Startup Candidates: Housing Supply

Rather than a partner memo on a specific startup, which we circulate privately, we’re sharing a broad exploration of the landscape of startup solutions to the housing supply challenges in major US cities. New regulations and new technology are encouraging founders to start companies that solve very old problems. Our question remains whether to pursue a full stack solution (where primary business model includes building new housing supply from the ground up and getting it occupied) or continue to invest in solutions that become a core part of the new housing stack. First, we’re going to explore full stack approaches.

Problem

Housing supply falls behind demand in many cities for many reasons including regulations, permitting, weather, site conditions, home construction times, labor availability, labor costs and finance. Options such as prefabricated and modular or mobile homes are seeking the opportunity to meet some of that demand with Accessory Dwelling Units (ADUs) and prefabricated multifamily buildings, but these often face additional challenges.

Regulations remain piecemeal and can be confusing but many local policies are shifting toward ADUs. One example is the recently passed California Senate Bill 1069 which limits local government authority to prohibit ADUs in certain cases, which strengthens or enables local policies in cities like Los Angeles and San Francisco towards the goal of rapidly scaling supply of new housing units. Changes in policy like this are progressing in Portland, Boston, Seattle, Austin and many other cities and states.

Home construction is historically slow to innovate and almost exclusively iterative (many argue the last major leap in multi-family structures were the first skyscrapers built in the 1880s in Chicago), suffers massive waste, and has seen productivity decline along with labor pool shortages in recent years. Efforts such as modular homes, prefab homes, tiny homes, mobilized homes and improved manufacturing software, are evolving but many have failed or remained stagnant due to questions around financing, equity and permitting. Well designed products have had minor success and garnered media attention but demand is hindered by cultural biases around things like curb appeal and size. It also doesn’t help that trailer homes are associated with low income or poor communities. These may be changing as necessity and cultural shifts are creating a new class of renters and buyers more willing to go small, mobile or modular as they revisit norms around economics and status

Financing persists as the biggest barrier to the growth of new housing supply. Traditional banks have financial products designed around assets that fall into specific models, such as site constructed structures and the appreciation of land. Other products such as financing for mobile vehicles enable some structures that are used for housing but reviewed as a vehicle. These come with higher interest rates. New models could arise around financing cash flow from rental income generated by housing such as ADUs. This is boosted by the availability of consistent short-term rental supply thanks to AirBnB.

Competitive Landscape

Beyond traditional builders and solution providers, tech firms like AirBnB and Alphabet’s Sidewalk Labs are exploring the industry. There are also many startups taking a variety of approaches. Architizer (an Urban Us portfolio company) connects architects with manufacturers of an expanding universe of building products. People can use platforms like New Avenue to access architects and planners while managing the process completely. Builders can use software like Manufacton which specifically targets prefabrication builders. They’ve positioned themselves as a one-stop-shop solution for managing the manufacturing, and tracking, of prefabricated building components throughout their entire lifecycle, from raw materials to final installation. Acre Designs aims to replace architects and some appliance makers by providing a select set of design and materials for rapidly building zero net energy homes out of a kit.

Prefabricated home builders deliver complete or ready to complete homes and other structures directly to buyers. There are also builders focused on affordable container homes, tiny (sometimes) mobile homes and prefabricated designer homes.

Keen Development Group focuses on affordability and builds container homes (shipping containers converted into housing) starting at just over $20,000. Similarly, Back County Containers and Boxouse uses containers for homes and start at $25k. More container homes: G-pod, Cargotecture, BOXHOMZ

Avava focuses on backyard units with preset design and components but also provides contractor and permitting services. Avava ships via flatpacks and builds an entire unit in 6 weeks for as little as $115k. Similarly Cover.build offers backyard unit construction and associated services from $100k and up. Getaway.house recently raised $15M with a similar strategy.

Another tiny home builder, Tumbleweed focuses on solving the finance challenge in two ways; keeping wheels on the homes & creating a hotel platform where Tumbleweed owners can offer their units for rent. Though the homes retain a tiny wooden house aesthetic, the mobile element allows for different qualification for banks. By promoting the homes as an investment towards creating rental cash-flow, including creating official Tiny Home Hotel lots, Tumbleweed also reduces some anxiety around the long term value of the units.

The shift to more and better housing stock will likely include better designs and manufacturing processes, including the efforts of prefabricated home builders who keep units small enough to ship on trucks. Some builders are focused on aesthetics and brand, others on a suite of products including commercial construction. For example, Kasita focuses on designing studio units modeled after the iPhone that can serve as ADUs, or part of a low-to-mid rise multi-family structure, as well as dormitory, hotel and workforce configurations. An individual Kasita is priced as $125k or more and can include different smart home options. Blokable builds modular units that can be combined and arranged for various configurations including multi-room, multi-family, and commercial. They’re also enabled by smart appliances, including solar power, water and hvac, and are focused on partnering with cities around various types of affordable housing. Blokable prices units at $65k+ and are focusing on multifamily opportunities.

There are yet other types of ADUs including converting a freestanding garage or converting existing space in the bottom floor. Ori systems and solutions like it may offer a path towards affordable and flexible use conversion.

Impact

Affordable housing touches different aspects of city life. The most obvious issue is economic. As people spend more and more of their monthly income on rent or mortgages, they eventually decide to move to more affordable cities. This in turn makes is harder for local businesses to hire and retain talent. City housing offers density and resulting reduced carbon footprint. Safe and well built housing has health and resilience impact. Flexibility, mainly the ability for housing to shift and ebb as cities change are also key.

Risks

The biggest barriers around financing and liquidity are yet to be universally addressed. Some solutions focus on rental income and lower priced mobilized options. As other barriers ebb, additional stakeholders may step up in subsidizing new types of housing stock, such as the Meyer Memorial Trust who are exploring fully subsidized ADUs in Portland, Oregon.

The use of shipping containers, also seen as a path towards rapid development of new supply, present additional challenges. Those include structural and environmental challenges inherent in using shipping containers as housing such as wasted steel and design constraints, including the loss of space due to insulation. Additional risks include the exposure to materials retained in the units (from past shipments) and the likely inclination to have new container units produced more cheaply than existing stock (increasing environmental impact of steel use).

As mentioned above, policy is shifting and rules around electric hookups and parking space requirements are loosening to reduce the barriers to ADUs. But these new housing rules are not nationally adopted. In many North American municipalities, secondary suites are illegal because they do not conform to the zoning or land use district the property is in, they have been developed without the proper permits, or they do not meet the local building code. For California, where there is a statewide push towards increasing housing stock, the new 1069 law forces local regulators hands but leave enough ambiguity around the process to still add confusion and delays. We expect pushback to persist in efforts to protect parking availability and neighborhood character (see NIMBYism).

Incentives around taxes and convenience may not be aligned for enough homeowners to leverage new rules and options for ADUs. Some units may trigger a reassessment of property values resulting in increased property taxes. And many may opt to keep their backyard untouched.

Critical for venture investing is the opportunity for venture returns. The top 10 home builders made a combined $43B in 2015, with D.R. Horton at $11B.

Thank you Luke Iseman, Jeff Wilson, David Friedlander and Shaun Abrahamson for help with this.