The sharing economy is a hot topic; Zipcar, Uber, Airbnb, bike sharing, and shared workspaces are just a few of the brands and concepts in this space. With Oslo, Ditto Residential, a boutique residential developer in Washington, D.C., has reconceived and updated another time-tested sharing idea, house sharing—or in this case, apartment sharing, sometimes known as group living. For years, groups of young people have rented older townhouses and single-family homes in search of affordability. Oslo is tapping into a segment of this market, but also offers something different—a new and thoroughly contemporary shared-living experience.
Oslo is a nine-unit multifamily rental apartment development on a central-city infill site in the Shaw neighborhood of Washington. The project has been positioned to appeal to recent college graduates and millennials who want to share a large apartment as a preferable and cost-effective alternative to renting a studio or one-bedroom unit. The building has three units with three bedrooms and six units with four bedrooms, with typical unit sizes ranging from 970 to 1,410 square feet (90 to 130 sq m).
Idea and Background
The idea of developing an apartment building designed and targeted to appeal to this market is unusual. Oslo’s three- and four-bedroom units all offer the same-size bedrooms with private baths in a modern, high-design building—a product very different from the older rowhouses that are more typically shared. In this way, Oslo fills a gap between the shared rowhouse at a lower price point and a studio or one-bedroom apartment at a higher price point. The building and the units have large windows, are well located in a walkable neighborhood, and provide easy access to transit.
Ditto Residential was founded in 2008 by Martin Ditto, who is the company’s chief executive and leads all its development activities. Ditto Residential began with the development of a single home on an urban lot and has grown steadily since then. The firm has undertaken about 50 projects in the Washington area; Oslo is its first multifamily rental property and, at the time, was the largest project the firm had undertaken.
When acquired, the 5,520-square-foot (513 sq m) site consisted of an old, obsolete, nonhistoric nine-unit brick apartment building that covered the front half of the site. Although located in the middle of the city block, the original building had eight-foot (2.4 m) setbacks. This was an attractive feature that allowed Ditto to develop a building that capitalized on natural light by placing windows on all four sides of the structure. The walkability of the neighborhood and its location one block from the Shaw Metro station and about a 12-minute walk from downtown D.C. were two additional appealing features.
Even though the site had by-right zoning, conforming to zoning requirements was a challenge because the company was making major changes to a nonconforming existing building. There was initial uncertainty regarding how much of the building foundation needed to be retained to preserve the existing zoning rights, which allowed for a nine-unit building with a height limit of 40 feet (12 m). Ditto eventually determined that the zoning allowed demolition of most of the building, but the firm needed to retain the foundation to a level four feet (1.2 m) above grade in order to maintain the zoning rights. Getting to this final zoning interpretation was not simple, however, and took time and expertise.
Planning for Oslo began in November 2012, and the site was purchased that December. Design proceeded throughout 2013, construction financing was arranged in November 2013, and construction began in December 2013. The project was completed in November 2014.
Development costs for the project totaled $4.85 million, including the site acquisition cost of $1.28 million, $2.74 million in hard costs, and $831,000 in soft costs, including $190,000 in overhead costs for the development staff. The project was financed with $1.25 million in equity capital, 50 percent from Martin Ditto, and 50 percent from a private real estate investor that he connected with through family.
Financing also involved a $3.6 million construction loan from Capital Bank, a Maryland-based institution that has been an active lender to smaller development startup companies in the area. The loan was arranged with an 80 percent loan-to-cost ratio and covered both acquisition of the property and development of the building.
Permanent financing was obtained from Sandy Spring Bank, a Maryland bank, in spring 2015 after the project was stabilized for 30 to 60 days. The permanent loan totaled $5.35 million and is structured as a seven-year adjustable-rate mortgage. At the time of the refinancing, the property was valued at $7.25 million. “It was a home run from a financial perspective,” notes Ditto. The permanent financing allowed both equity investors to get their equity back after the permanent financing was put in place, and the owner partnership expects to hold the property for some time.
Planning and Design
The program for the project increased the overall square footage on the site while still conforming to the nine-unit and 40-foot (12 m) height limit required by zoning.
To accomplish this, the developers and designers focused on the specifics of the zoning and came up with a plan that allowed them to build a four-level building, with the lower level at grade in the middle of the site but below grade at the front and rear of the site. With the addition of the lower-level floor and the larger footprint, the new four-level building is more than twice the size of the old building: the built area increased from a nine-unit, 5,400-square-foot (500 sq m) building to a nine-unit, 12,800-square-foot (1,200 sq m) building.
