Since early 2018, in markets like New York City, luxury units have reached a 13% vacancy rate, nearly four times higher than the average vacancy rate of the city. Financial concessions are at all time highs as renters look to other options to save money. Once recessions hit, rent drops only increase, as we saw in the Great Recession; renters have less money to spend and seek more affordable options.
The high cost of land, labor, and financing, you might argue, push you to build up to 80% of your units as luxury or market-rate units to recoup your costs.
But there’s another way. By surveying startups working to reduce the cost of housing, I worked with Stonly Baptiste, co-founder and partner at Urban Us, to offer six tool chests to embed affordability into your next project.
Tool Chest #1: Find undervalued land
Driven by a lack of supply in major cities, land costs can eat up 30% to 40% of a real estate development budget.
Find diamonds in the rough
Empty lots behind buildings can be used to build housing such as accessory dwelling units. One housing startup, Blokable, partnered with a church to produce a 3-story apartment complex on the church’s empty lots. Use Brownfield Listings to find vacant buildings, such as factories or warehouses, which E-lofts and Starcity converts into housing units. Or take a page from Turner Impact Capital or Housing Partnership Equity Trust, who buy and keep older, multifamily projects affordable for the long-term. Equipping you with data, Idevelop.city helps you discover great development opportunities. Using machine learning, Citybldr optimizes land sales. It, for instance, found homeowners could sell their units for 40% more as a group in an assembled lot over as individuals.
Build next to transit
Building next to multiple public transit options allows you to build less parking, saving money for everyone. In one analysis, parking raises development costs by 50% or even more if parking is underground. Furthermore, if a public transit connection exists, look for cheaper land further from overvalued neighborhoods. To find lots that ease your renters’ commutes, use Coord, which provides transit, bike-share, and curbside data. Consider partnerships with parking startups, like Pavemint that allow local owners to rent their empty lots for parking, and transit startups, like Via or Getaround. By working with Getaround, one developer saved itself from building 77 spots of parking.
Tool Chest #2: Go Micro
Startups are “designing for affordability” -- creating new layouts that make living in dense environments more pleasant. More units per lot mean you’re able to better recoup the costs of expensive land.
Build Smaller
Micro-units are studios 30% to 50% smaller than studios in the same neighborhood. They maximize space using highly-functional furniture, such as pop-out desks and beds. Some are even more lean, having renters share common spaces, like kitchens and bathrooms (also known as “congregate housing”). These micro-units allow renters to save 30% to 40% off equivalent rooms in the area. Waiting lists for micro-units are dramatically long; Starcity’s 36 units have more than 8,000 applicants. Some companies provide furniture tools to help people live better in smaller spaces. Bumblebee spaces, for instance, lets the occupant use one room for multiple purposes by using ceiling robotics. Ori Systems provides robotic furniture that serves multiple uses, such as a bed, desk, and closet, in order to save space. Kenchikukagu provides portable and foldable offices, kitchens, beds, and bathrooms.
Share Rooms
To increase affordability and cashflow, some companies go beyond sharing apartments to sharing individual rooms. HomeShare uses partitions to convert living rooms in luxury units into bedrooms, which allow renters to discount 30% to 40% the cost of an equivalent room. Others help renters share rooms by installing “sleeping pods,” as Haas Living or PodShare does, or bunk beds, as Rentashare does. Tools such as Everblock easily allow you or renters to build temporary walls.
Help renters have fun or save time
To make up for less privacy and reduce vacancies, you can partner with a “coliving” service that gives renters extra convenience or community. Starcity, for instance, takes care of common annoyances such as cleaning and laundry. Doorbell organizes fun events and a platform for renters to connect online. Nesterly connects people with seniors and others who need help around the house. Hubhaus and Padsplit focus on finding quality roommates who share similar interests and activities. These coliving services have large demand. In just a couple of years, Hubhaus, for instance, has grown to 400 renters in 70 houses all over the Bay Area, with zero vacancies, compared to an average of 7%.
Tool Chest #3: Build more efficiently
The second-highest cost is that of labor and construction, which can eat 30% to 50% of a building’s total costs. Part of the problem is the housing industry’s lack of productivity growth the past two decades. Workers lack standard designs, so they have to learn new systems for each build. On-site construction means development is subject to unpredictable local labor costs, traffic patterns, and inclement weather.
Mass-produce
Pre-fabricated housing developers, such as Kasita, Blokable, and Panoramic Interests, overcome these disadvantages. These companies are able to mass produce standardized housing in factories, saving 10% to 70% per unit compared to conventional construction or recycle shipping containers. Because they are blocks of housing, a unit can be placed on cheaper oddly-shaped lots like backyards. Due to their block-like designs, Kasita and Blokable units can be stacked vertically up to five stories, allowing developers to obtain more density for cheap. To grow with families, Module Housing’s prefabricated design can be extended with add-ons like extra rooms. When actually constructing housing, Avvir or Vnatures can save up to 10% of construction costs by monitoring construction activity and cutting down on mistakes. Much like micro-units, demand for these blocks of housing are moderately high - 85 Kasita units have been reserved already in one housing community.
