Keeping construction costs down is increasingly critical as budgets are squeezed and labor and materials costs remain high. While others may emphasize different strategies to keep costs lower, at Tiscareno Associates we like to prioritize efficiency.
Area efficiency is a known metric to most developers, but, for those less familiar, it’s the percentage of net rentable square feet (NRSF) within the gross building area—most often this is per floor. Since only NRSF (or leasable area) generates income, the higher the percentage the better, right? Well, yes, but not always. Here’s why:
The areas you cannot rent: elevators, stairs, corridors, and the like are the architectural equivalent of an investor’s sunk costs, and they’re going to be there regardless of whether you have 600- or 800-square-foot apartment units. With these non-rentable, sunk-cost areas as a given, 800-square-foot units certainly will result in a better area efficiency than 600-square-foot units. When we have a constrained site and are fighting for every square inch, this is a reliable approach to provide value. When we are working on a site with a bit more room, another factor should be considered, namely, that each additional square foot above a certain point, say 600 for example, delivers increasingly diminished returns. This is unit efficiency.
We hear over and over that while larger units earn more rent than smaller ones, the relationship of NRSF to rent isn’t directly proportional. The reason being that the market for a one-bedroom apartment is only so broad, so an extra 10% of NRSF in one unit will not actually earn 10% more in rent. As the area increases, so does the disparity. Furthermore, with construction costs what they are, the return on that extra 10% or 20% of NRSF might not actually pay for itself. The intersection of unit and area efficiency is a key factor in maximizing rents and minimizing costs.
Here are some tactics to consider:
1. Design right-sized units at the very beginning of the project
Identify the type and size of units that have the maximum unit efficiency, and then plug and play. Don’t always default to a maximized envelope that then gets demised into units. Start with highly efficient units, and then choose where you’d like to make a few of them larger to aid exterior design or create a higher-end unit where there’s a great view.
2. Minimize your area sunk costs
Elevators, stairs, and corridors should never be larger than necessary. When you’re evaluating early design options, look for the area efficiency of each scheme and drill down—cut the fat as best you can. Remember that more NRSF might actually be hiding an inefficient core by inflating the percentage.
“Necessary” is subjective, of course. Large buildings that extend a corridor to an exterior wall for a window look like they’re giving up a lot of NRSF, but that little bit of natural light in a corridor may help with retention. Likewise, widening the corridor at elevators and corners may not be necessary but will help with move-ins/move-outs. Stairs are frequently oversized in smaller buildings where lower occupant loads may allow for skinnier stairs.
3. Don’t forget about the ground floor
With apartments, it might seem appropriate to start the unit design at the second floor and go up, leaving the ground floor to be filled in later with amenities, leasing, retail, etc. However, this is not always the best approach for an efficient building. Ground floor units may get lower rents, but they still earn more than storage closets. It’s a good idea to right-size the ground floor functions at the beginning of design—you might discover that you actually have the space for a few more units.
It’s important to note that all of these tactics need to be applied at the start, during feasibility, and before the program is finalized. Efficiency gets decided early on. A month goes by, and the window of opportunity has all but closed. So, start your project off right by carefully considering unit and area efficiency before hurrying on to the next phase.