Missing Middle

Question: In the six months since Arlington passed Missing Middle, what have you seen and what do you think of it?

Answer: It’s been about six months since Arlington passed the Expanded Housing Options (EHO) aka Missing Middle (MM) zoning changes, allowing the construction of 2-6 unit properties on lots that were previously zoned exclusively for single-family homes. There has been much excitement and angst about it changing the fabric of our community, but it seems to me that the outcome will be much milder than many people expect. Unfortunately (or not?), it seems like it won’t go far enough to make the proponents happy but goes far enough to make the opponents angry.

For those who want more of an introduction to Missing Middle, you can read my initial thoughts on MM from March. This week, I’ll share an assortment of thoughts and observations I’ve gathered over the last few months while I try to better understand what MM means for Arlington. I’ll caveat the entire column saying that MM is all very new, very much undeveloped, and we probably won’t understand where and how it will be most utilized for another 4-5 years.

Don’t Expect Floodgates to Open

More than a dozen Missing Middle applications were submitted during the first week the County opened applications (on July 1), but according to Arlington’s application tracker, there are currently 22 applications submitted and under review and 5 applications approved. I consider this to be a modest pace of applications, suggesting there’s not a huge appetite yet to build Missing Middle. I’ve run at least a dozen scenarios with builders and architects and have mostly found that the numbers don’t make sense or that the margins are too tight to justify given the risk of the unknowns (outsale prices/demand, permits, lawsuit, etc). 

Initially, I expected MM to add significant value to many older, smaller Arlington homes right away and cause a bit of a frenzy in the marketplace. The limitations of the new zoning code coupled with uncertainties about market demand for MM products and the County’s permit process seem to have kept, from my observations, developers and investors from paying a premium for tear-down homes intended for Missing Middle development (the pending lawsuit is also a significant factor).

Based on my conversations, it seems that the approach many are taking is to apply a similar valuation to an acquisition as they would for single-family development so there’s a safe exit if the Missing Middle project doesn’t work out or the lawsuit prevents further development. Each investor will evaluate potential MM deals differently, but it seems unlikely, for now, that we’ll see a frenzy of buying at a premium over previous tear-down valuations. There will of course be exceptions for certain lots that set-up perfectly for MM.

Applications Don’t Mean Much

So far, all we’ve seen are applications for Missing Middle construction not actual construction, but it’s important to understand that applications, even the five approved applications, are a small first step towards delivering a Missing Middle project. The County does not charge an application fee and the requirements for an application are simple:

• Floor plans 
• Building elevations 
• Existing property plat and building location survey 
• Proposed property plat and building location survey 
• Landscaping and/or tree preservation plans

I think that many approved applications won’t get any further, especially after going through Arlington’s ever-changing Land Disturbance Activity (LDA) and Stormwater requirements (this comes after the MM application gets approved), which adds a lot of cost and complexity to construction projects in Arlington and hamper profitability.

I also wouldn’t be surprised if a lot of the owners are hoping to sell their home with an approved Missing Middle application and set of plans, but don’t intend on actually building it themselves. That means they may not have done a true cost/profit analysis to determine if MM is financially viable or more profitable that a single-family development, so they might not get built.

One question I have for the County is that, given the limits on the number of applications they’ll allow each year, how will they clean out the application pool of applicants who decide not to build, sit on their application, or get stuck in the application process?

Large Lots, Largely Untouched

Of the 27 properties listed on the County’s application review tracker (as of this writing), none are located in R-8, R-10, or R-20 zones, which are home to most of the larger lots (“large” is relative) in the County and mostly located north of Langston Blvd. Note: the higher the number after the “R” generally the larger the lots are in that area/neighborhood.

I think this is mostly because the County, intentionally or not, made MM development unappealing for developers, compared to building single-family homes, on large lots by limiting number of townhouses that can be built to three modestly sized units. A developer must go with a multi-family/apartment-style product if they want to build more than three units and it’s hard to imagine demand being too strong for mid-sized condos without amenities, that are located away from the commercial/Metro corridors, where most of these larger lots are located.

I believe this trend will hold unless changes are made to allow 4+ townhouses to be built on a lot or there’s a significant increase in how large the building envelope (gross floor area) can be for developments on larger lots.

