Cities across the country are having to adapt to the needs of the millennial generation, who make up the largest share of home buyers, according to a generational trends report by NAR. Due to the recent economic climate, millennials don't mind making sacrifices, often choosing compact housing and not owning a car, as long as they can live in a vibrant city with a lot of perks.

Read moreThe 8 Fastest-Growing Cities for Millennials 

"They [millennials] seem more willing than other cohorts to trade space for access to transit and a walkable, mixed-use lifestyle," says Stockton Williams, executive director of the Urban Land Institute's Terwilliger Center for Housing in Washington, D.C. "It doesn't necessarily mean they're all saying they want to live in downtown central cities. It can be smaller towns or suburban towns that have these features."

To meet the need for affordable housing options, many cities are being proactive. In Austin, Texas, which is a hotspot for young professionals, builders are catering to millennials by offering homes that are much smaller than the national average and close to public transportation and local attractions.

"The demand for the smaller homes was enormous, and millennials bought them," says REALTOR® Scott Turner, owner of Riverside Homes in Austin, Texas and broker-owner of Turner Residential. "Millennials are much more willing to make the location-over-space trade-off than prior generations. They're happy with less space and less stuff. We found that 850 square feet with two bedrooms and one bath is fine if it’s in a good location."

Housing affordability remains a huge issue in Manhattan, and builders are going a step further by offering up micro housing as a solution. Micro housing is loosely defined as an apartment less than 350 square feet with a functioning and accessibility compliant kitchen and bathroom. Micro housing projects are also cropping up near Washington D.C. and Seattle.

"In places like Seattle, more micro housing units are popping up, and that does seem to be a viable option," says says Matt Kelly, a policy analyst and researcher at Florida State University in Tallahassee. "Smaller and smaller square footage seems to be viable for short-term year apartment leases because there needs to be a low-income housing alternative."

In the past, many cities had zoning regulations that banned small housing. New York City, for example, only recently waived a requirement that housing must be larger than 400 square feet. San Francisco recently allowed housing as small as 220 square feet, and two cities on the forefront of the micro housing trend, Seattle and Portland, have no minimum size requirement.

As housing affordability is outpacing income growth for many across the country, it continues to be important for cities to think out of the box and develop accessible and affordable options, not just for millennials, but for everyone.

Source: "Reducing Everyday Costs for Affordable Neighborhoods," On Common Ground (June, 2015)