A new startup pays the upfront cost of a backyard dwelling in exchange for some of the rent it generates.
PORTLAND, OREGON—A wind through the back alleys of the Alberta Arts District reveals an eye-catching assortment of little buildings behind homes: a low-slung converted garage, a wooden A-frame on a hitch, a “tiny house” with second-story sundeck.
With about 70 percent of its metro area zoned for single-family housing, and some of the fastest-rising rents in the country, Portland has a paralyzing shortage of affordable housing that officials believe more accessory dwelling units (ADUs) could help address. City homeowners are embracing the idea: ADUs are popping up faster here than anywhere else in the U.S., with the city issuing building permits for about one unit per day in 2016.
But financing a full-fledged secondary housing unit is out of reach for many homeowners. A custom-built ADU (which is also sometimes called a granny flat or in-law unit) can easily set a Portlander back $150,000.
“That’s just not attainable for most people,” said Patrick Quinton, peeling back a thorny vine in an overgrown alleyway.
Quinton is the former executive director of the Portland Development Commission and the co-founder and CEO of Dweller, a startup aimed at helping more homeowners ride the wave of ADUs affordably. Dweller fronts the cost of purchasing and installing one-size-fits-all prefabricated ADUs in backyards. Third-party property managers rent out the unit to long-term tenants, and Dweller splits the revenues 30-70 with the homeowner, almost as if the company is leasing the land.
Homeowners have the option to buy out Dweller at any time, or purchase a turnkey ADU by themselves from the start, at a cost of $118,000 per unit. The leasing model is similar to how Solar City, the Elon Musk-acquired solar-panel startup, works—except probably with better potential for returns. In Portland, an ADU on the lot of a single-family house generally rents for $1,200 to $1,500 per month.
“There’s a natural market in these neighborhoods,” Quinton said. As high-end duplexes and triplexes pop up in areas like the arts district, the economics of housing in Portland are driving people to think about how to use their space more efficiently. While developers are accustomed to maximizing their square footage in dense downtown sites, “people haven’t traditionally thought of single-family plots that way,” he said. “Now we are.”
Long-term, the idea is to help Portland keep ratcheting up its rental supply so that housing costs level out. As in many other cities, new housing development slowed to a halt during the recession, and a lot of what’s gotten built since has been on the luxurious end of the scale. As new residents keep flocking to Portland, rent prices have ticked up sharply—12.4 percent from 2014 to 2015, the highest increase in the country at that time.
The casualties of Portland’s affordable housing shortage are plain. Longtime lower-income residents, many of them people of color, face the threat of displacement in booming neighborhoods, especially as the city has failed to use basic tools to protect vulnerable residents and preserve affordability. Homeless encampments are now a common (and totally legal) sight on sidewalks and other public right-of-ways. I counted five on a seven-minute walk from the grocery store to my Airbnb—an ADU, as it happened—in the residential Lloyd District near the convention center. A housing state of emergency was declared in 2015 and has been repeatedly extended since.
But there is hope on the horizon. Builders have been aggressively adding apartments, with the city permitting between 3,000 and 4,000 new units in both 2015 and 2016. As more supply comes online to meet demand, “the balance of power in the rental marketplace will shift from sellers to buyers,” wrote the Portland-based urban economist and writer Joe Cortright for City Observatory in November.
The humble ADU could be part of that wave. While housing-crunched Seattle, Austin, Washington, D.C., San Francisco, and L.A. have also recently liberalized their granny-flat policies, Portland has set about creating the most ADU-friendly policies in the country. In 2010, it waived impact fees for developers building ADUs, lowering an enormous financial barrier for homeowners. (It renewed the waiver in 2016.) The city has also relaxed enforcement of its ban on tiny-house and RV rentals on private property (these have been regulated a little differently than ADUs, since they’re technically mobile homes).
Right now, there are an estimated 2,000 ADUs completed in Portland, sitting on less than two percent of home lots, the most in the country. But as many as 116,644 properties—nearly half of taxable lots—could be “ADU friendly,” according to an analysis done by Portland State University. As companies like Dweller and others (including Cover in California and Blokable in Washington state) try to bring down upfront building costs through prefabrication, Quinton believes a total of 10,000 to 20,000 ADUs could be a good goal for the city. Five property owners have already placed orders for Dweller ADUs, he said, and the first is set to be installed next week. Three of these units will be owned and rented out by Dweller. Two will be owned by the homeowners from the start.
Dulcinea Myers-Newcomb, a real-estate broker and homeowner in the arts district, is working with Quinton to market Dweller’s services to other Portland property owners and renters. But she’s also an early adopter herself, clearing out cypress and bamboo trees in her backyard to make way for a 450-square-foot unit that she will own, complete with equipped kitchen, bathroom, and a bedroom. It’ll be craned in, the standard approach for Dweller.
“I’m so excited,” she said. “My dad is moving in.” The cost of building an ADU would have been prohibitive otherwise, she said.
With miles of single-family residential housing spreading east of downtown Portland, Quinton suspects the city’s building code will keep shifting further in favor of duplexes, triplexes, and ADUs, allowing homeowners to build more than one (for example) if they desire. As other cities follow Portland’s lead, his hope is to take Dweller’s model to homeowners up and down the West Coast, where upfront ADU construction costs can also be a barrier.
Not everyone will be able to afford sleek granny flats at going rents, even if increased supply helps ease housing costs. Portland still has a long way to go in picking up the slack on truly affordable housing at below-market rates. In 2016, Oregon finally overturned its ban on inclusionary zoning, and the city has made some investments in affordable developments, but there have been mixed results. Last year, Multnomah County launched a radical pilot: It built ADUs in four private backyards in Portland for homeless families to live in, rent-free, for five years. But it’s a very small step towards addressing a huge problem.
Then, of course, there are those Portlanders who protest ADUs out of concern for neighborhood character, increasing densities, and parking pressures. But with Portland’s tight urban growth boundary, there is perhaps a broader acceptance here than in other cities that infill is coming to the neighborhood. “People know we can’t grow out,” Quinton said. “And these houses have to go somewhere.”