Transcript
Dean Wehrli:
Hi everyone, this is Dean Wehrli with the New Home Insights Podcast. As we discussed in a very recent podcast episode, we have a housing shortage here in the US. The lack of affordable housing is particularly acute. So one solution to this, or at least partially a solution, is ADUs, accessory dwelling units. And those are, probably know what they are, but think small houses that you can place on existing lot or even sometimes attached to the main house. We have a company here with us that is looking to realize the problems of ADUs, and they’re called Villa Homes. Villa Homes specializes in kind of these affordable, smaller ADUs, and they can sell them to homeowners, home renters, to builders, to almost a whole cast of characters. We’ll get into that. This ADU revolution, if that’s what we can call it, is happening in a big way in California, but it’s for sure not just California, and we’ll talk about that as well. So with me to talk about this topic is Sean Roberts. He’s the CEO of Villa Homes. Sean, how you doing?
Sean Roberts:
I’m doing well. Thank you very much for having me. It’s exciting to be here and to share a little bit about what we see in the ADU market and what we’re up to at Villa Homes.
Dean Wehrli:
We’re going to talk a fair amount about ADUs, then about Villa Homes, and then we’ll talk about who are the users? Who needs these? Who wants these? Where is the demand being derived from? First though, let’s learn a little bit more about you. Give us a little bit on your background as well as the background of Villa Homes.
Sean Roberts:
For sure. So I spent most of my career as a private equity investor, focused on mostly real estate as well as some corporate things. And in 2018 I moved over to join a company in the power buyer space where I spent the better part of nearly five years working to build that company up from an early stage, kind of following its Series A round, and scaled that business up and built a vertically integrated real estate brokerage, title company, mortgage company, and a whole lot of really interesting tech around that business.
And having been in that part of the housing resale market, it became really clear to me that the challenges around the housing market and the housing shortage and affordability issues that face the country are incredibly profound and absolutely worth tackling. And so I came on board to join the team here at Villa Homes earlier this year to really work on those challenges through the lens of building ADUs and building prefabricated housing, which is the cheapest, fastest, and frankly also the most sustainable way to build housing, which we’re really excited about.
So that’s a bit about my background. And Villa Homes itself is about two and a half, three years old at this point. So it’s still an early company, kind of a Series A startup. We view the business as being really the next generation home building platform, and we’re focused on building ADUs in California really as a wedge to build the business into a broader housing marketplace and platform over time.
Dean Wehrli:
Yeah, California is really, and ADUs been around for a much longer time than I think a lot of people might think, but California has really made a big difference here with state laws making it almost impossible not to permit an ADU if you meet certain criteria. So let’s start with that. Let’s start with first, let’s, let’s go real basic here. Let’s say, so other than my definition of a small home, what is your definition of an ADU?
Sean Roberts:
Yeah, well, there’s lots of different interpretations of it, and generally in my mind, they break down into three sort of broad categories. There are detached ADUs where you have an independent free-standing structure that is kind of the small house in the backyard. And that’s what we focus on at Villa. In addition to that, you have attached ADUs where you’re building an extension to an existing primary residence, which has its own entrance and kitchen and bedrooms and it’s a living space that is separate from the main residence. And then there’s kind of another category of converted other spaces. So converting a garage or another existing part of a home that can become an ADU. But generally it’s a self-contained living unit where you’ve got a kitchen, a bedroom, and some living space that can be locked off and separated from the primary residence and rented out or used by the primary residence owner in whatever way they think they want to use the space. So they’re very flexible, a lot of use cases.
Dean Wehrli:
That second category, attached to the house, I’ve seen that sometimes called a junior ADU. Do you hear that nomenclature a lot?
Sean Roberts:
Absolutely. It kind of varies by where you are in the country in terms of how people label them. You also hear them referred to as granny flats or laneway houses or there’s lots of different words for it, but we kind of think about detached and detached ADUs, with detached really being where we focus.
Dean Wehrli:
Okay, okay. And for the garage thing, go ahead and get your permits. Little anecdote, but there was a house just down the block from us and they were clearly building out their garage to be an ADU. And I live in California. And about a week later, they were tearing everything out that they had done. They did not go and get their permit, I’m assuming. I don’t know.
