Underwriting
Unit Mix And How It Shapes Revenue
The distribution of unit sizes in a building determines its revenue per square foot, its turnover pattern and its tenant profile, often more than the building's location does.
Unit mix is the composition of a building by unit type, from studios through larger apartments. Two buildings of identical size in the same neighborhood can perform very differently because of it.
Rent per unit and rent per square foot diverge
Smaller units command less rent per unit but more rent per square foot. A studio rents for less than a two-bedroom, yet each of its square feet earns more.
That relationship holds because tenants pay for the kitchen, bathroom and access to the location, and those costs do not scale down proportionally as the unit gets smaller.
A building weighted toward small units therefore produces higher gross revenue for its footprint, while a building of larger units produces higher rent per household from fewer tenancies.
Operating cost follows unit count
Many costs scale with the number of units rather than with floor area. Turnover, leasing, appliance replacement, inspections and administrative time are all per-unit expenses.
A building with many small units therefore carries a heavier operating load than a building of the same area divided into fewer, larger homes.
The higher revenue per square foot from small units is partly consumed by this. Comparing the two mixes on revenue alone omits the side of the equation that offsets it.
Turnover patterns differ by unit type
Studios and one-bedrooms tend to house households at more transitional stages, and they turn over more frequently as circumstances change.
Larger units more often house families or established households, whose moving costs are higher and whose ties to schools and employment make relocation less casual.
Since each turnover carries vacancy and preparation costs, the mix effectively sets a baseline turnover rate that management can influence but not eliminate.
Depth of demand is a mix question
The number of households seeking a given unit type in a given area is finite, and it varies with local demographics rather than with the building's own qualities.
A large concentration of one unit type in a submarket with shallow demand for it can produce persistent vacancy that no amount of marketing corrects.
This is why rent comparables should be drawn from the same unit type as well as the same area. A studio comparable says little about a three-bedroom.
Mix is difficult to change
Reconfiguring units means structural, plumbing and electrical work, and in most places it also means permits and compliance with current building and zoning requirements.
An architect and the local building department determine what is feasible before any financial analysis is meaningful, and local requirements vary and are amended over time.
