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Jumpstarting the market for accessory dwelling units

Karen Chapple, Professor, City and Regional Planning | May 23, 2017

How did Portland, Oregon, go from permitting two accessory dwelling units (ADUs) per month in 2009 to almost two per day in 2016?  Now, more than one of every 10 housing units built in Portland is an ADU.

 

ADU permitting explodes: Permits as a share of all residential permits.

Compared to other housing types, ADUs, or separate small dwellings embedded within single family properties, are so affordable and easy to build that one might expect them to proliferate in our hot coastal housing markets. As our recently released study shows, a few Cascadian cities, like Portland, Seattle and Vancouver, Canada, are seeing a rise in ADU construction, jumpstarted by a combination of zoning reforms, fee waivers and outreach. Yet, by comparison, California cities are off to a slow start.

Cities can support the building of ADUs by reforming their zoning regulations (particularly minimum lot size and floor area), minimizing design review, and easing owner occupancy requirements. According to our survey of homeowners, the single biggest motivation to start an ADU project is the easing of land use regulations. Waiving fees, such as permit or utility connection fees, can also encourage homeowners to build. And cities that are seeing the most success are helping to create some excitement around and greater familiarity with ADUs, for instance by sponsoring tours and providing technical assistance.

Portland made it easy to build ADUs through a combination of zoning reforms, education and fee waivers.

Homeowners in Cascadian cities are building ADUs on their properties because of the flexibility these units provide; the majority use them for permanent housing, but they can also serve as a home office, a source of rental income, or shelter for a friend in need, depending on the circumstances. And they are easy to build, too: our survey found that for most, the entire process from design to construction took just 18 months or less.

                                                                              

But most importantly, ADUs are offering new pathways to affordability. They are not just affordable by design — the average ADU in our sample cost its owner approximately $156,000 to build — but also they tend to rent for below-market rates, whether rented to family and friends, or at arm’s length to strangers. Why do ADUs rent for less? It may be that they are relatively small – we found an average size of 631 square feet – or simply that homeowners are willing to forego higher rent in exchange for the flexibility ADUs provide. In any case, as affordable space, ADUs provide housing for small households of moderate means, ensuring that this market segment does not compete for precious affordable stock elsewhere. ADUs rightsize the market.

(Photo by Portland Photos)

Once cities ease regulations and provide technical assistance, obtaining financing becomes the biggest challenge that homeowners face. To finance an ADU project, 30 percent of our study respondents used only their own cash and an additional 15 percent drew entirely on other personal resources such as credit cards. Among the remainder, 40 percent of respondents reported borrowing against the existing equity in their property, with the majority relying on credit unions or local or regional banks. Very few were able to borrow against the future expected value of the unbuilt ADU to help finance its construction.  To broaden this market, it will be essential for banks and underwriters to develop new lending products and protocols that recognize the value of ADUs and their potential for rental income, and increase lending to more homeowners for their production.

On January 1, 2017, California Governor Jerry Brown signed Senate Bill 1069/Assembly Bill 2299 into law, reducing important barriers to ADU development such as parking and sprinkler requirements, eliminating utility fees, and streamlining approvals. This was an important step to spurring construction. But to truly jumpstart the market, California cities will need to follow the lead of models like Portland in making the process more transparent and accessible. Cities and counties that take steps to educate homeowners (for instance, via ADU manuals) and work with entities such as CalHFA to develop new financing programs are likely to reap significant rewards in their backyards.

 

 

 

 

Comments to “Jumpstarting the market for accessory dwelling units

  1. Hey Karen, so glad you wrote about this. In particular that second chart, the one showing the dates of the various reforms, is very persuasive.

    At the same time, I think the evidence about ADUs and affordability is more nuanced.

    Construction costs are widely misunderstood, but to most people who’ve never built anything $156K is pretty gigantic. As you noted, that in itself is a serious barrier, and perhaps the reason the SDC waiver was effective … it made meeting the financial challenge just a little bit easier.

    In terms of rents, from my reading, the evidence is that average rents are not significantly different between permitted ADUs and comparable non-ADU rental housing: see here and here.

    It’s not the average, it’s the distribution of rents that shows the affordability effect. Those same studies show that a relatively high proportion of ADUs are rented out voluntarily for either zero or extremely low rents. Those units are affordable by nearly any definition. Yes, it’s mostly for family and friends, but hey, those people still need a place to live.

    I also think there are affordability effects for the owner as well. When an ADU owner is a person of moderate means, the flexibility to change between renting the ADU out for full market rate, and renting it cheaply to a family member, friend, or other informal “supporter” can contribute significantly to stability. ADUs could even be creating a new class of landowner — the family that has exactly one income-producing asset. It’s nowhere near being a big bad landlord, but it’s a giant step up from having zero income-producing assets.

    So yes, ADUs are amazing tools for affordability, and maybe even for economic justice, in this era where there are fewer and fewer people in the “middle” class. But getting people over the hump to build them is a big challenge. Besides regulations and financing, I think we might need some sort of construction manager or something — an agent that can help neophyte homeowner-developers get through the process. Have you heard of anything like that out there?

    Cheers, Martin

  2. San Jose uses a model that shows that residences generally pay less in taxes than they receive in city services unless the residences are high density with high income tenants.
    Sarah Chaffin this week proposed building 8-to-16 apartment units all earmarked for teachers with rents about $2,00 per month … these would be ADU’s to an existing salon or equivalent amount of commercial space in a somewhat blighted commercial area of San Jose.
    Chaffin said teachers helped her overcome dyslexia and now as a mortgage banker she is in a position to give back.
    But guess what? San Jose city government cites absolute zoning restrictions and alleges tax revenue loss to oppose her benevolent plan to provide affordable housing for 8-to-16 teachers as ADU to a commerical enterprise.

  3. Increasing residential density is a good thing, but is encouraging ADUs the preferred way to do so, or is it like tempting people out of their gas guzzling light trucks by incentivizing them into hybrid electric cars?

    A hybrid is less horrible than an SUV, but that doesn’t mean it’s good–it still perpetuates car-centered rather than human/life centered ways of living. Maybe more ADUs will be similar — not as bad as a wasteful lawn in your backyard but still pretty atomistic, still privileging the individual short-term over the community long-term.
    If the choice was really between a lawn that only one household has access to versus an additional small household, then sure, the additional small household is the better choice. But that isn’t what we, if we care about each other and our progeny, have to choose between. We can choose to build high-density, people-centered housing that is part of a virtuous cycle of resource usage efficiency, where everyone wins, including those who are currently just a twinkle in young couples’ eyes.

  4. Look at the savings of most Americans – most will outlive their savings.

    Thus, I imagine many of these ADUs are being built to house aging family members.

    It’s actually a very good solution for many and much better than relying on the government for their housing needs.

    Cary Michael Cox

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