Creative Opportunities for Aging in Place, Families, Singles

One of the ways I can see Missing Middle being utilized is allowing homeowners to partner with a builder on the redevelopment of their property to create multiple units, one or two of which would be designed to their own specificationsn/eeds, with the cost of their new unit being reduced through the sale of the other units. For example:

• Aging in Place: a homeowner who requires care could build themselves a first-floor condo and a separate studio for a caretaker, then sell the other units
• Families: a family might build out the entire top floor for themselves, buildout a separate unit for their parents (a truly separate and self-sufficient in-law suite), and sell the rest
• Savvy Singles: a savvy single might build a small 1BR or studio for themselves to maximize the value and size of the rest of the units to earn themselves a free or very inexpensive home

Classic Cottages Leading the Way

Classic Cottages, a well-recognized custom homebuilder in Arlington (and surrounding Northern VA communities) seems to be taking the lead in Missing Middle development projects, with a handful of applications in across the County. They will likely be one of the first to give us a glimpse of what early Missing Middle will be, and can be.

None of their projects will be rentals, a fear many Arlingtonians have that neighborhoods will fill up with small rental buildings, and they intend to build to a similar design aesthetic and quality standard as they do in their $2M+ homes. They’re one of many local builders who will likely dabble in Missing Middle construction who don’t want to spoil their custom-home brand by building a weak product that reflects poorly on them. 

I think we’ll see a high-quality product that is meant for sale, not rental, from most other developers too. The Arlington consumer rewards builders with high price premiums for higher-end construction, so the margins and incentives exist to deliver quality. I’m also convinced that in most cases, the cost of acquisition and construction are too high for rentals to pencil out and most MM construction will be sold to homeowners, not investors.

Lawsuit Won’t Change the Long-Term Path

The current lawsuit filed against the County may slow down the implementation of Missing Middle, but I see that as only a short-term victory for MM opponents, not something that will prevent upzoning from being established to Arlington in the long-run. Variations of Missing Middle are picking up momentum all over the region (City of Alexandria, Fairfax Co, Montgomery Co) and increased zoning flexibility seems to be the only way to feed a starving housing market. Even if the lawsuit is successful, it should only be bump in the road to more housing density.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Question: What effect do you think Missing Middle will have on the Arlington housing market and community?

Answer: As expected, Missing Middle (MM) aka Expanded Housing Options (EHO) passed unanimously on Wednesday March 22. In short, the new zoning laws will allow development of 2-6 units on any lots previously designated exclusively for one (single-family detached) unit, effecting a majority of Arlington, if certain minimum lot size/requirements are met. Here’s a link to Arlington’s press release with details.

There is so much to digest, investigate, and learn about what MM means for the Arlington community and housing market that will come together in the coming weeks, months, and years as we determine the best implementation of the new zoning code, learn more about how the County will permit MM housing, and most importantly, analyze how the market will respond to different MM products in different parts of the County.

Results will be positive for some, maddening for others. Some results will be expected and others a complete surprise. Over time, slowly, Missing Middle will change our community…but that’s the point.

I will dedicate many posts here to Missing Middle in the coming weeks, months, and years and would love to hear from you (homeowners, renters, investors, architects, community activists, and on) about what you’re seeing and learning as we go.

To kick things off, I’ll share some initial thoughts on the zoning details and answer some questions I’ve received.

What are the highlights?

The code requirements I find most relevant to how MM will be implemented are:

• MM is allowed in all residential single-family zoning districts (R-5, R-6, R-8, R-10, R-20) on conforming lots, meaning the lot meets the minimum size (total sqft and avg width), with the exception that R-5 lots must be at least 6,000 sqft instead of 5,000
• Same set-backs and coverage requirements apply as previous/existing requirements for single-family development so the maximum building envelops will be similar to what you see now for most new single-family construction
• Gross Floor Area (GFA), the total floor area (measured from exterior walls) less any garage space, maximums are determined by project density (number of units) and type (e.g. townhouse vs multi-plex) and will limit how big a project can be, even if the lot coverage and set-backs would allow for larger development (this effectively caps enormous development on large lots).

Where will MM be built?

Much of Arlington’s single-family housing was built prior to the 1960s and has been the target of builders and homeowners to tear down and build new homes for years. Missing Middle housing will follow a similar pattern of replacing existing older homes with new development.

We will likely see a concentration of MM development along transit corridors like Rosslyn-Ballston, Columbia Pike, Washington and Langston Blvd, and National Landing (Crystal/Pentagon City area) where multi-plexes (3-6 unit buildings) can sell for a premium, but MM development will also happen in neighborhoods outside of transit corridors, likely in the form of 2-3 unit offerings.

