"Finally, A Profitable Way to Fill Up Your Backyard!"
/By Andrew Dealy, Managing Partner
It’s widely understood that there's a scarcity of modest and affordable housing in pretty much every major city in California. Factors such as expensive land, labor shortages, high construction costs, and difficulty in obtaining permits have resulted in a situation where only sky-high rents and home prices can offset the cost of doing business. With those considerations in mind, California lawmakers recently started to ease restrictions on alternative housing options to help relieve some pressure on the State’s rapidly declining middle class. And one such option, commonly referred to as ADU’s (Accessory Dwelling Units), have experienced a surge in popularity as homeowners look for creative ways to generate additional income right from their own backyards.
ADU’s are hardly a new concept but they effectively became one in 2017 when California passed a series of laws that required cities to remove limitations on ADU’s. Prior to that, entrepreneurial homeowners often built backyard structures without permits and at the risk of heavy fines from their local governments. The clandestine nature of those projects also meant that homeowners were not able to advertise those apartments on traditional listings sites and therefore they rarely hit the open market. But five years and one major housing disruption in the form of COVID-19 later and ADU’s represent a growing share of new (tiny) homes across the State.
California homeowners built 12,000 ADU's in 2019 alone and experts are predicting that the same measure from 2020 will be multiples of that pre-pandemic figure. It’s clear that many homeowners with the means to do so used their extra time at home to take on renovation projects like adding ADU’s of all shapes and sizes. While that trend is well documented at this point, I was surprised to learn that over 50% of those ADU’s were built to generate income according to a recent survey of 800 California homeowners. I had wrongly assumed that the majority of ADU’s were constructed for family members, home offices, or gyms, but it turns out that most are eventually listed as long-term rentals.
However, this for-profit approach to ADU’s should not be viewed as a negative consequence because it’s creating inventory that was otherwise non-existent as of a few years ago. And since ADU’s are typically smaller and cheaper than traditional multi-family apartments, these units are entering at the lower end of the market rather than at the luxury level. It’s unlikely that these homeowners are getting rich off of renting out studio apartments, but they are benefitting their municipalities by adding the kind of housing that developers stopped building in California decades ago.
One Bay Area company in particular, Abodu, has been responsible for much of the growth in this sector. Abodu builds pre-fabricated ADU's that are assembled onsite and delivered within one month of signing the initial contract. Its smallest option is a 340 SF studio that starts at $189,000, which is not necessarily cheap on a square footage basis but certainly less expensive than the price of a comparable condominium in San Francisco or Los Angeles.
Los Angeles might not have as many ADU related start-ups as San Francisco but they’re determined to compensate for that by providing the fastest approval process via their ‘over-the-counter’ ADU Standard Plan Program. Los Angeles has also partnered with high profile design firms to supply the templates so that certain neighborhoods are not put off by what they determine to be cheap architectural plans.
California’s major cities are all-in on ADU’s and experts such as the McKinsey Global Institute estimate that California could add up to 800,000 ADU’s by 2025. We hope that’s the case and while we have not personally invested in the fabrication or deployment of ADU’s, we’re always interested in how state and local governments collaborate with the private sector to produce more affordable housing. And beyond that, how builders can achieve maximum density in a responsible manner that benefits all parties. One point is irrefutable -- California needs another 3.5 million units in 5 years to be able to house the State’s population and hitting that target is going to require a level of ingenuity that has escaped most zoning and planning commissions to date.