Sean Roberts:
Permits are important. It’s something we’re very focused on at our company. It’s a very important part of the process.
Dean Wehrli:
So let’s go over just some basics for the California law. We don’t want to want to be too California centric here because this is a national phenomenon, but in California it really has just gone nuts. And what is the California law? What are the key aspects of that and how has it changed the game here?
Sean Roberts:
Yeah. Well this really started changing back in 2016 when the California state legislature started passing a series of legislative motions that have really torn down the barriers to building ADUs. And they’ve done it top down, so from the state level, pushing the reduction of barriers to building ADUs down on the local municipalities, which is a really effective way of driving policy change across the state. And that has been incredibly catalytic to driving the adoption of ADUs across the state. If you look at 2015 before these laws started getting passed, about 1100 ADUs were permitted statewide. And if you look at the data for 2021, it was something a little over 23,000 ADUs were permitted. So that’s like 20X growth.
Dean Wehrli:
It’s exponential growth. It’s amazing.
Sean Roberts:
It’s massive. It’s absolutely massive. And when you look at California, it’s by far the most housing constrained market, or the cities within California are the most housing constrained markets in the country, which I believe your firm has actually published research on that not long ago. And the state said, depending on who you’re listening to, the state of California needs to build somewhere between two and a half to three and a half million homes by the end of this decade. And if those homes are to be built in places where people really want to work and live, it’s going to require densifying existing areas. And the best way to do that at an affordable price without really disrupting the existing look and feel of existing neighborhoods is through ADUs. So it’s been an incredibly popular option for a lot of homeowners, and increasingly now investors, to want to participate in.
Dean Wehrli:
And just to be clear, it’s still not easy to build homes in California at all?
Sean Roberts:
No.
Dean Wehrli:
At all. But this is one area where the state government put its money where his mouth was and kind of played a game of whack-a-mole with local jurisdictions after the initial legislation trying to find out clever ways to get around it, and they just popped them down and knocked them down and knocked them down until you saw that exponential growth in permitting that we’ve very recently seen. So how about beyond California? Is it a little more, I mean it’s not top down. Is it more sort of bottom up? Is it happening? Is it percolating outward?
Sean Roberts:
Well, it’s certainly more bottoms up based on different local jurisdictions passing local ordinances that are making this easier to do in different parts of the country. I think over time the template that California’s laid out, which is working really well, it’s one of a few examples of government legislation really driving real tangible change to the housing market, which is great to see. So we’re optimistic that other states will see that and start to adopt part of the California model throughout other parts of the country. But there are a lot of other cities out there that have a pretty strong penetration of ADUs already, with growth. Like Seattle is one market where it’s about 1% of the single family housing stock that is currently attached to some kind of an ADU. And the ADU production in Seattle is up about 9x over the last decade. So huge growth there as well.
Portland is something like 2% of single family homes have an ADU. Denver is making a lot of and the cities around Denver are making a lot of policy changes that are very favorable to ADUs. Austin, Texas is another one. And really the poster child market that we spend a lot of time thinking about and talking about here is Vancouver in British Columbia, Canada, where about a little more than a third of the housing stock has some kind of, they call them laneway houses there, but it’s an ADU. And that’s a market that is incredibly land constrained and expensive, where ADUs have been a phenomenal solution to housing in that market and I think it’s really set a template for other jurisdictions to follow over time. So it’s still early, but we’re seeing a lot of tailwinds behind the policies that historically have made ADUs kind of hard to build, and that’s really starting to fall away, which is a good thing.
Dean Wehrli:
Do you still see though the kind of, again, for lack of a better term, nimbyism, where a lot of the concern was from local neighbors thinking, “Oh, you’re going to make our neighbor too congested or you’re going to bring in people we may not want to be into our neighborhood.” Is that a big hurdle still across the country?
