Housing development today divides urban, close-in infill, suburban, and rural areas into two unequal parallel universes.

In one dimension, among people and households who want all the best and most innovative of what architects, builders, engineers, and developers do--and can pay handily for it--housing's economics and business models square with market opportunity, fueled by growing numbers of well-educated, high-earning, dual-income households.

In another, where people need access to housing options to support households where their earnings fall on the bubble of area median incomes or below it, current economics and business models mostly don't apply because of how costs have outrun present and anticipated returns.

Forcing the divide wider and wider apart--from an economics and current business model standpoint--is a freighted force-factor that's taken on a life of its own: Land use restrictions, local fee costs, and risks.

Picture each trade-able piece of real residential property, whether it's a home site or an apartment unit, as an amalgam of four side-by-side multi-tiered capital stacks: costs, prices, business profits, and values.

In the "costs" stack, a tier that represents the share of expense--money, time, talent resources, aggravation, etc.--related to land use is increasing at a rate that has alarmed, ... well, everyone.

Now, into that widening divide, accessory dwelling units--granny flats, in-law units, backyard tiny houses, etc.--have emerged as a source of hope and speculation that this form of increased density may help housing affordability's cause, particularly in that ADUs reflect opportunity area on both the local policy and the builder productivity front.

We saw two Ivory Prize finalists (one of them a winner, the Alley Flat Initiative in Austin, and another an honorably mentioned program called Dweller, pictured above) whose housing affordability solutions marry revenue-earning (or money-saving) benefits to the property owner, with zoning leeway that adds rental units to the submarket.

Whether the backyard ADU is used as a revenue unit or for a "multigen" adult family member, the theory is that the single permit could benefit both the property owner and the ADU dweller.

That's the theory.

Here, San Francisco Chronicle correspondent John King notes that, as one might expect, theory and reality often bear little resemblance. King writes;

Source: San Francisco Chronicle
Source: San Francisco Chronicle

1,598 such units were approved in 2017, the latest year for which full regional numbers are available, compared with 434 in 2016. There’s a push in Sacramento to remove many of the remaining bureaucratic obstacles to their construction, which could send the numbers higher still.

But to put these numbers in context, a recent study on behalf of Bay Area housing advocates suggests that the region needs to build 525,000 units during the next 15 years. And while supporters have argued for years that backyard cottages and garage conversions can become a major source of supply, government officials grappling with the housing crisis on a daily basis aren’t prepared to go nearly that far.

King goes on to report that a Bay Area organization called CASA--Committee to House the Bay Area, an alliance of government, civic and business leaders organized by the Metropolitan Transportation Commission--suggests that as many as 300,000 ADUs could be added to existing residential properties in the area without stressing the current density.

That's what's motivating two 26-year-olds--who after each putting in a few years at Bain and Company--are striking out on their own, bent on goal of adding housing to capacity constrained urban areas through the manufacture and install of pre-fabricated ADUs.

John Geary and Eric McInerney are founders of Abodu say they're taking "a product and customer-focused approach to the ADU market." They’ve spent the last 8 months in product development–working with architects from U.K.-based Koto Design and a team of builders with experience building single family homes in the Bay Area. Geary says that public launch of the startup will come by the end of August, when Abodu unveils a 500-or-so square-foot exterior footprint model with interior living space of about 450 s.f.

Geary and McInerney met and became friends in Chicago during their undergraduate college years, Geary at Northwestern (industrial engineering) and McInerney at University of Michigan Stephen M. Ross School of Business (finance and strategy), and their "go-big" dream of creating Abodu traces to their being "blown away" by Bay Area rents in the past few years, especially compared with what they were paying in the Midwest.

"We'd been working at Bain with clients who are the most impactful in the world at giving their customers a world-class experience," Geary says. "And all the while, as we learned, we got to thinking, ‘do we want to follow the career consulting path? Or are we interested in building a new project from scratch?'” This got us talking with our friends about the astronomical costs of apartments and homes, and thinking about housing, especially in some areas of the country, and its two big pain points right now.

"One is that housing is far too constrained, and constraints on supply, and need for an increase in density, have caused a crisis in prices and attainability," Geary says, adding, "the other is that the process for customers is full of stress because of the lack of transparency, the time and aggravation it takes, and the loss of agency. This is why we started Abodu."

Bootstrapped through the first stage, Geary and McInerney have been tapping a "small amount" of outside capital from interested "angel investors" Abodu is sourcing production through a Sacramento-area facility on a contract basis.

"Eric and I don't want to raise a lot of money without having proved the concept," says Geary. "We expect to hit the ground running in early 2020, and if all goes well, we can do a run-rate of between 25 and 50 units a year from that point onward."

Abodu unit front elevation, designed in collaboration with U.K.-based Koto Design.
Abodu unit front elevation, designed in collaboration with U.K.-based Koto Design.

Initial 450 s.f. (interior) models, designed in collaboration with Koto Design, will price out--for construction, installation, permitting, etc.--for $180,000 for a one bedroom, bath, kitchen, not-too-modern-not-too-classic unit, says Geary.

"We're working on a 350 square-foot range unit that would go for $130,000 to $140,000," he says. "These units are perfect to expand a household's property value and either accommodate an in-law, an adult child, or a rental revenue opportunity."

The Terner Center for Housing Innovation looks at ADUs as an "untapped housing type" opportunity in this analysis by Derdre Pfeiffer, associate professor at Arizona State University and visiting scholar at UCLA Ziman Center for Real Estate. Dr. Pfeiffer writes of three key policy take-aways from her research into the current state of ADU policy and business uptake:

Source: Terner Center for Housing Innovation UC Berkeley
Source: Terner Center for Housing Innovation UC Berkeley
  1. Policymakers should build tools to support different types of communities. More research is needed to investigate what motivates the varying approaches to ADU regulation. The diversity of California communities means that policymakers may need to use a range of tools to encourage ADU production.
  2. Localities can incentivize ADUs by passing ordinances with less restrictive regulations. Localities with ADU ordinances and lighter restrictions received more ADU applications, and my research surfaced a particularly strong relationship between waiving off-street parking requirements and the frequency of ADU applications.
  3. ADU production represents one tool of many to improve housing affordability. Localities can also implement policies that show statistically significant effects on rental affordability, such as affordable housing construction.

The question is how soon this rather meaningful zoning concession on the part of more and more cities and towns, in California and beyond, can yield a measure of new unit volume and density increase that could help contain the rate of price and rent increases.

Scalability of the ADU idea depends not only on localities' willingness to incentivize them, but on builders' capacity to produce, permit, and generate value from them so that they benefit not just the ones who want them in their backyards, but the ones who need them there.

"We're passionate about providing housing in this constrained market," says Geary. "We've gotten so much help on how and where to push our thinking, and people have helped us unlock a great base of resources and talent on engineering, designing foundation systems, concreteless, helical piles, etc., and especially in ways that we approach the customer experience with full transparency, predictability, and ease. We've got a lot of work ahead of us, but this is what we feel we're cut out to do."

It's part of what makes American home building, design, development, investing, product manufacturing, and materials supply great.

Happy Independence Day!