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Accessory dwelling units, or ADUs, saw a surge in popularity during the pandemic, when rock-bottom interest rates stoked the skyrocketing interest in adding elbow room for everything from home offices to fully appointed living spaces.<\/p>\n
But the pandemic is now over and interest rates<\/a> are way up. So, what\u2019s happening with ADUs now? The short answer: a lot. But the landscape is changing, and ADU buyers (and ADU builders and makers) are adapting to it. Here are a few of the key trends we\u2019ve been watching.<\/p>\n ADUs still max out at about 1,000 square feet, so \u201cbig\u201d is, as always, a relative term. The interest in the smaller structures that were hot sellers during the pandemic has ceded ground to a surge in inquiries about ADUs with bathrooms, kitchenettes and the full suite of HVAC, plumbing, and electrical service.<\/p>\n Increasing costs associated with higher interest rates are, however, tapping the brakes on conversions to sales of these full-featured ADUs, and that\u2019s understandable. In early 2022, people were locking into 3% and 4% interest rates. Now those numbers are more like 8% or 9%. <\/p>\n For a fully appointed, $240,000 ADU, a 30-year loan with an 8% interest rate costs over $600 more per month compared to the same loan with a 4% rate. The sharper focus on cost is now boosting interest in modular factory-built ADUs, which tend to be less expensive and faster to build than custom onsite construction. <\/p>\n Still, an ADU is a big investment, and potential customers are thinking harder before pulling the trigger. All that said, ADUs still pay off for many homeowners \u2013 it just depends on the ROI of a specific project.\u00a0<\/p>\n Look around the web and you\u2019ll find that ROI estimates (and rules of thumb to help estimate ROI) for ADUs are all over the place. <\/p>\n A Porch.com<\/strong>\u00a0study<\/a>\u00a0found that homes with ADUs are, on average, priced about 35% higher than those without ADUs. Homelight\u00a0surveyed<\/a>\u00a0real estate agents who found ADU ROIs to be neutral to negative, depending on the location. Assuming the ADU is a full-time rental, Symbium<\/strong>\u00a0estimates<\/a>\u00a0that the ADU owner\u2019s property value will increase by 100 times the monthly rent on the ADU.<\/p>\n While many customers are interested in adding an ADU for full-time rental, most seem keen on developing a flexible space for personal use as private, detached quarters for visitors and a short-term rental when it\u2019s convenient for them. <\/p>\n The majority don\u2019t plan to rent out their ADUs full-time, so let\u2019s use the ADU cost as a foundation for estimating return.<\/p>\n All-in, ADUs typically cost about $400 per square foot \u2013 and that includes site work, the foundation, utility hookups, and so on, according to our estimates. We\u2019ve also found that, in the eyes of real estate markets, a detached ADU\u2019s floor space adds to the total square footage of the main dwelling. We\u2019re also seeing the greatest interest in ADUs in neighborhoods with real estate values in the $600 to $800 per square foot range. <\/p>\n So from the narrow perspective of short-term real estate valuation (that is, excluding potential rental income), you\u2019re looking at 1.5x or better ROI in those markets. Conversely, if you live where real estate goes for less than $400 a square foot, you may see a flat to negative ROI.<\/p>\n City leaders are now familiar with ADUs\u2019 potential to address a longstanding, stubborn nationwide urban housing\u00a0shortage<\/a>\u00a0\u2013 particularly when it comes to affordable housing. The list of urban centers that have embraced or are in the process of embracing ADUs is long and growing (see\u00a0Denver<\/a>,\u00a0Austin<\/a>,\u00a0Los Angeles<\/a>, and\u00a0Seattle<\/a>\u00a0as examples). <\/p>\n In broad geographic terms, ADU hotbeds, such as California and the Pacific Northwest, are being joined Colorado, the metropolitan Washington, D.C. area, North Carolina, and Georgia. More liberal ADU zoning is playing a role in all of these places.<\/p>\n Zoning is, as a national trend, liberalizing, with housing-starved cities leading the way. But cities consist of neighborhoods, and the acceptance of ADUs can boil down to a neighborhood\u2019s or homeowners association\u2019s delineation of parking, setbacks, and other requirements. <\/p>\n The often hyperlocal nature of ADU permitting can act as a deterrent to potential ADU buyers, who lack the expertise (or the time and energy) to navigate the regulatory maze. ADU builders are stepping into the void as part of another trend.<\/p>\n To build an ADU is to build a small house. That involves permitting, financing, and managing all the details related to the physical infrastructure: surveying, grading, foundation work, tying in electrical and plumbing lines, and so on. There are many moving parts. <\/p>\n Most people interested in building ADUs have jobs to be able to afford them. However, they\u2019ve got limited time to digest and work the details.<\/p>\n Leading ADU builders are establishing in-house teams and networks of external partners to help customers get ADUs built with minimal time and effort. That includes offering competitive financing, tracking the vagaries of local permitting and then helping customers through the permitting process. And, in the case of manufactured ADUs, the teams are vetting local contractors and packaging third-party bids for onsite work. The vision is to offer customers a hassle-free (or at least minimal-hassle), turnkey ADU-construction process.\u00a0<\/p>\n That vision is still under construction, so to speak. But for homeowners and the cities and towns they live in to reap the many rewards that ADUs promise, it\u2019s one well worth pursuing.\u00a0<\/p>\n Jeremy Nova is the founder of Studio Shed.<\/em><\/p>\n This column does not necessarily reflect the opinion of HousingWire\u2019s editorial department and its owners.<\/em><\/p>\n To contact the editor: sarah@hwmedia.com<\/a><\/p>\nCustomers are interested in going bigger<\/h2>\n
ROIs are tough to calculate, but there are rules of thumb<\/h2>\n
Permitting is getting easier, but there\u2019s progress to be made<\/h2>\n
ADU builders are working toward a turnkey vision.<\/h2>\n