What will be built?

This is the million (billion?) dollar question: what will be built and where? The reality is that this will come down to what maximizes returns/profit for builders and investors.

The code allows for duplexes (one unit stacked on the other), semi-detached/townhouse (direct-entry homes sharing one or two vertical walls), and multi-plexes (mini condo/apartment buildings).

The Gross Floor Area maximums and standard set-back/lot coverage requirements significantly limit the size of the units that can be built, likely resulting in most MM units being ~1,000-2,400 finished sqft. If that’s the case, I think the code falls short of how the consumer would define “middle” housing and if there’s a disconnect between demand and what the code allows, developers may not like the returns enough for MM development to take off.

The GFA maximums (e.g. 7,500 sqft for three townhouses and 8,000 sqft for 5-6 unit multiplexes) have a limiting effect on larger lots that otherwise support a bigger structure based on set-back and coverage requirements and the set-back/lot coverage requirements likely prevent builders from reaching the GFA limits on smaller lots (e.g. you won’t get anywhere close to 8,000 sqft GFA on a small 6,000 sqft lot).

Minimum off-street parking requirements of .5 or 1 off-street space per unit, depending on proximity to transit, have been established but I think developers will ultimately build to demand rather than code minimums and demand will likely be for 1+ off-street parking in all locations and two off-street spaces in locations away from transit corridors.

Who will be building?

Projects will cost millions when factoring acquisition, construction, and selling costs which is too expensive and complex for most one-off “hobbyist” developers/flippers. I think that’s a good thing for the community because it means a more professional, thoughtful approach from developers who intend to do business many times over in the community and it means fewer chances for mistakes – building the wrong product in the wrong location.

The other concern is that we’ll be overrun by deep pocketed investors/private equity funds who will load up our neighborhoods with cheap 6-unit rentals. I don’t see this being the case. There are much easier ways to put $100M+ to use than buying 100 Arlington lots, each with different zoning requirements and market factors, spending 12-18+ months permitting and building, only to manage 100 separate locations for modest ROI (Arlington has very low rental ROI compared to other markets because property values are so high). We’ve seen very little national-level real estate activity here while it’s become popular in many other parts of the Country the last few years, and I expect it to remain that way.

I think that, for the most part, MM will be built by local and small regional developers like we currently see in the single-family market.

Will rentals take over my neighborhood?

I’ve heard a lot of concerns about 4-6 unit rental buildings popping up all over neighborhoods, but my initial assessment suggests the returns in non-transit oriented locations will be far too small to justify the amount of capital needed to build dedicated rentals and this is likely also true for many transit-oriented locations/lots.

There are bound to be some outliers where a rental makes sense or a mistake is made that lands a rental multi-plex in the wrong location that produces poor returns and devalues surrounding homes (this is the part of Missing Middle I hate most), but I don’t see MM leading to widespread development of dedicated rental properties, the land and construction costs are simply too expensive and unit sizes in multi-plexes too similar to what’s already widely available for rent in apartment/condo buildings.

How will lots be valued?

Lots being acquired for single-family development have mostly traded at 35-45% of the resale value of the house that replaces it. Local builders and agents have a good idea of what their costs and resale value will be so the valuation of lots has been straightforward. The cost of building MM housing won’t be too difficult to calculate, but projecting resale value/demand will be a much more difficult for a while to come and other risks, such as unknowns working with the County on something so new, also must be priced in.

Understanding the most efficient, and sometimes creative, way to construct MM to deliver the right product to the market based on location and assumed consumer demand will play a huge role in determining lot values. Some developers will be ultra conservative and prefer to stick with the tried-and-true approach of single-family development and others who have more experience in MM products (e.g. DC-based developers) may be more aggressive in their projections and valuations.

Many homeowners in older homes have just seen their property (land) values jump overnight, possibly by 10-20%, but there will also be plenty of homeowners whose lot and location don’t support MM as it’s currently defined and will see no change in land value.

When will they be built?

We’re probably 16-18+ months away from seeing the first MM properties delivered to market. The County won’t start taking permit applications until July 1 and I’m certain that the permit process for MM will take longer than the already cumbersome, months-long permit process for single-family development, then add 8-10+ months for construction.

If you’re interested in how your lot fits into Missing Middle or have a project you’re working on that you’d like to discuss, you can reach me at Eli@EliResidential.com.

You can read the full details of the code changes in the County’s press release and reference a library of information on Missing Middle here. 

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.