Can PropTech Startups Utilizing SB9 Help Alleviate America’s Housing Crisis?

The US Housing Accessibility Crisis: Quick Intro

America’s housing accessibility crisis isn’t new. Mounting prices and insufficient supply are known issues (heck, even my former WeWork CEO Adam Neuman is focused on it!). But what is new is an innovative legislative-inspired approach to solving it — starting in California.

In 2012, a third of US cities reported a housing undersupply (source). Not surprisingly, the cities affected were largely “highly desirable”, densely populated, and often coastal. This profile changed over the last decade. More and more US cities in middle America suddenly faced issues similar to the ones that were typically reserved for the coastal elites. In short, the dream of homeownership amongst my generation, which was previously attainable, has begun to slip away across nearly all of America.

The factors exacerbating this crisis are numerous and complex. COVID-19 caused massive slowdowns in housing production, due to everything from material and human labor shortages to supply chain constraints — slowdowns that were already pervasive in an environment of building regulations, restrictions, and NIMBYism (not in my back yard) that has plagued housing stock. Mass adoption of remote and flexible work drove previously coastal residents inward in search of more space. Amid the pandemic, corporate entities (and likely many iBuyers) also bought and warehoused “up to 50%” of their properties — artificially constricting supply and driving up prices. (source)

Ultimately, we’re now in desperate need of more, and more affordable, housing. Specifically, the US needs more “starter” homes, or first, affordable homes. The severe lack of starter homes is prolonging renting for otherwise would be buyers, exacerbating renting prices nationwide. (source). Solving this problem will likely require the cooperation of multiple stakeholders, ranging from innovative startups to city regulators and real estate developers.

From a governmental policy perspective, there are numerous solutions from decentralizing zoning control to reducing regulation to increasing funds and tax breaks towards affordable housing construction. In a few areas in particular, California is leading the way — and driving, in conjunction, with a number of tech and tech-enabled startups working to help bring housing policy innovations to life. To appreciate the quiet revolution happening in California, and its particular catalyst with Senate Bill 9, we need to step back and review a bit of recent regulatory history in the Golden State.

Quick California Policy Background Re: Innovative Housing Policy

California has been a frontrunner for creative, policy forward solutions to the US’s housing problem. This isn’t surprising as it has the most severe housing shortage of any state in the country. Estimates vary, but California needs to build several million homes to keep up with demand, and recently released a plan to build 2.5M homes by 2030. (source) For context, the US has a total estimated housing shortage of 6.8M according to the National Association of Realtors. (source)

In 2015, California began enacting multiple zoning policy adjustments to enable and incentivize more home construction, starting with a push for accessory dwelling units (ADUs). At the time, over 50% of the state’s housing stock was zoned as “single family” — meaning that only one family or unit was permitted per lot. ADUs, in theory, incentivized consumers to effectively generate more housing stock by building homes in their backyard, and renting them out for supplemental income.

Technically speaking, the zoning adjustment “worked” — from 2018 to 2019 the number of permits issued to build ADUs increased from 5,911 to 15,571. (source) There’s some variance in opinions regarding ADU use cases, but many believe that these homes were used for extra space for the primary family living on the lot — a backyard studio, office, space for extended family, etc. (source) In short, against the backdrop of a multi million home shortage, a few thousand more ADUs have not measurably moved the needle to increase housing supply.

Senate Bill 9: Going Beyond ADUs

In 2021, California took their push to increase home supply a step further with Senate Bill 9 (SB9). This bill, which went into effect January 2022, has two core components. First, it enables single family residential “lot splits”, effectively turning one lot into two (a subtle, but important differentiation from just building a backyard unit on a single residential lot, where the primary homeowner is then renting out the unit). And, second, it allows duplexes to be built on what were previously zoned as single family residential lots.

A few months into the bill becoming law, very few homeowners have utilized SB9. As of July, SB9 hadn’t led to the construction of any new units. (source) How could such a seemingly revolutionary and innovative legislative solution have had such a small impact on the ground?

Much like constructing an ADU, navigating the process of determining if a plot of land is viable for splitting, or additional building (and of what kind), is complex. SB9 is also structured so that developers can’t simply buy up single residential units or lots, and split or build duplexes thereafter. (e.g. the lot splitter has to sign an affidavit stating they plan to remain on the primary lot for at least three years, so it effectively needs to be a consumer/homeowner).

All this said, the responsibility of enacting SB9 lies in the hands of homeowners, and they’re not well equipped with the tools or resources to do so. Hopefully, technology startups can help here. That’s an area I’m keenly exploring.

One startup in this space, Homestead, helps homeowners determine if their lots are eligible for actionzing on SB9, and guides them through the steps to do so.

There are also a plethora of startups in the ADU faciliaton space. Some are pure software solutions, such as Cottage, which helps homeowners determine ADU eligibility and design, and offers a marketplace of contractors for the actual development. Others such as Abodu, Mighty Buildings, and Cosmic are ADU builders themselves. The market of “builders” is extremely expansive, many with their own strategic positioning — custom design, energy efficient, 3D printed, etc.

Looking Forward:

Categories that require the cooperation of multiple, diverse stakeholders are often complex (especially if one of those stakeholders is a governmental entity). So, I’m somewhat apprehensive that SB9 will be embraced by homeowners, unless there is a clear and low-effort meaningful financial upside. At the same time, I care deeply about housing affordability, especially as it serves as a critical method of wealth creation for most families in our country. Without going too deep here, many of the US’s zoning restrictions are rooted in racist and classist policies that aimed to maintain segregated residential neighborhoods to preserve home values in the mid and late 1900s. (source)

One interesting comp here is iBuying data — homeowners are happy to take a cut on earnings for speed and simplicity in the home sale process. If a homeowner could simply and easily split and sell their backyard, and use that money to pay down the rest of a mortgage, for some it could be a pretty sweet deal. The key here is keeping it simple.

If you’re a startup thinking about SB9, or a comparable regulatory policy for a different state, I’d love to connect — julia@flybridge.com.

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Julia Maltby

Julia Maltby

Early Stage Investor @ Flybridge & X-Factor Ventures | GP @ The MBA Fund | Previously @ Underscore VC, WeWork, and Plum Alley Investments | Wharton MBA