Will California’s new ADU laws create a backyard building boom?

California’s housing and affordability crisis isn’t going away any time soon. But a slate of new state laws have empowered homeowners to use a small but significant tool that advocates say will create an increase in new units and new opportunities.

Accessory dwelling units, or ADUs—small structures, typically under 1,000 square feet, that are built by homeowners on their properties—became a centerpiece of state housing legislation this week after five bills were signed into law expanding the ability for Californians to build such structures in their backyards. By allowing residents to both build a small apartment and convert their garage, the legislative package, in effect, allows triplexes in much of the state.

“People will be able to have an ADU and a junior ADU on single family lots, or they can convert two garages on a duplex lot,” says Ira Belgrade, an advocate and consultant for ADU construction in Los Angeles and runs the site YimbyLA. “That’s big for LA!”

State Sen. Bob Wieckowski, a Democrat from the Bay Area and longtime ADU advocate who’s successfully backed three ADU bills in four years, says there’s recently been a surge in production in cities such as San Diego, San Jose and Los Angeles. A number of ADU developers have told him that they’re looking to hire and expand.

“I’ve always said they are a critical part of what needs to be a multi-faceted solution to our housing shortage,” says Sen. Wieckowski. “There is no single solution. But I do believe ADUs can make a dent in our housing shortage. If 10 percent of homeowners built an ADU, that would be roughly 900,000 new units. In the San Francisco Bay Area, that would amount to 150,000 new homes, mixed in throughout existing neighborhoods, at no cost to taxpayers.”

Can these laws create an ADU building boom?

ADUs can’t compete with new apartments in terms of delivering the numbers of units needed to fix California’s housing shortage. But any new units help. And the new slate of laws signed by California Gov. Gavin Newsom this week may help create a new ADU building boom in the state, part of continued growth in ADU construction across the country.

“We have only scratched the surface of much of a dent ADUs can make in the housing market,” says Kol Peterson, a Portland-based ADU expert and author of Backdoor Revolution, a guide to ADU development. “Single family properties still dominate major American metropolitan centers, but there’s theoretical potential to double or triple the housing capacity of those properties as more jurisdictions allow not just one ADU, but two”.

Permits in California grew nearly 50 percent between 2017 and 2018, and roughly 7,000 ADUs were permitted across the state last year, according to figures gathered by Abodu, a San Jose-based ADU construction firm. If cities act quickly on new state legislation, there’s no reason Californians can’t build 10,000 ADUs statewide in 2020, according to Abodu. And there’s room to grow. Abodu predicts San Jose alone could support 120,000 ADUs, while the entire Bay Area has one million lots that could build an additional unit.

This isn’t the first time new laws have helped speed up such construction. According to figures from Dan Bertolet, senior researcher at the Sightlines Institute, after California liberalized ADU rules in 2017, they accounted for one in five of LA’s total housing building permits in 2018. Other states have also taken big steps to increase this kind of housing production, especially Oregon’s recently passed House Bill 2001, which both legalizes duplexes and bans a requirement for owner occupancy of ADUs.

Vancouver remains the model for this kind of construction: the city has has allowed these types of buildings for much longer, which have become a core part of the housing stock. At least a third of the city’s single-family housing lots have at least one ADU.

Bertolet believes the biggest change for California is the elimination of minimum lot size requirements; those limits previously held back many Californians from being able to access ADUs. New policy also dictates that owner-occupancy of ADUs isn’t required, homeowners can add two units per lot, and parking minimums are capped near transit.

There’s also a lot more awareness about ADUs now, in the Golden State and elsewhere. Sen. Wieckowski says companies and nonprofits, such as the Housing Trust Silicon Valley and the state’s Department of Housing and Community Development, have been education consumers about this options, and cities across the state and country are updating their own laws to show homeowners what’s possible. Peterson sees the market becoming more sophisticated; financing products are being developed, entrepreneurs are stepping into the market to help create more affordable ADUs, public private partnerships are experimenting with using ADUs to help provide housing for lower income households.

“The same issues and concerns come up across the country; neighborhood character, parking, excessive requirements.” Sen. Wieckowski says. “But more cities are realizing this is a great way to increase housing.”

Financing ADUs is still a problem

There’s one significant challenge to creating a true ADU building spree: paying for them.

“The biggest problem are the banks,” says Belgrade. “They haven’t figured out ADUs yet. What they need to do is come up with new loan products specifically for people building ADUs that will be rentals, because many people don’t have the money or the ability to borrow based on current lending practices.”

Bertolet agrees. There’s a huge potential for an increase in total units, he says, but because ADU construction is done by homeowners, not highly capitalized construction firms, new units won’t go up overnight. New laws seek to help; the just-signed State Bill 13, which was backed by Sen. Wieckowski, eliminated excessive developer impact fees, which could be up to one-half the total cost of a new ADU. But financing remains a significant hurdle. A handful of companies are attempting to create turnkey schemes, some involving modular construction, that would help to quickly provide property owners with an ADU in exchange for a cut of the rent.

But even if they don’t take off in just the way advocates expect, Bertolet says, or the industry takes a while to figure out funding, any increase in ADU production is a big boost to equity.

“Even if ADUs don’t take a big chunk out of the shortage, they improve equity by giving lower-income people access to expensive, single-family neighborhoods that tend to have the best schools and parks,” he says.

And, as Peterson says, check back in 50 years. Market penetration is still very low; Portland, a center for ADU construction, has only hit 2 percent penetration. As coastal cities see land value and housing continue to skyrocket, ADUs may be a necessity to help offset a pricy mortgage.