Build simpler
Construction costs can be further lowered by not adding interior finishes, like floors and cabinets. “Naked” or minimalist homes are becoming very popular in London and Japan and can be built up to 40% cheaper than a similar house. 22 units are currently under construction in London and the Mayor of London intends to provide grants to produce dozens more.
Don’t build at all
The most radical solution to save on construction costs is to avoid construction altogether. Just rent plots of land to prefab housing owners. For instance, Constellation ATX rents land to owners of Kasita’s micro-units. These savings pass onto the resident, with space rent up to 60% off similarly-sized units in the area.
Tool Chest #4: Navigate rules
Regulatory costs involved with building a home, the National Association of Home Builders claim, can take up to about 30% of the cost of developing a home. Reducing delays, permit and development fees, and changes in building codes -- the major culprits of regulatory costs -- can equate to savings passed on to you and tenants.
Streamline the Permit Process
For smaller projects, like ADUs, several services let you outsource the permitting process to experienced actors. Montainer and Cover Technologies get building permits, with the latter also using algorithms to create code-compliant designs. Subscribing to Vigilant’s alerts or CivicPro equips you with local regulatory intelligence for proposed areas and to plan proactively.
Build Partnerships
Development is political. To build people power, consider building partnerships with nonprofits and grassroots leaders, taking a page from Kasita’s or Blokable’s partnerships with community development corporations to help vulnerable populations. To share and fund best practices, Facebook built a housing innovation fund with advocates of low-income residents in East Palo Alto to explore scalable ways to build affordable housing. To help local communities for especially large projects, create a community benefit agreement, such as that of Columbia University’s, to fund opportunities for local communities. With Neighborland’s or CoUrbanize’s online platform, you systematically gather data on local needs, including those who are not able to attend planning meetings, build responsively, and, according to some reports, gain approvals faster.
Tool Chest #5: Find more money
Raising enough money for a new project, as one developer emphasizes, is one of the biggest hurdles you’ll have to overcome. These tools make it easier for you to raise financing and pass on savings to your renters.
Partner with down payment assistance programs
Selling some of your units to homeowners allows you to get immediate liquidity and reduce the amount of financing you need. But homeowners often have trouble affording down payments. To address this, Loftium, for instance, helps a prospective buyer with up to $50,000 for a down payment, if the buyer rents an extra room on Airbnb and then shares the rental income. Landed helps educators buy houses, covering 50% of their down payment, and takes up to 25% of the home’s appreciation when sold.
Crowdfund
Users on Realtyshares and Compound can provide additional sources of capital from users on their platforms. If you can demonstrate positive social impact, platforms like Small Change or Neighborly can provide funding too. In particular, Neighborly gets paid a premium if you meet your impact goals (and nearly nothing if not), effectively allowing governments to outsource social service innovation with less risk.
Group buying
Pre-selling property in bulk saves sellers and buyers money in multiple ways. First, sellers have greater certainty they can reach their goals in just one transaction, ultimately saving on marketing, brokerage, and other costs. Furthermore, they can get much needed cash to construct, reducing the amount of expensive or difficult-to-get financing. Through group-buying platforms like GroupBookings, residents have saved 20% or more in Indian real estate markets.
Tool Chest #6: Reduce operational costs
Aside from building the property, the costs of operating a building -- from collecting rent, maintaining the building, and finding new renters -- are tremendous. Startups have made progress reducing these costs.
Automate property management
Property management companies can charge anywhere from 7% to 10% of rent just to manage daily operations, and, even then, offer variable service. Startups such as Zenplace and Castle reduce these costs through automation of certain tasks, such as posting on craigslist, and best practices. Zenplace charges 5% of rent, while Castle charges a flat $75 subscription fee.
Help renters save money
Utility costs (electricity, gas, water, and sewer), from one analysis of public real estate records, add up to 27% of a renter's costs. Aside from self-help tools renters listed in this resource on Urban.us, you can reduce utility costs by building with passive house principles, such as using triple-pane windows, which reduce heating and cooling costs by 90%. Passive or low-energy housing can be 5%-15% more expensive. But these costs can be amortized through rent, and have payback periods that range from 11 to 18 years. BlocPower and Mosaic can also reduce capital costs by funding these efforts and sharing in the savings. Due to advances in solar, panels can be paid back in four to12 years, accelerated by batteries and your city’s solar tax credits. Solstice, for instance, worked with the NYC Housing Authority to help renters save up to 20% off energy bills.
In conclusion: Stay in the know
Leverage what the people around you know. Connect with venture investors and their communities such as Housing Innovation Vision Economics, Urban.us, Urban-X, Metaprop, and Brick and Mortar Ventures. To reduce the risk that one of the tools above are not up-to-par, check whether a leading investor in the space, such as Urban.us, has invested and backed the company.
A recession, experts claim, may be on the horizon within the next few years. Affordability, then, is a business imperative. By creating high-quality housing that saves renters money, renters in your units during recessions are less likely to ask for concessions or leave. Many investors have similar ideas, with deal activity for more affordable units 2.5x more active than market-rate ones.
Ultimately, startups are creating tools to reduce the cost of land, construction, and finance that can further a profitable housing future. Don’t get left behind in the next recession.