Sean Roberts:
It varies by where you are. And of course like anything else, there’s going to be different sentiment in the public that’ll be for and against things like this. But I think generally, based on the surveys that we’ve seen done by various groups across California, generally ADUs are pretty well received and supported by the public. Of course, that’s when it’s conceptual and it’s not in their backyard. And so when you get down to the hyperlocal level, you definitely have a little bit more pushback from the neighbors. But at the end of the day, this is the right thing for the housing market and the right thing for America to do to build more housing that can be owned or rented at an affordable price. And that’s really important for us.
Dean Wehrli:
This is probably an unfair question, Sean, but have you seen any states at all look like they make noise that they might do the California model for lack of a better term, if that makes sense?
Sean Roberts:
I think Maine is one. It’s a small market, obviously. That’s one state.
Dean Wehrli:
Yeah.
Sean Roberts:
I’ve heard rumblings about New York maybe going in that direction.
Dean Wehrli:
Okay.
Sean Roberts:
But candidly, we’ve had our head down focused on California because there’s so much to do there that we haven’t really dug deep on the policy landscape across other states just yet. But we’re turning our attention to it this year.
Dean Wehrli:
I would guess Oregon and Washington, just because you have Portland and Seattle being kind of ahead of the curve already. We’ll see.
Sean Roberts:
They certainly are too, yeah.
Dean Wehrli:
Okay. And apologies to our friends in Vancouver. Okay, fine, you guys with your laneway homes, you started it. Absolutely. Fair enough. Congrats. But yeah, but thank you. Thank you for exporting that to the south. So now let’s switch gears a little bit. Let’s talk about you and what you guys do. Villa Holmes, you’re the CEO of Villa Holmes. You just kind of started up just this year, right?
Sean Roberts:
Yeah, just recently. And it was because I got to know the team and the investors behind the company late last year and just absolutely fell in love with the mission and the vision of the business and the fact that this is a really clear and tangible way to have an impact on housing affordability and availability across the country. And our goal here is really to build the preeminent next generation home building platform by focusing on prefabricated housing. And that may take many forms, including HUD manufactured housing, modular, panelized, like lots of different ways to build things in a more cost-effective and efficient and sustainable manner. But our goal is really to build the preeminent marketplace business that connects the demand of housing to the various factory suppliers of housing. And we started by building ADUs in California as a great go-to-market wedge to profitably build a business around that concept. But we have pretty big vision to build this into a business that’ll be in many more states than just California and likely product types that go beyond just ADUs, including scattered single family homes and other types of prefabricated housing over time.
Dean Wehrli:
Let’s start with ADUs.
Sean Roberts:
Sure.
Dean Wehrli:
Tell me if I’m wrong, but your bread and butter product at this point.
Sean Roberts:
Absolutely, it is. Yeah.
Dean Wehrli:
Give us the gist of how big are they typically? What’s your typical size? Even your typical cost range if you can.
Sean Roberts:
Yeah. Well, typically our average price is somewhere in the fully loaded, including the home and all the site work and subcontractors and everything, the fully loaded project cost average is somewhere in the 350 to $400,000 range. And that’s for predominantly Northern California focused ADU. So slightly higher cost markets where people are building a pretty nice spec product. The typical size that we build is just shy of 1000 square feet for an ADU, which is big. And we do offer a variety of SKUs with different sizes of homes and different floor plans and configurations that the customer can choose from and also customize within. So we’ll go down as small as a 550 square foot unit and we’ll go up to 1200, 1300, square foot units as well. But our goal really as a business is to provide the consumer with the widest selection of product types, with the most customization, to be able to fit the most ADU that they want to build in their backyard. So that’s what we’re really focused on.
Dean Wehrli:
Okay, so the ADU is the core, but it sounds like you’re quickly going to be doing a lot more than that. So this prefab, the way you build, tell us about that. How is that going to translate and expand from ADUs into a wider product array?
Sean Roberts:
Yeah. So to be really clear, we’re not a factory. We don’t manufacture the homes ourselves. We work with a variety of different suppliers across the industry and we essentially connect the consumer to the factory and we provide a lot of really important services that are necessary to bring into the equation to help the consumer actually complete a project.
