YIMBY Denver

The Economics of Accessory Dwelling Units (ADUs) in Denver

Denver, like many American cities, needs more housing. Approximately 80,000 units need to be added to the Front Range. One recent action the City took to address this shortage was to revise the ADU zoning to allow two-story structures, slightly taller sidewalls on the structures, and allowing larger ADUs. An expected outcome of this revision is to make it easier to build ADUs and thus generate an additional mechanism for adding units.

A combination of factors makes building urban ADUs more expensive than multi-unit development, and thus ADUs are unlikely to be economically viable at a large scale. Based on per-unit cost, they are roughly 30% more expensive than multiplexes or low-rise apartment units of similar sizes with comparable finishes. Furthermore, the construction of ADUs requires financing by individual owners rather than institutional homebuilders who have access to capital markets.

The recent ordinance change's reduction of ADU barriers did no harm, but cannot result in meaningful change to the housing supply, and thus is not suitable or sufficient for solving Denver’s housing issues. Additional policy changes to enable more homebuilding in Denver, such as citywide upzoning or single-stair reform, are needed to spur the construction of more homes.

Project Background

A prototype ADU was built to test a design that works on various lots under the Denver laws passed in 2023, allowing 2-story ADUs. The total cost was in the high $300,000, with $30,000 in savings available through improved legislative and utility policy.

Everything about the ADU is meant to reduce the complexity of construction and operations, with a goal of an easy-to-repeat ADU build.

Policy Considerations

The Denver metro area has a shortage of 80,000 units. Ensuring that the policy decisions that are intended to close this gap do what is desired means policymakers must understand the efficacy of proposed solutions.

ADUs have been a significant focus of housing policy in recent years as one tool in the toolbox of fixing Denver’s housing crisis, but fewer than 400 have been completed in recent years, approximately one-half of one percent of the estimated need. Both city and state policies have been implemented and are intended to be one tool in a toolbox for tackling Colorado’s housing crisis

There are three significant barriers to the construction of more ADUs:

• High Unit Cost: Cash flow and added property value can make building an ADU profitable. Still, set costs comprise a larger percentage of the total cost of an ADU build, making small projects like individual ADUs more expensive on a per-sqft and per-unit basis vs. multifamily.
• Household Capital: Given the price, only homeowners likely have access to capital or financing to build ADUs today. Government policy, through better loan terms and incentives, can be extremely helpful in this area.