The objective of the design was to create a high-design, transformative residential building that provides young professionals a great living experience at a reasonable cost through a shared-living concept. Zoning supported this objective. Because the zoning requirements focused on the number of units and not the square footage, the designers used the shared-housing concept to create a building with large units of three and four bedrooms that were highly marketable to millennials. Large units like these would likely not have been marketable if not positioned as shared-living units.
The principal issue the developer and designer faced was how to fit a larger building onto the site—including a new lower level—given the zoning requirements and the fact that they were required to retain the foundation of the building. It took considerable time and effort to properly interpret the zoning requirements.
The developer eventually determined that only 48 inches (122 cm) of the above-grade foundation needed to be retained, rather than two stories, which was the company’s initial assessment. This allowed for the addition of a lower level. The developer actually built a new foundation under the existing one, with the cellar level partially below grade. Soil was removed from the middle of the site to lower the grade and create lighted walkways, allowing the cellar-level units to feel like above-grade units and providing individual exterior entries to units.
Because the site offers eight-foot (2.4 m) setbacks around the entire structure, the new building was able to provide large windows on all sides, ensuring that all units offer a lot of light; there is at least one window in every room of the building. The lower-level units have patios on the north side, and the two top-level units have balconies on the back of the building, all with large windows.
Each renter receives roughly the same bedroom, bathroom, and closet spaces, minimizing the need for tenants in the shared-living units to set different rent levels for different rooms.
A floating footbridge was chosen to provide access to the second-level units and to the stairwell entrances that provide access to the third and fourth levels.
Part of the appeal of the offering is that it allows tenants to “get in on something social,” notes Jamie Weinbaum, chief operating officer of Ditto Residential. “The units are communal and the building is communal. Our tenants want to be in a boutique, curated experience. That goes with the idea that we are trying to provide.”
Permitting and construction issues affected final delivery of the project. Building occupancy, originally planned to start in August 2013, was delayed by three months until just before Christmas, which historically is a slow season for leasing. “That was not an ideal scenario,” notes Weinbaum. “Leasing apartments at that time of the year was extremely challenging. We knew we had to be creative. Our long waiting list had shrunk due to the time of year. With events and mixers, we were really doing a lot of matchmaking.”
By the end of February, the project was fully leased. “That exceeded our expectations,” Weinbaum says. The introductions and the personal touch were very important in the quick lease-up. The fact that only nine units needed to be leased was also helpful. To find tenants, the marketing team leaned heavily on craigslist, the place where most people in Washington look for shared housing offerings.
Three-bedroom units rent for about $3,640 per month ($3.75 per square foot), and four-bedroom units rent for $5,310 per month ($3.76 per square foot); the cost to rent a room in a three- or four-bedroom unit at Oslo ranges from $1,200 to $1,350 per month. These rents compare favorably with one-bedroom units being offered in the area, which typically rent for $1,800 to $2,200 per month.
Creating groups to lease units was necessary at the beginning and was an effective initial lease-up strategy. However, once these groups are formed and units are leased, the units tend to stay leased to the group even as individual tenants move into and out of the unit. Full occupancy is expected to continue in the building for some time. Notes Martin Ditto, “The likelihood of three or four tenants moving out at the same time is relatively low.”
Observations and Lessons Learned
In retrospect, it seems obvious that a shared-housing multifamily concept could work in Washington, but when the project started, many observers were skeptical. The idea of developing a new and very modern apartment building in the city that targeted the millennial market with this shared concept was relatively new and innovative. Ultimately, the project was able to tap into an underserved market and be successful. Ditto Residential has at least four other projects under way in the city using the shared housing concept.
Also, design matters. The large front windows, the floating access deck, and the exterior material all served to distinguish the project and draw attention to the building. Ditto saw the building attract a lot of interest because of the design. The design process works best when it is collaborative. The robust dialogue and investigation of issues—among the developer, the architect, the engineers, the contractor, and the marketing team—lead to an innovative and superior product. Notes Chuong Cao, principal at project architect DEP Designs, “If your process is thorough and sincere and dynamic, being bold and being creative is not a risk.”
Dean Schwanke is ULI senior vice president, case studies and publications. For more information on Case Studies, visit casestudies.uli.org.