And so as we go forward, our manufacturers are able to build not just ADUs, but many other types of prefabricated housing that we know our consumers, and especially institutional capital that wants to work with us, wants to build. And the capabilities that we’ve built around permitting, entitlement, getting site work right, structural engineering, designing really attractive physical product that we’re building through these manufacturers to our own custom specifications, all of that is part of the value add that Villa brings to the table. We make it easy for the end user to be able to come to us, engage with Villa in a modern tech forward way and discover the type of, now it’s an ADU, but over time it could be a scattered site single family home or other types of product, and figure out what they can build, what they want to build, what they can afford, and do that all in a really modern tech forward way where they can literally design it on our website and choose all the colors and fixtures and finishes.
And it’s really a user experience that’s very similar to how you might expect to buy a car online, which is really cool. And we think it’s a really important part of being able to be a consumer brand in this category going forward because houses are kind of one of the last things that you can’t really buy on the internet in the same way as you can other consumer products.
Dean Wehrli:
So will you be able to, say you’re the, I don’t know, standard, the most common, which is a homeowner who now in California can put up to three more residential units on his or lot. Will you actually sort of match the elevation, the look, the style, of that main house?
Sean Roberts:
Yes. Absolutely. That’s really important. And getting the aesthetic exterior to be consistent with the primary residence is something that our customers care a lot about. And it’s something that we care a lot about too. We want a physically attractive unit that’s in the yard that looks like the main residence and we’re able to skin the houses with different types of material and different colors to be able to match the primary residence as best possible. And they look really good. So we’re pretty happy about that.
Dean Wehrli:
That’s great. How do you differ from other type of offsite construction? Are you basically just a type of offsite construction?
Sean Roberts:
In some ways, yes. We view ourselves as the connection point between the consumer and the factory. And what that means is we can offer, again, the widest selection of choice, at the best pricing, with the fastest speed to deliver to the consumer. And doing that, again, all through a modern tech forward interface allows the consumer to engage with us and figure out what they want to build in a really intuitive way.
But I think the thing that really differentiates us right now is we are the leading builder in California of ADUs. I’m not aware of anyone that’s done more projects than us at this point. We’ve sold more than 500, we’ve completed more than 200, and we’ve built across almost all jurisdictions in California where someone would actually want to build an ADU. So we have the local knowledge and sophistication and data to be able to cost and price projects really accurately, and we understand how to navigate the local jurisdictions from a permitting perspective, and that helps us get our customers through the journey of building an ADU with a lot of confidence that they’re working with a company like Villa that can actually get the job done. And that’s a really important thing to have the scale and the track record to build the homes well.
Dean Wehrli:
So you’re holding their hand? You’re getting them through the permitting process too?
Sean Roberts:
Absolutely. Actually, we self-perform permitting internally. So we’re not a factory, we don’t build the home. We design the homes and we tell the factories what to build.
Dean Wehrli:
Okay.
Sean Roberts:
We’re not a general, well, we technically are a general contractor, but most of the labor in terms of actually installing the home and doing the finish work and the site work is all outsourced to various contractors that we work with, who are great. But the part of the value chain that we really focus on doing internally and self-performing is permitting because it’s complicated at heart.
Sean Roberts:
And the more you do it and the more reps you get in across different jurisdictions to really understand what their parameters are and what you can and can’t build and how to get permits approved in a way that works really well for the local jurisdiction and for the customer is really important. And so that’s a center of excellence that we’ve really focused on investing and in building out as a really important capability for us.
Dean Wehrli:
And apparently can be a complex as apparently our neighbor found out recently.
Sean Roberts:
Yeah.
Dean Wehrli:
Are there major drawbacks? Like I’ve heard somebody said, “Oh, well, don’t forget, ADUs have to be independently plumbed, and there’s some cost factors there.” What are the biggest drawbacks or the concerns with folks who are looking at you to get an ADU?
