Granny flats. In-law units. Backyard bungalows.
These nicknames tell you everything you need to know about how people have traditionally thought of accessory dwelling units — as afterthought add-ons to single-family homes, built out of necessity to keep families together.
But that began to change on Jan. 1, 2020, when laws took effect in California to encourage ADUs at multifamily properties. By 2023, one out of every five homes built in the state was an ADU, according to the California Department of Finance.
Faced with the statewide housing crisis, the encouragement has continued: Gov. Gavin Newsom signed three more ADU-related bills in September alone.
“For the past several years, ADUs have been the fastest-growing sector of California’s housing market because they’re cheaper and easier to build and because the governor and legislature have enacted many new laws that removed obstacles and streamlined ADU permitting,” State Sen. Nancy Skinner, chair of the Senate Housing Committee, said in a statement.
Skinner, a Democrat from Berkeley, sponsored one of the recently passed rule changes, which will quadruple the number of detached ADUs that can get a rubber-stamped approval on multifamily properties. When it goes into effect in January, the rule will also allow more existing non-livable space to be converted to ADUs; the maximum number of new ADUs will be 25 percent of the current total unit count.
This simple permitting process, plus the cost-effectiveness of ADUs, which can often be prefabricated off-site, means that “granny units” are no longer just for granny. National REITs like Avalon Bay Communities and mostly local Bay Area investor-operators like Veritas are paying attention, too. They are pleased with the results of the ADUs they’ve built so far and plan to keep building more by turning carports, greenways, storage spaces and laundry rooms into much-needed — and revenue-generating — entry-level apartments, sometimes in a matter of months.
“My lesson learned to anybody looking at this is to keep an open mind, because the possibilities really are endless,” said Jackie Todesco, senior vice president at AvalonBay.
An ADU education
Todesco said AvalonBay has taken advantage of the legislative changes since 2020 to add about 50 ADUs into some of its California communities, with 20 of those in the Bay Area.
The average 425-square-foot studios and junior one-bedrooms units bring in between $4 and $8 per square foot in rent. They have been able to rent them out within 30 days, on average, and so far there have been minimal concerns on the part of existing tenants. That’s because in the suburban, garden-style communities where AvalonBay has focused its ADU push, there’s usually ample space to resituate a gym, move laundry in-unit or swap one parking spot with another on renewal. In a recent conversion in Mountain View, AvalonBay was able to borrow enough square footage from an oversized party room to create a new apartment.
No one missed the extra-large room, Todesco said.
“We are really looking at preserving where we can in these amenity spaces or providing an alternate area where [tenants] can use that space,” she said. “But there really hasn’t been any pushback.”
“The regulatory environment has not been super kind to multifamily. [This legislation is] the only one so far in my 25-plus years of experience in multifamily that’s been as fruitful as it’s been.”
Getting local officials caught up on all the latest legislative changes was more challenging, especially at first. Some of AvalonBay’s first conversations in Bay Area municipalities generally opposed to density could have gotten “prickly,” Todesco said, but the company tried to take a “more educational approach.”
The state’s Department of Housing and Community Development occasionally popped in to confirm the legality of the ADU conversions or additions and to explain that the law required a quick turnaround from city planners. A yea or nay is mandated within 60 days — 30 for pre-approved ADU plans — and if the project is denied, the local agency must provide a complete list of corrections needed.
Since those early days, the kinks have been worked out, Todesco said, and some cities are now clearly posting ADU requirements on their websites. It helps that in the last few years the state housing department has become much more proactive in checking that cities have realistic plans for hitting their Regional Housing Needs Assessments, goals set by the state for creating more market-rate and below-market housing over an eight-year period.
“Cities have RHNA goals, and they’re motivated to bring more housing,” she said. “So we definitely tap into that mutually beneficial opportunity.”
Nine to 12 months has been the typical time from identifying a conversion opportunity to getting a certificate of occupancy, but with the legislative changes, the greater familiarity and buy-in from city officials, and more efficiencies from her staff, the turnaround time could be shortened more.
“The regulatory environment has not been super kind to multifamily,” she said. “But this is legislation that allows for us to find opportunities on the hunt for revenue-generating opportunities. It’s the only one so far in my 25-plus years of experience in multifamily that’s been as fruitful as it’s been.”
The power of incremental change
That regulatory environment didn’t change on its own, and it didn’t change overnight. Instead, it was the result of years of “deliberate, careful” effort on behalf of pro-housing advocates, according to Denise Pinkston, managing director of land use and policy for Bay Area developer TMG Partners and founder of the Casita Coalition. The nonprofit advocates for “missing middle” housing solutions like ADUs and co-wrote the first state laws in 2017 that legalized ADUs at single-family homes.
“It’s incrementalism at its best,” Pinkston said of the organization’s legislative approach, which started with single-family homes, then added multifamily, then increased density and lowered barriers like setbacks and solar panel requirements. “It’s intended to be popular, to get heads nodding even in places that are skeptical about housing policy or there’s state-local government tension.”
While the coalition is backed by real estate, banking and tech heavyweights like the James Irvine Foundation, JPMorgan Chase and Meta, Pinkston said that her organization isn’t controlled by industry — nor beholden to civic leaders.
