The problem with price per s/f in New York City

Hovering over a plan table several months ago and surrounded by some of New York City's finest architects and engineers, we sharpened our pencils in an effort to make the residential apartment units smaller. Marketing agents don't like the term "smaller" so they like to use "more efficient." From my perspective, more efficient means "the tiniest apartment possible." Developers often look for "efficiency" so they can maximize the price per s/f and tell their investors that they'll exceed target pro-forma estimates; financial analyses that are driven by this price per s/f (p/psf) figure, and hence maximize returns. As I scratched my head and the architects scratched a closet here, a foyer there, an epiphany came: At what cost do we increase p/psf? The problem with the psf metric is that it forces our architects to curb their design vision: kitchens become smaller, living rooms become narrow, closets disappear, and the end-user is boxed into a cubicle similar to where they spend their work hours earning the income to afford the rent we ask. Not only are we hindering our designers' ability to generate true vision from paper to reality, the size constraints are changing the lifestyle of the end-users: they're now limiting the size and weight of a dog, reducing the amount of clothing purchases, second-guessing that idea to purchase a bicycle, eating out more frequently, practicing contraception, etc. Indeed, one can argue that the alternative way to raise p/psf is to ask more in rent. But, economists would warn us that we face a market reset to equilibrium because sizes of apartments cannot shrink forever. Moreover, the end-users will collectively force downward pressure on rents as they seek out larger units. In other words, renters will not continue to pay higher and higher rents (or purchase prices), only to receive less and less staple amenities. Because we feel that it's not worth sacrificing quality to reach a higher p/psf, my business partner Daniel Hollander and I are daring developers to join a contrarian movement based on our philosophy that end-users will pay more in absolute rents or absolute purchase prices to achieve a more desirable residential unit. True pioneers need to realize this movement now, and implement these design programs to stay ahead of the market demand. DHA is currently practicing this thesis on two projects: The first is a super-luxury condo building in Greenwich Village where we are offering buyers full floor, 5,000 s/f units, and second in a luxury rental building in Midtown West, where the rental units are 15-20% larger than our competitive set. A few weeks ago, an equity fund decided against investing in a fantastic rental opportunity we presented. The deal had all the merits one would look for when placing money; however, the market lacked evidence supporting our p/psf assumption, and because of that factor, plus an analyst's inability to see beyond this misguided metric of success, we were forced to seek another source of equity. We did so successfully and with less hassle than expected. As developers, it is our duty to provide housing worth living in. We want our end-users to stay and enjoy our buildings without feeling claustrophobic. Solely seeking to satisfy this p/psf metric is foolish and ruining the fabric of the great designs that many architects are capable of achieving. Lastly, the size of units, if allowed to continue shrinking because developers are forced to increase the p/psf to satisfy investors, will result in a city of micro-apartments and unhappy residents. We encourage other developers to join our contrarian effort. Joshua Schuster is a principal at DHA Capital, LLC, New York, N.Y.