road?
Gonzalez thinks smaller units in an urban area near transit will do OK, but developers taking the small unit formula outside the core may have trouble in the future. Specifically, he wonders whether today’s shrinking apartment sizes will fit resident needs a decade from now. “We seem to have about a three- or four-year vision in our industry, which is fine,” Gonzalez says. “You’re trying to make money this year and next year.”

So no one seems to dispute that smaller one-bedroom units make sense now, but what about five or 10 years down the road? “Once you get through that first wave, and the economy comes back, will people settle for a 430-square-foot one-bedroom? And if they don’t, what are [apartment owners] going to do with that?” Gonzalez wonders.

Ansel agrees, adding that what's popular now may not always be en vogue. "The cycle moves around from larger floorplans to smaller floorplans," she says.

What's more, if the condo conversion market ever re-emerges, Gonzalez wonders if these units will have any traction within the market. “I just don’t see how you can ever make that a condo,” he says.

Brindell says he doesn’t make development decisions on conversion opportunities, however. “We’ve never built anything with the goal to convert,” he says. “If there’s a conversion opportunity there, you consider it like you would consider a more traditional exit to the institutional investor.”

Gonzalez holds out hope that there could still be a way to preserve future conversion opportunities with small one-bedrooms, though. He thinks it may be possible to lay out small one-bedrooms in a way that they could be combined easily by removing one wall. “If you plan a building with two living spaces next to each other with a wall that can be removed, there are options. Maybe you need to have something that’s more convertible going forward,” he says.