What Product Will Capture Massive Missing-Middle Opportunity?
The development and delivery of right-sized, right-priced workforce housing is one of the most challenging yet undervalued opportunities for builders and developers today.
This so-called “middle neighborhood” defines a third to half of urban America, representing a wide variety of ethnicities to form some of the most racially and socioeconomically diverse areas in the country, says Paul Brophy, principal at Brophy & Reilly, a community development consulting firm based in Ellicott City, Md., and editor of On the Edge: America’s Middle Neighborhoods. In the book, he shares dozens of case studies from policymakers, scholars, and other community development professionals.
Dan Parolek, principal of Berkeley, Calif.–based Opticos Design and creator of www.missingmiddlehousing.com, specializes in desigining sustainable, walkable communities, and defines the missing middle as housing that falls between single-family homes and apartments, and says there hasn’t been much of it built in the past 60 years due to zoning challenges.
Yet, despite the glaring need for such housing, creating a profitable business model for building middle neighborhoods is complex. Indeed, a significant roadblock to building middle neighborhoods lies in the constraints developers face in trying to make such product viable, comments John McManus, vice president and editorial director at Hanley Wood, publisher of BUILDER magazine.
“Today’s rules of engagement for market-rate, private-sector players in residential real estate and construction—costs, policies, borrowing expenses, tax laws, labor capacity, rates of return, etc.—essentially consign housing’s ‘missing middle’ to being regarded as a strategic sinkhole,” McManus says. “From this standpoint, no smart, successful, profit-making venture knowingly would dare to commit all-too scarce resources of time, talent, and capital to the ‘missing middle.’ Especially when a focus on the ‘non-missing upper income household’—the ones who can walk into a bank and qualify for a $300,000 or more loan, or prove income for a new apartment lease in the downtown urban corridor of one of the nation’s economic hotbed cities—comes with its own set of business and cost challenges.”
Doug Farr, president of Farr Associates and author of the new book Sustainable Nation: Urban Design Patterns for the Future, argues nonetheless that missing-middle housing presents a great opportunity for the industry.
“Surprisingly, it has its application in many places,” Farr says. “It’s a great tool to add housing choices and density in single-family neighborhoods across the country. It’s a great product for decommercialized corridors in legacy cities.”
Scott Choppin, founder of Urban Pacific, is creating his own best practices with rental townhouses in Southern California focused on the multigenerational demographic. The homes feature a bedroom and bathroom on the ground floor, a plan Choppin developed after tracking three trends: housing-supply constraints, the rising rent burden, and the increasing popularity of multigenerational housing.
Choppin reviewed every element of the design—from land use to the number of tradespeople required to build it—to create an efficient construction process and minimize costs to make a profitable business model. Farr, too, focuses on reducing the number of trades needed, notably for gas supply and piping and masonry.
Urban Pacific’s townhomes sit 25 to an acre and each have five bedrooms and two-car, direct-access garages. Choppin, who calls the product the Urban Town House, or UTH, speaks more about the business model in this short video.
Choppin is also leveraging private equity along with tapping into the benefits of the federal government’s Opportunity Zones program. And while he’s impressed with a 25% yield, he’s also providing a much needed social benefit, he feels, providing housing for neglected moderate-income families that will form a sticky tenant base while providing a long-term life for his asset, protecting it from a downturn.
As California stares down the barrel of Proposition 10, the UTH properties also provide a very equitable rent option, coming close to falling between market-rate rents and Fair Market Rents.
Best practices in the design, construction, and engineering of Choppin’s townhomes provide a powerful example of one way to seize the opportunities available in middle-neighborhood development.
As Parolek says, the market is waiting … . Will you respond?
This story appears as it was originally published on our sister site, www.multifamilyexecutive.com.