Sean Roberts:
Well, we help them work through all that. So in terms of all the site work and utilities and the other infrastructure that needs to go in place to build it, we work through all that with the customer in our pre-construction phase. So we’re helping guide them through that and navigating it and coordinating with the different design and engineering parties that need to be involved in getting that right. And we have an understanding of what needs to be done, how much it’s going to cost, and we’re very transparent with the customer about that upfront, which is important, so they know what to expect in the project.
And one of the advantages of how we build is, because it’s prefab, it’s like a one day installation. You crane the box into the backyard and you’re pretty close to done. There’s a little bit of finish work and maybe some site work that needs to be done before and after that. But the construction timeline is very, very quick, which makes it particularly nice for someone who’s living in their primary residence to not have a one or two year long stick-built construction project in their backyard. So the speed and the lack of disruption is another big part of what we do, and we find that to be really resonant with our customers as well.
Dean Wehrli:
So let’s talk about the who uses them? Where are they? What niches are they filling? Just to be clear, these can be for rent. You can rent them out. You can sell them as a second unit. You can sell ADUs typically independently, can’t you? Can you even sell them when you, the main homeowner, still has the main home?
Sean Roberts:
Yes. There’s sort of an emerging regime around being able to separate the ADU from the main residence in California. That’s pretty technical. But we are starting to see some of the groundwork being laid to be able to do that and separate them in a really interesting way. So we’ll see where that goes over time. I think it’s still pretty early to see how that develops and also how things will be valued and trade in the market. But we’ll see.
Dean Wehrli:
And appraise too.
Sean Roberts:
Yeah.
Dean Wehrli:
There are issues with appraisals, I would guess, for that too, That’ll shake out, but I guess we’re at the inception of this, aren’t we?
Sean Roberts:
It’s early innings in this category, with a lot of things to be figured out, and that is one. And the policy framework around it is there. The market still needs to figure out what that means and how it’s going to take advantage of that over time and we’ll see what the market does.
Dean Wehrli:
Are your users, I don’t know, this is a terrible question, but do you think, are they mostly going to rent them or are they very frequently using them like for the office? I mean, they’re phenomenal for a home office. They’re so sequestered. Or the oldest kid or is just array of uses?
Sean Roberts:
Yeah, it’s not a terrible question at all. It’s a good one. And so in terms of our consumer business, we see a mix of all different types of use cases. It could be everything from a home office, as you mentioned, a separate space for the in-laws or the grandparents who may stay there full time or part-time. It may be someone that wants a Pilates studio. It may be someone that wants a pool house. It may be someone that more importantly wants to generate income out of that unit by either renting it on a long-term basis or potentially on a short-term basis by putting it onto one of the short-term rental marketplaces.
And so there’s a lot of different reasons that the consumer would want to build this type of unit. And ultimately it creates value for the property too. You’re creating more square footage for your home, which is pretty attractive for a lot of folks, particularly when they’re locked into their primary residence at a really low mortgage rate. If you need more space, this is an interesting way to do it rather than going and buying a bigger house at a really expensive mortgage rate today. So we’re finding a little bit of that coming in as well on the consumer side.
Dean Wehrli:
Yeah. The classic golden handcuffs of your 2.9% mortgage rate. That will never be a thing again in all likelihood. So let’s talk a couple ways of how they add value. Let’s do rental first and then homeowner. Is there a sense, is there almost like a rule of thumb, if you are going to rent this, is there a rule of thumb of how much value they add? Or if you’re say a single payment residential operator, you now have two units instead of one, is it 150% of the total rental value of that lot or something like that? Any kind of rule for that?
Sean Roberts:
Yeah, like everything in housing, especially when you’re dealing with existing homes, everything is incredibly idiosyncratic and every deal is its own unique snowflake. What we have seen from a sort of putting our investor hat on, we’ve looked at underwriting a pipeline of several potential acquisition opportunities where we would buy the primary residence, which in California is kind of a, I don’t know, three and a half, three and three quarter cap kind of game these days. But by putting an ADU in the backyard, what we found is we can generate stabilized cap rates in the kind of high fives to low six cap rate range, which is we think a pretty interesting return profile to be owning really high quality single family residential rental properties in California.
Dean Wehrli:
Yeah.
