The author sees a growing demand for communities of small, factory-built homes. It’s a market that residential developers shouldn’t ignore.
by Darin Zaruba
- Demand for small homes is driven by economic pressures and changes in technologies and lifestyles
- While the real estate industry is focused on square-foot costs, homeowners have different priorities
- Faster turns mean more profit for the developer
Small homes seem a logical part of the solution to the shortage of affordable and attainable housing. By small I mean single-family residences with 1,000 square feet or less of living space—the average home size before the 1960s. Developers I know who are building these homes have no lack of customers.
The question is why so few developers are building them. I believe it has to do with an outdated mindset.
Part of the problem is the real estate industry’s focus on cost per square foot. Because it’s so cheap to build more “airspace,” a 2,500 square foot home will seem like a bargain compared to one half the size.
Developers who want to offer small homes will discover that modular construction makes economics more attractive. In my opinion, the sweet spot is in small communities of 50 to 200 units.
Before outlining the advantages of modular, let’s look at why small homes are attractive to many buyers.
Why Small Homes?
People with average incomes care a lot less about square-foot pricing than the real estate industry does. That’s especially true of the many young people priced out of the housing market.
A 2019 survey by Apartment List found that 70% of people aged 23 to 40 said they couldn’t afford to buy a home. And that was before the recent run-up in home prices (a nearly 20% increase from January 2021 to January 2022). Many can’t even find an affordable rental.
These people just want a place to call their own and don’t mind sacrificing size to get it.
Societal trends like the tiny home and minimalist movements show that a growing number of people actually prefer small homes. That became clear to me in 2014 when I entered a 399 square foot model home into the El Paso County, Colorado, Parade of Homes. While competing members in the local homebuilders’ association were vehemently opposed to including such a home, it was a hit. It overwhelmingly won the people’s choice award that year.
There seemed to be an untapped market here, so in 2015 I launched the Tiny House Jamboree, which showcased small homebuilders from around the country. It attracted an estimated 40,000 people internationally over its inaugural 3-day weekend.
To be clear, I’m not advocating for tiny homes on permanent trailers and wheels like an RV, although they work for certain niche markets. The main opportunity I see is in smaller-sized homes in general, and smaller modular homes specifically. The tiny home movement merely shows there’s a demand for modest spaces.
Of course, economics is the main driver behind this demand, but it’s not the only one; more and more people want to simplify their lives. For instance, an Amazon search for books on Minimalism yields 300 titles on the first seven pages of results. A book called The Magic of Tidying Up, in which the author spends 200 pages telling people to get rid of their stuff, reportedly sold 7.8 million copies.
I credit much of this simplification trend to changes in technologies and lifestyles. Musical tastes that used to require hundreds of records or CDs and a big stereo set can now be satisfied with an app and a pair of headphones. Movies can be streamed from Netflix or Amazon. An entire home library can fit on a Kindle or iPad. And of course, few of today’s families need a formal dining or living room.
People simply don’t need or want as much space as in the past.
Municipalities are catching on. Many have made it easier to get permits for small accessory dwelling units, or ADUs. Others are encouraging entire small-home communities. For instance, the same El Paso County where I put that 400 square foot show home passed an ordinance that allows small homes and ADUs in areas zoned for single-family residential. This is also happening in other cities and towns across the country.
Small Modular Communities
In most cases, modular homes are the perfect way to satisfy this demand. The kinds of modular homes that best fit this market are built to the same International Residential Code and International Energy Conservation Code standards as site-built homes. In many cases, only one module will be needed.
Hard construction costs for a small modular unit might not be lower than for a site-built home, but it will get finished a lot more quickly and will probably be built better. Faster turns mean the developer pays less for financing. And modular makes it possible to build in areas where builders are fully booked.
This isn’t a theory: I know of several successful small-modular communities. Two examples come to mind.
One is Leap Housing’s Windy Court affordable housing community in Boise, Idaho. It has 900 square foot homes with four small bedrooms and two baths. (Bedrooms only have room for a bed and a couple of end tables.)
Another is the Cottages at Sand Creek by Goodwin Knight in Colorado Springs. Its 84 modular homes range from 375 square-foot studios to 900 square foot, two-bedroom units.
The company has gone all-in with the concept. After site building for 20 years, Sand Creek was its first foray into modular. “It was an experiment to see if we could improve quality and reduce cycle time,” according to CEO Brian Bahr.
They did. The company opened its own modular factory and is getting ready to build two more small-home communities with 116 and 168 units, respectively. Bahr says this gives them more control over build quality and means they don’t have to compete for slots in modular manufacturers’ schedules.
The time from foundation pour to move-in is 60 to 90 days, compared to between 150 and 180 days for a site-built home. The lower all-in construction costs mean rents are 10% to 15% percent lower than the company would have to charge for comparably-sized apartments in a multifamily building.
Although Colorado Springs is a good-sized city, Bahr thinks that the best opportunities for most developers will be in smaller markets. “Where modular can offer a tremendous advantage is in communities with 10 to 25,000 people that have a limited array of trade partners,” he says.
Other Approaches
While I believe modular is the best solution for most small-home developments, other housing types could work better in certain situations.
Some developers have had success with park model homes, which are built to a recreational code. They have a lower cost than a modular home and, while they’re often associated with RV or mobile home parks, they have much more attractive designs.
The practicality of this housing type depends on the market. For instance, Village Farms in Austin, Texas, offers recreational park models as full-time dwellings on leased land.
Unlike some other small homes, these are marketed as “tiny homes.” Austin has a young population that seems to value trendiness, so that term attracts a lot of them.
However, the term could be fatal elsewhere. Many municipalities will approve a community of small homes but will reject one that offers tiny homes, even if they’re exactly the same homes. I call it “the curse of the adjectives.” An understanding of the local community should tell you which adjective best serves your interest.
For instance, Mill Creek Ranch Resort in Canton, Texas also features park models, but calls them cottages.
The reason the developer went with park models instead of modular had to do with taxes. “In Texas, they’re classified as RVs if they have less than 400 square feet of living space, which reduces property taxes,” says community owner Andrew Stewart. “Ours have 399 square feet.”
Unlike many of the other communities, I am familiar with, this isn’t an affordable housing play. Most of the cottages are owned by small investors who rent them out on a weekly basis. There’s a revenue-share arrangement between the resort and the owners.
However, Stewart thinks these structures would be a good solution for full-time living. The small space obviously makes them most appropriate for singles or couples without children.
The above are just a few examples. Communities of small, factory-built homes are popping up around the country and I may profile some of them in the future. This is a short introductory article and my main goal here is to plant a seed.
My point is that high-density communities with small manufactured homes are a viable business opportunity for niche developers. They offer the chance to make a good profit while helping to address the shortage of affordable and attainable housing.
Darin Zaruba, a 20-year veteran in the offsite building industry, is a national consultant, advocate and developer specializing in modular construction with a focus on simple, small, smart, sustainable housing.
