As housing costs soar and supply struggles to keep up, cities across the country are turning to an innovative solution that adds homes without changing the face of established neighborhoods: the Accessory Dwelling Unit (ADU). As municipalities struggle to adapt zoning, this clever addition to single-family properties is gaining traction as a critical tool in the fight against housing shortages. The two most common forms of ADUs are Detached Accessory Dwelling Units (DADUs) which form a standalone structure on the same lot as a Single Family dwelling, and Attached Accessory Dwelling Units which are conjoined to the primary dwelling and includes units such as garage conversions and in-law suites.
Cities around the country are capitalizing on ADU growth, however, according to recent studies, the following 5 metros are leading the charge:
- Seattle, WA
- Portland, OR
- Los Angeles, CA
- Durham, NC
- Gainesville, FL
Seattle, WA in particular has emerged as a national leader in ADU permitting over the past five years, in response to a market where the median rent for a 1Br/1Ba still consumes over 30% of the median income, leaving more than half of the city's residents rent-burdened. So, how effective has this strategy been? The following graph illustrates Seattle's steady rise in ADU permits, recently hitting a milestone of over 100 in a single month.
Additionally, the City has shown its commitment to support continued ADU production. Following a release of a package of new legislation aimed at simplifying the ADU permitting process, Mayor Harrel stated: “Making progress on Seattle’s urgent housing affordability needs requires not only increasing overall production, but increasing the diversity of housing available… ADUs are a key element of our One Seattle Housing Agenda.”
Public incentives and permitting reform are one piece of the puzzle, and it's also important to understand how early developers are faring in the ADU construction landscape. In an analysis of over 1,000 projects in Seattle, we found that property owners on average increased the value of their property by 39% by adding ADUs.
The chart above shows a trend line of the median growth in property value on ADU projects in Seattle since 2020. We interpret the rapid growth in ADU yields in 2020 and early 2021 as an indication that developers were taking advantage of recent legislation to make significant investments in their properties. Instead of simply investing in a single bedroom addition or “mother in-law suite,” many saw the opportunity to engage in more complex construction which added more square footage to the lot.
The cooling off effect that we saw in mid 2021 and 2022 could be attributed to a surge in housing supply as a result of the long term low-rate environment. However, seeing a resurgence in early 2023 shows that the Seattle ADU market may be settling at a new equilibrium indicating a fundamental shift in the behavior of ADU investors.
ADU financing expert and Certain Lending loan officer Israel Lopez said: “Over the past 3 years we have seen a much more sophisticated approach to ADU construction”. Certain Lending and our parent company Vontive believe that as rates continue to drop, there will be even more significant opportunities for real estate investors to add value to their properties through ADUs by taking advantage of better financing and more available listings.
For more information on how the statistics were calculated see the Methodology description below.
How are ADUs financed?
Certain Lending supports real estate investors by offering flexible financing solutions for ADUs both in Seattle and across the country. Here are some recent examples of loans where we've partnered with developers to construct ADUs in the past, illustrating how investors use our products to boost their property values.
Every loan has features beyond those in this table and may impact the interest rate or leverage amount a project qualifies for, but we believe these are good examples of what Certain Lending provides for a typical project:
If you're interested in learning more about financing a real estate project with an ADU or DADU, you can call us at (206)-237-0105, email us, or submit your deal in 3 minutes and one of our ADU financing experts will be in touch promptly.
Methodology
ADU permitting data was acquired through the Seattle GeoData publicly available platform. The data includes information on permit issued dates, project completion dates and project descriptions. In order to estimate changes in property value due to ADU construction, we used tax assessment data from our public records provider Cherre. Finally, we adjusted raw changes in property value to account for changes in median home value using the Zillow Median Home Value Index.