Sean Roberts:
So it’s interesting and a lot of investors are seeing that potential and we’re seeing that potential too. We’re actually raising some capital around that strategy ourselves right now to go and do it because we’ve seen some of our clients do really well with that type of acquire and develop and generate a really interesting yield profile by renting both the primary residents and the ADU together.
Dean Wehrli:
Let’s come back in a second, Sean, to the SFR and ADU equation. First though, I want to not forget the homeowner issue. Is there also kind of a rule of thumb, you have your single home, it’s worth X. And now you’re going to build an ADU, 800 square feet. Your home is now worth X plus Y. Is there kind of a sense of that?
Sean Roberts:
Again, it’s so idiosyncratic that I’m not sure I’ve got a great rule of thumb for that because it also depends on the size of the ADU relative to the primary residence, the level of fixture and finish that’s going into the ADU. There’s a lot of factors that go into it.
Dean Wehrli:
Yeah, okay.
Sean Roberts:
It’s certainly adding value, and it’s adding material value, certainly relative to the cost of the ADU, but every project is going to be different. So I don’t want to anchor folks to the wrong kind of rule of thumb there because everything is so different.
Dean Wehrli:
I also feel like it might widen your potential buyer pool because you now include folks who need that for a use, home office, extra kid, in-laws, but also see that as a money maker, as a profit or a rental center to defray their mortgage cost.
Sean Roberts:
Absolutely. And we’re seeing some buyers look at it through exactly that lens, which is a really interesting way to generate some yield to do exactly what you’re saying, which is offset the cost of the mortgage on the primary residence, which is in this environment incredibly attractive to a lot of folks. And it can be a gateway getting into home ownership that they couldn’t otherwise access.
Dean Wehrli:
Yeah. Especially in California where you are, for now, because that’s where we all know what home values are in California. So let’s talk about who the other folks you’re looking at. So the single family residential developers, or even just mom and pop purchasers, or even mid-size purchasers, are they a big part of your client bases? They’re putting them on that lot and then will have two units to rent?
Sean Roberts:
Yeah, it’s a big segment for us. It’s grown in terms of its share of our total mix quite a bit in the last few months and it’s an area that we’re really focused on developing even more this year. And it goes from everything from the mom and pop, individual investor that’s buying maybe one or two rental properties to do this on, to smaller groups that have portfolios of a few dozen homes. Even the bigger institutions at this point that are finding this to be a really interesting way to deploy capital, especially in an environment where acquiring the standalone primary single family home really doesn’t pencil in today’s capital markets. But if you put an ADU behind it, the math radically changes and it starts to make California SFR’s something that can be really unlocked to institutional investors.
But you need the capability to actually build the ADU and build it quickly and know what you’re doing. And so it’s something that capital theoretically has an appetite for, but actually accessing that with a partner that can do it at scale is something that I think we’re pretty uniquely suited to do that at Villa, which we’re spending a lot of time building that out this year.
Dean Wehrli:
I won’t ask you to give anything away or name any names, but are you working with some of the bigger institutional folks in that space potentially?
Sean Roberts:
Yes.
Dean Wehrli:
Okay.
Sean Roberts:
So I won’t name names, but I can say that there are large multi-billion dollar publicly traded companies that have a pretty keen interest in doing this, which makes sense. If you’re an asset manager at one of these big companies and you can’t really do new acquisitions of new properties that are accretive to your FFO profile, but you’ve got capital to put to work and a CapEx budget to spend, putting an ADU adjacent to an existing asset at a low teens yield on cost is pretty darn attractive to a lot of these folks. And we’re finding that there’s pretty voracious demand to build ADUs around existing both single family homes and multifamily properties that has been really, really, frankly, a stronger demand channel than I expected.
Dean Wehrli:
You mentioned that to me. So you actually can potentially put ADUs in an existing normal Class A apartment complex. If they have some space that is usable, you can throw, put some ADUs in there. They just magically increase their rent roll.
