National Housing Market OutlookCaliforniaNorthwest

ADUs Surge in California, Gain Momentum Nationwide

Scott Wild
Chelsea Scott photo

Scott Wild

Chelsea Scott

August 23, 2023
adus-surge-in-california

Accessory Dwelling Units (ADUs) are exploding in popularity, especially with the rise of the work-from-home trend. We have studied ADUs, spoken with industry experts, and one of us even works in one. 

Although the term is relatively new, accessory dwelling units have a long history as an affordable, efficient form of housing. They have also been called granny flats, carriage houses, casitas, or tiny homes. Regardless of nomenclature, some commonalties define what we now refer to with the umbrella term ADU:

adus-surge-in-california
  • A secondary unit to a primary home. ADUs cannot be bought or sold independently. The primary home and the ADU(s) are considered one property for tax and appraisal purposes.
  • Independent living space. ADUs must have private entrances, kitchens, bathrooms, and HVAC per local building codes.
  • Typically a small, self-sufficient structure. ADUs are usually less than 1,000 square feet with 1–2 bedrooms. Statutes often limit the size and height of ADUs, but this varies widely by jurisdiction. Some areas allow full-size homes.

Why ADUs? Why now?

Builders have struggled to build enough homes in recent years, and ADUs are one way to satisfy pent-up demand. Home prices have risen as demand outpaces supply, creating a combined affordability and availability crisis in many US housing markets. According to one of our recent white papers, America’s Needed Housing Construction, ADUs can be a cost-effective solution for homeowners and local municipalities.

ADUs leverage existing public infrastructure to help municipalities meet their housing goals. They also allow homeowners to tap into their homes’ equity in a way that adds functionality and value to their existing property. ADUs offer the following value propositions, which vary by life stage and household type:

  • Rental income to boost affordability for homeowners
  • Multi-generational living, lessening the burdens of childcare and senior care
  • Work-from-home spaces that serve as guest quarters or extra living spaces outside of business hours
  • Affordable housing for the “missing middle” (loosely defined as something between an apartment and a single-family detached home)

The California test case

The current housing crisis is acutely felt in California’s coastal metros—Los Angeles, San Francisco, Orange County, and San Diego.

Scott Wild

Scott Wild
Senior Vice President, Consulting
San Diego, CA

These desirable areas have all been losing residents in recent years—in large part due to the lack of affordable housing options. Land is in short supply, and building new neighborhoods is a long and challenging process.

In anticipation of a worsening crisis, California enacted zoning changes in 2017, which makes adding ADUs to single-family lots much easier. Although the local application and interpretation of the state-wide mandate vary, the results are clear: ADU construction spiked from 1,100 in 2016 to 23,600 in 2021.

About 68K ADUs were built in California from 2017–2021, which made a small dent in the enormous gap between demand and supply for housing. The housing shortfall in Los Angeles was estimated at 250K units in 2022 alone. Although the bulk of ADU development has been in California’s large, high-cost metros, some smaller cities are also embracing the concept. ADUs represented 46% of 2022 permits for new homes in Santa Maria, a central California city with about 110K residents and a median home value of $404K.

Becoming a nationwide trend

As ADUs’ popularity rises along the West Coast, the trend is spreading eastward. Using California’s policies as a starting point, other states and municipalities are targeting similar goals. Oregon has essentially eliminated single-family zoning state-wide and now allows multiple units to be built on any lot (with required setbacks). Miami-Dade County recently began creating a legal pathway for homeowners to rent attached or detached units on their properties. The city of Denver, Colorado, is making it much easier to add ADUs to existing properties, with the stated goal of easing housing shortages by adding homes that are large enough for families.

ADUs in Denver

“In 2019, the Blueprint Denver land use plan removed many barriers to ADU construction throughout the city. Although this laid the groundwork for the ADU movement, the zoning changes related to ADUs were implemented on a neighborhood-by-neighborhood basis. Chaffee Park made headlines in 2020 when the Denver City Council approved a neighborhood-wide rezoning change allowing residents to construct ADUs without applying for individual rezoning permits. This was quickly followed by similar measures in Sloan’s Lake, Regis, and other Denver neighborhoods.

In June 2023, the City of Denver announced city-wide zoning changes to allow for larger ADUs, including two-story units that are suitable for families to live in. While this was a victory for some policymakers, residents, and builders, the approval of these stand-alone, tiny homes has not come without controversy.

Not all Denver residents are supportive of the movement. Concerns include neighborhood stability, a potential influx of short-term renters, reduced privacy, increased traffic, and parking issues.”

Chelsea Scott, Senior Consulting Manager

Chelsea Scott photo

Chelsea Scott
Senior Manager, Consulting
Denver, CO

While these counterpoints are valid, they may not be sufficient to halt the momentum of the ADU movement, considering the pressing need for more housing and the shortage of affordable housing alternatives. Other cities in Colorado (and some neighboring states) are considering similar ADU strategies.

Challenges and opportunities

As Denver illustrates, ADUs are clearly gaining in popularity, but there are still obstacles to their broader acceptance.

  • NIMBY-ism is the typical response to any proposal that would increase housing density. Importantly, California’s state-wide mandate made local officials much less wary of political backlash by taking some of the decisions out of their hands.
  • ADUs can be costly to build. Adding an ADU is often more efficient than a home remodel because occupants don’t need to move out of the primary home. However, it is typically more costly than a new build due to the small scale of units and constrained workspaces on existing lots.
  • There are concerns about parking, noise, and privacy when adding more households to existing neighborhoods.

ADU trends continue to evolve as they spread and gain momentum. Prime opportunities include:

  • Adding ADUs to built-out neighborhoods unlocks them for more growth, helping areas with limited new development opportunities meet their housing needs.
  • Planning ADUs into new home communities can make development more feasible for builders in outlying areas with affordability challenges.
  • Prefab ADU construction can lower costs with efficient factory-built components. Start-ups are racing to fill this space.
  • Homeowners can use rental income from ADUs to offset their monthly housing costs, and now they can also use this income to help qualify for mortgages.

We’ll need a diverse array of strategies to combat the housing crisis. We hope the success of ADUs will help pave the way for broader acceptance of other innovative housing solutions.

To learn more about ADUs and other housing market trends in your area, reach out to one of our local market experts

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About The Author

Scott Wild
Scott Wild
Senior Vice President, Consulting
Scott leads project specific consulting analyses throughout Southern California.
Chelsea Scott photo
Chelsea Scott
Senior Manager, Consulting
Chelsea is part of the consulting team that writes housing market feasibility and research reports helping executives make informed housing industry investment decisions.

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