California Fix: More Housing, Same Footprint
Casey Case of Gates & Associates on two strategies helping developers address the dire need for housing while maximizing ROI.
With a wave of new legislation, California is beginning to turn the tide on its shortage of housing through two powerful strategies: density bonuses and accessory dwelling units. Density bonuses incentivize developers to include affordable units by allowing higher-density projects than typically permitted. ADUs make use of unused lot space in residential areas, and underutilized spaces in existing urban multifamily buildings, creating additional housing opportunities without expanding a building’s footprint.
Together, these tools are helping create more housing and, importantly, making projects “pencil out” in ways that allow California to address its critical housing shortage. Other states have similar pushes to speed up housing production, but California is arguably a proving ground for a number of these emerging tools.
How are developers getting creative in squeezing more housing out of their lots and existing buildings?
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Density bonus
Density bonus laws are a major source of housing development in California, and especially in the San Francisco Bay Area. Developers can significantly expand multifamily developments by taking advantage of new and existing laws that enable projects to add “bonus” units if they meet certain criteria, mainly that the new units are affordable housing.
While recent headlines have cited urban and high-rise housing, developers are also utilizing density bonus tools in next-tier cities and community development projects.
For example, at our project for Pulte homes at Mission Blvd. in Fremont, the 4.5-acre site around a historic single-family home has utilized density bonus opportunities to add 105 condominiums, 51 townhomes and 54 stacked condos.
According to Holland & Knight, a number of density bonus tools are at play. For example, California Assembly Bill 1287 adopted last year allowed developers to increase the density of existing projects by as much as 50 percent through incorporating deed-restricted, moderate-income units. This bonus is “stackable” with any density increases previously approved under the existing State Density Bonus Law, creating a lucrative opportunity for developers.
HK’s Chelsea Knight says a project sponsor first has to maximize the density bonus that has been available in the past. “If you maximize that, then the developer can add additional density by providing more affordable housing units. One of the most powerful combinations people recognize is if you do 15 percent very low-income, that originally would have entitled you to a 50 percent bonus. Then if you add an additional 15 percent of moderate units, you get an additional 50 percent bonus under AB 1287 for a total 100 percent density bonus.”
The 960 Howard project in San Francisco by OWOW is among the largest to take advantage of new legislation, having nearly tripled in size under the 100 percent density bonus legislation, according to SFYIMBY.com. The mixed-use project, once planned for 104 apartments, will now offer 274 rental units across 16 floors of the 19-story proposal.
Accessory dwelling units
After a slow gestation, ADUs are also becoming a key source of new housing production, and as of 2022, accounted for 19 percent of all housing units produced in California, according to California YIMBY. That’s primarily ADUs added to single family homes such as garage apartments or “granny units.”
But apartment owners and developers are utilizing ADUs, too, in both suburban environments and urban centers.
A wave of ADUs is being added to existing apartment projects such as converting carports, or storage or other excess space into new units and adding density in the same footprint.
Toll Brothers was recently greenlit by the City of Milpitas, a bedroom community in Silicon Valley, for 43 townhomes and 13 ADUs. A major multifamily developer, AvalonBay, is also a fan of ADUs, having completed 40 units to date with another 400 “opportunities” for converting underutilized space or creating new detached ADUs. Its Eaves project in Fremont repurposed excess storage rooms into new housing.
Most recently, a new law signed by the governor this year increases the number of detached ADUs that may be constructed for multifamily projects. Specifically, SB 1211 increases the number of detached ADUs that are allowed on a lot with an existing multifamily dwelling. Additionally, detached ADU limits now apply on a “per lot” basis, as opposed to “per project” basis, thereby increasing opportunities for properties with multiple lots.
Even high-density cities like San Francisco are in on the trend. One of California’s most active multifamily owner/operators, Veritas Investments, has been repurposing and transforming unused space into new housing for San Franciscans since the city relaxed regulations in 2016. The firm has turned underutilized garages, storage space and even an abandoned dining hall into 82 new apartment units across the city, with well over 100 more in development or under construction.
Casey Case is president of Gates & Associates.