Sean Roberts:
Yeah, yeah. We just completed a project last month for one of those big publicly traded companies that had a 100 unit, low-rise, multi-family property and it had excess land, a little bit too much parking, and they concluded that between the two buildings they already had, putting 2 ADU units in was aesthetically consistent with the property, but it allowed them to add two more units to the rent roll and doing so at a pretty interesting yield on cost made a lot of sense to them.
And that group in particular is keen to do a lot more with us and we’re seeing others come in now that we’ve demonstrated the ability to do that. And I think we’re the first, at least to my knowledge, I think we’re the first group that’s actually got an ADU permitted and built on a multi-family property in California. So it’s a new thing that we’re really excited to look at how we can densify even further existing multi-family properties over time.
Dean Wehrli:
Yeah, I have a few that I should mention to you because we do a lot of apartment studies here and usually it’s in urban areas and obviously parking is at a premium, but we often do in outlying areas or suburban areas. And it’s really surprising sometimes how some of these large apartment complexes just have mass parking.
Sean Roberts:
Yeah.
Dean Wehrli:
And it’s like, “No, we don’t need it all. There’s plenty of parking. No one’s concerned about parking. No one will pay for parking.” Those types of complexes are ripe for this kind of ADU enhancement.
Sean Roberts:
We agree, and they seem to see it that way too. So we’re excited about what can be done there.
Dean Wehrli:
How about build-to-rent in the format? Are you going to be doing that? Are you seeing that as an opportunity too? Essentially, again, you have these build-to-rent communities, that was going to go all single-family detached, and now all of a sudden it could be at least some of them could be a two for one on that lot.
Sean Roberts:
Yeah, well, we’re seeing demand from there as well. And some of the build to rent players that are out there building new communities have already set up the communities with the right legal infrastructure and permitting to be able to allow ADUs to be built in those developments. And from their perspective, it’s additional yield, which is really interesting, and it allows them to densify and really maximize the yield they can get out of the land that they’re building on. So that for us is a more nascent channel, but one that we’re exploring and spending a lot of time with different players throughout California doing build to rent developments and thinking about ways that we can work with them to help provide an ADU solution for what they’re building.
Dean Wehrli:
Let’s talk, let’s wind this down with the future as I’m wont to do on this podcast. Let’s first talk about, let’s start with California, but then maybe expand. I’m going to ask you sort of to just give me a feel in terms of market size. I mean I think this is big, this feels big, but how big is big? You mentioned a minute ago some some of the permitting for the state. Can you recap that and then just give me a sense of how big do you think this grows over the next few years?
Sean Roberts:
Yeah, it’s a great question. And the data that’s out there around the total size of the ADU market, both in California and nationally, is incredibly bad. No one has really good clean data and I hope John Burn starts to study it and put some more structure around how we track the metrics here. But from our assessment of the California permit data, which again went from about 1,100 permits a year in 2015, the laws changed, in 2021 it was a little over 23,000 permits that were pulled for ADUs. That’s a huge growth in terms of the permitting.
But when we look at the market from our lens, which is looking at detached like standalone ADUs, the way that we cut the data is to basically assume that half of the ADU permits are going to detached ADUs. And we know the majority of California ADUs are detached. We don’t really have the exact mix, so we kind of assume half the permits are detached. Then we assume that about 80% of those permits will pull through to be completed projects. And we assume a roughly $300,000 average product, or average project price, which includes the home, the site work, all the subcontractors. It’s sort of the fully loaded price. And if you kind of multiply that all out, it implies roughly a $5 billion total addressable market for detached ADUs in California this year.
And when we look at trending that out over the course of the rest of the decade and getting to reasonable really low single digit penetration rates of all single family homes, and a little bit of penetration, but pretty low across multi-family throughout California, we see this growing to roughly a $10 billion a year industry by 2030. So between now and the end of the decade, it’s something a little more than $60 billion of ADUs, just detached ADUs, just in California, will be built. And that from our perspective is a really exciting and really great thing and a great market to be building a business in. And going beyond California, assuming other jurisdictions continue to sort of follow suit, the market is just going to continue to grow exponentially into other jurisdictions over time. So we’re really excited about the market potential here.
