Over the past 10+ months, we've observed, blogged and presented webinars about this recession. We've compared our observations to our experience of the last couple of recessions. We've always tried to tie these observations to actionable tasks any multifamily housing operator can do to manage the downsides of this and leverage the upsides.

One of the most curious quirks of this current downturn is the way that residents and prospects seem to be thinking about physical space, and there are important implications for operators. In the recessions of 2002-3 and 2008-9, prospects and residents generally became more price-sensitive. Larger units got harder to rent and highly amenitized units even harder than that.

Yet, for the past several months of this downturn, smaller units have turned out to be much more difficult to lease, while larger units have been easier. Why is that? We believe a couple of things are playing into this.

Once again: this recession is different

First, as we discussed in our latest webinar, unlike past V- or U-shaped recessions, this one has been K-shaped. That means that the demographic attracted to A and B-class housing has suffered little if any long-term economic harm. They can still afford the larger homes, and in markets where rents have declined, they have been able to take advantage. In fact, with stimulus checks and "forced savings" from fewer opportunities to spend money on travel, restaurants and bars, etc., they can afford to spend even more on housing.

Second, and perhaps more importantly, the pandemic is a sociological phenomenon, not just an economic one. With massive shutdowns of office space and the resulting increase in work-from-home regimes, people are spending far more of their waking hours at home. Spending anywhere from two to five times the time they previously spent at home, it's quite natural that they want more space.

To recap: many renters are relatively unaffected by the economic downturn, can afford a larger apartment and are motivated to upgrade to a larger unit. We would argue that at this time, specifically, there is no amenity as important in multifamily as square footage. For renters spending more time at home, which is more important: a really nice backsplash or more space? Not that the former isn't desirable, but the latter is clearly so much more valuable.

An opportunity missed

Yet time and again, we see clients and prospects undercharging for extra square footage, sometimes ignoring it altogether. I was recently looking at one client's configuration and saw the following:

• The smallest one-bedroom home was leasing at $1.47 rent per square foot (RPSF)
• The next largest home was 60 square feet larger
• The incremental cost for that 60 square feet was only $20

That's just 33 cents per incremental square foot! Only 22% of the base RPSF. I know from experience that it should be in the 60-70% range. On just 100 units, that difference is $3,292 per month, which is close to $40K per year. That represents over three-quarters of a million in value just using a 5-cap (and almost all sales are well below a 5-cap these days!) We know that prospects value size, so if anything, this may be a bit conservative.

It's a surprising opportunity that the industry is missing. Readers of this blog will be familiar with our views on the missed opportunity that amenities represent to many operators. Amenity pricing is surprisingly difficult to do well without analytical capabilities. But setting consistent square footage premiums is conceptually simple. Square footage is square footage and the base rent sets an expectation of what it should be worth. All it takes is a little consistency and discipline to get it right and to claim the kind of revenue upside that we’ve been uncovering for our clients more or less every week!