“We’re kind of a unique beast in the nonprofit housing world,” she said.
The group’s goal is “to try and figure out how to take the next step in the middle-housing journey so that more middle-income Californians can have a place to live … [that] fits into existing communities without causing massive dislocation or upset.”
The prefab solution
Several of the coalition’s partnerships have been with companies that make and install prefabricated housing, a growing industry that has benefited from the higher density rules and increased demand from multifamily.
Katherine Anderson, founder of prefab installer Perpetual Homes, said that until recently the company’s “bread and butter” customers were single-family homeowners. But that has all changed within the last two years, with multifamily investors looking for anywhere they can increase returns, given higher interest rates and flat rents, and discovering prefab ADUs. Only 10% of what Perpetual has installed in the last five years has been at multifamily properties, but its pipeline is 40% multifamily.
“We’ve got calls all day long,” she said. “It’s crazy.”
Anderson started Perpetual Homes back in 2019, after the former SummerHill Homes development manager became frustrated by the long timelines and high costs of building homes in the Bay. The company is a dealer for Skyline Homes, based in Woodland, outside Sacramento, where the labor costs are significantly lower than in the core of the Bay Area.
The price range depends on the size of the unit, the customers’ design and the finish choices but often come in at under $300,000. That is less than half the cost of building new stick construction for affordable housing units, she said.
“Just think if you had to buy a piece of land in the Bay Area and then build seven units. It would be astronomical,” said Anderson, who added that the company can have a unit built in just a few months and can also handle the permitting process. “ADUs really make a lot of sense.”
Urban ADUs
Detached, prefabricated ADUs work well in suburban multifamily complexes, but in urban areas, there’s less room, even for small, detached units — though Anderson said she has put a handful in behind single-family homes in San Francisco.
Instead, say multifamily owners in the city, ADUs are typically custom jobs fitted into unused storage space, empty garages or other ground floor areas of a building. (Such retrofits have been happening since before the statewide push, since San Francisco passed legislation in 2014 that effectively lifted a ban on ADUs in certain districts.)
As in other Bay Area markets, subsequent state and local laws have helped to speed the approval and permitting process. It can still take a year or more from plan submission to construction, but it used to take two or three. Owners say there are reforms still to be made, such as easing zoning restrictions to allow ADUs in mixed-use zones instead of residential-only areas, and removing the rent board hearing from the entitlement process.
“It’s incrementalism at its best. … It’s intended to be popular, to get heads nodding even in places that are skeptical about housing policy or there’s state-local government tension.”
Regardless of state law, there will always be local twists and turns to navigate, and owners, particularly in rent-controlled jurisdictions, need to be careful. For example, in San Francisco even brand-new units added to older rent-controlled buildings will fall under rent control. Many rent-controlled jurisdictions have also set standard rent reductions if a building eliminates amenities like storage or moves a parking spot, while in others those reductions are negotiated at the local rent board.
Veritas Investments, one of the city’s largest owners, has managed to stay the course through all those twists and turns to build 82 ADUs over the last 10 years, usually 300 to 600 square feet apiece, the equivalent of more than three typical San Francisco apartment buildings’ worth of units. Veritas has another 42 under construction, which will mostly wrap up by year end, about 50 more pretty far along in the entitlement pipeline and another 40 after that are in development but less far along.
Much of that last group of 90 will need to wait until market conditions improve to move forward, but Jay Pedde, SVP of operations for Veritas, said the firm is “absolutely committed to investing in ADUs as a crucial strategy for providing much-needed affordable, rent-controlled housing in urban areas” despite “the recent rise in capital costs.”
Mosser Companies, another big owner-operator in San Francisco, has largely “sidelined” its ADU program in the city given the current economic conditions, COO Andrew Silverman said at Marcus & Millichap’s recent Multifamily Forum. But he added that he expects those fundamentals to change and estimates that Mosser’s ADU program will be relaunched in the next year or two.
ADUs go national
AvalonBay is building ADUs in San Francisco, but Todesco said that the firm has no plans to build them in tenant amenity spaces in their California rent-controlled properties. But elsewhere, it is prolific. In Northern California alone, AvalonBay is looking to convert 50 more spaces within its communities to ADUs and add another 25 prefabricated units, using vendors like Perpetual Homes, Abodu and Villa Homes to grow its ADU portfolio. After the next year’s worth of ADUs have gone in, Todesco said, “I believe you’ll see us double those numbers at a minimum.”
As other states are inspired by California and start passing their own laws to make ADUs easier and quicker to install, the company could look to expand its ADU efforts elsewhere, she said.
The Casita Coalition is already at work on a national effort; it partnered with Zillow and created a “Build the Middle Playbook,” which is a tool that other advocates and policymakers across the country can use to help pass regulatory reforms and address additional steps like removing barriers around financing. The organization recently received a grant to go on tour promoting the playbook’s teachings, Pinkston said.
Even though ADUs might have started out as a one-by-one solution for individual families, multifamily owners are actually in a much better position to take ADUs to the next level and make a discernible difference in the affordable housing crisis, she added.
“Homeowners are not builders. They struggle to get these things financed, and it’s complicated to be a developer,” Pinkston said. “Multifamily owner-operators know how to do this. They have access to capital, and they have a professional staff who can get it done.”