Dean Wehrli:
Do you see that being fast or slow? Again, unfair question alert, do you see that being fast or slow outside California? Is the kind of thing we can just hit that critical mass and all of a sudden the zeitgeist says go and you start seeing other states, let alone large cities, adopt these kind of policies?
Sean Roberts:
It’s a great question. I mean, historically people would look at California and assume it’s a really hard place to build things and change laws to be able to do this type of thing. And they’ve done it. And it would’ve been, if they weren’t the leading state on this, I would assume they’d be one of the last. So we’ll see.
Dean Wehrli:
Yeah.
Sean Roberts:
There are a lot of other jurisdictions out there where it’s a lot easier to build and a lot easier to change policy around this. So I think it’s going to be a really, really interesting category for the rest of the decade. And I think it’s certainly going to vary city by city, state by state for ADUs, but there’s a lot more tailwinds than headwinds behind this.
Dean Wehrli:
Yeah.
Sean Roberts:
And when you think about the needs of building more affordable and more available housing in the places that people want it, the densification of existing cities through ADUs is really the best way to do that. And so I’m excited about where this is going to go in the years to come.
Dean Wehrli:
Yeah. Logically, it seems like it’s going to be in those locations where it’s chronically undersupplied and difficult to get supply. So maybe it does hit last those places where that’s a lot easier, your Texas, Florida, Carolinas. But any place that’s urban or where has a history of being a little bit anti-development, those seems like the places where it can hit. It’s just is there going to be the political will to make that happen?
Sean Roberts:
Yeah. Well, we’re seeing, I mean, Austin, Texas has a pretty good tailwind behind this. North Carolina’s got some interesting laws around this as well. So there are places that-
Dean Wehrli:
High price markets then, right?
Sean Roberts:
Yes.
Dean Wehrli:
Because Austin, Texas, especially for Texas, is a very high priced market.
Sean Roberts:
Absolutely.
Dean Wehrli:
So maybe that’s also another denominator, okay.
Sean Roberts:
Absolutely. Yeah.
Dean Wehrli:
Let’s end with this, Sean. How about for you guys and you guys at Villa Homes? I mean, you’re in California in a big way. Where are you heading to next?
Sean Roberts:
Well, we’re going to get bigger in California.
Dean Wehrli:
Okay.
Sean Roberts:
So we just launched our San Diego market earlier this month, which we’re really excited about. So we are actively marketing and looking for customers in San Diego, which we’re thrilled to be building houses down there in Southern California. We’ve already done some projects in Southern California, but we’re really making a dedicated effort to launch in San Diego right now.
The bulk of 2023 is going to be focused on California for us, really deepening in the markets that we’re in, really honing the operational machine, and starting to work at looking at building the business out to a few other places. Our shortlist is something that’s kind of evolving as we think more about it and we see where the demand is sort of pulling us to. But Austin, Texas is high on the list. Denver is high on the list. North Carolina’s high on the list. The Pacific Northwest is high on the list. So a lot of places where this can work, but we’re really focused on go deep, not broad, and we want to not stretch ourselves too thin and go too quickly, and we want to do it really, really well. And having the right supplier base in terms of factories and subcontractors, the right local knowledge around permitting, the right data to be able to price everything accurately, these are all capabilities that you need to get really in the weeds and deep in a market to really nail.
So we’re going to do it slowly and methodically, although it may look really quick to some of the folks on the outside, but really slowly and methodically to kind of go to the right places in the right sequencing over the next couple of years. But we’re excited to bring Villa outside of California.
Dean Wehrli:
I like that. It’s more don’t throw a bunch of darts, but really study that dart board and then be judicious about it.
Sean Roberts:
Yep.
Dean Wehrli:
Makes sense. Sean, I really appreciate you coming on and sharing some time about Villa Homes with us.
Sean Roberts:
It was my pleasure. And it’s always fun to talk about ADUs and housing and prefab and Villa, so I loved it. Thank you for having me on. It was fun.
Dean Wehrli:
Absolutely. This is Dean Wehrli for the New Home Insights Podcast. Thanks a lot for listening. We will see you again in a couple of weeks.
