Tech companies are already flipping houses — but can they build some too?

Ryan Johnson used to work at a San Francisco tech company, Opendoor, that makes software for buying and selling homes. Four years ago, he decided he’d rather build them.

Johnson, who grew up in Phoenix, moved back to Arizona and joined the growing ranks of tech industry expats now trying to shake up the U.S. housing market. The opportunity he thinks he spotted: not enough homes in walkable areas.

“The majority of the U.S. wants to live in a walkable neighborhood, but only 8 percent does,” he said. “And it’s because the U.S. largely stopped building walkable neighborhoods with the advent of the car.”

Johnson, the CEO of Culdesac, is planning to open a 1,000-person, car-free development this year in Tempe, near Phoenix. The company straddles the line between the housing and tech worlds, employing several software engineers and forming partnerships with tech companies including scooter-operator Bird. It’s been eyeing locations such as Denver, Dallas and the Raleigh-Durham area in North Carolina for future sites.

The startup is part of a rising trend of tech entrepreneurs turning their attention to housing construction, an industry with a steep learning curve for outsiders and one that for decades has resisted disruption.

The push seeks to address an urgent need: the massive shortage in the inventory of U.S. housing units. Last year, Realtor.com estimated the gap between the demand for homes and the available supply was 5.24 million units, and rents have risen more than 20 percent in some markets, with similar rises in home prices.

But it’s far from the tech industry’s first foray into housing. Websites from Redfin to Bankrate have long helped people search for housing or financing, and more recently, tech firms such as Zillow and Opendoor have pushed into a type of large-scale house-flipping known as iBuying, adding a new wild card to the housing market.

About half of Americans, 49 percent, said in a Pew Research Center survey in October that the availability of affordable housing in their community was a “major problem.” That was higher than the percentage who said drug addiction, Covid-19 or crime was a major problem.

“We’re seeing a lot of innovators step into the housing space with creative ideas,” said Michelle Boyd, program director for the Housing Lab, a nonprofit adviser and investor in housing startups that spun out of housing research at the University of California, Berkeley. “It’s a really big need, and there’s a lot of room to make money, if you can break through with innovation.”

Startups are looking at just about every part of the housing development process. Tech-infused companies are building software to help would-be builders identify buildable lots. Others are mass-producing tiny houses that can fit in backyards, especially in California, where newly loosened regulations allow for “in-law units” and duplexes. Still more are working on labor logistics, and they’re trying to streamline factory systems for manufactured housing, including through 3D printing.

“I don’t think we’ll have robotic construction workers in the near term, but there are parts of the process that could benefit from automation,” said Pete Flint, who co-founded the online marketplace Trulia in 2005 and is now an investor in early stage companies.

“You go to a construction site, and it’s devoid of technology. Whereas you go to any other big part of our economy, and there’s technology driving significant portions of it, whether that’s hospitals or whether that’s factories,” Flint said, citing research on construction productivity. “It does feel incredibly antiquated.”

Venture capitalists, who typically invest in software ideas, are taking more notice. Culdesac recently announced it had raised $30 million from investors including Silicon Valley heavyweights Khosla Ventures and Founders Fund.

Madelon Group is among the startups attacking the problem with software. It recently released its central product: an app, REDtech, that allows people to research sites for potential housing, automatically generate floor plans and connect with financiers and suppliers.

“We need to massively increase the supply of housing,” said Dane Andrews, Madelon’s chief operating officer. He said the process for infill development is especially archaic, and he imagines anyone from university officials to “mom and pop” developers to ski resorts eventually using the company’s app to build more multifamily housing.

The company is just starting, but since launching in early January, it said it has 45 active users who have underwritten 901 properties in three markets: Denver, Los Angeles and New York. It’s also working directly as a development partner on a 40,000-square-foot project in Denver to build small studio apartments.

Other technology-focused housing startups are less focused on creating software platforms and more on materials or even using factories to build modular homes, a practice more common in Europe than in the U.S. One builder, Factory OS, has investments from Facebook and Google.

Icon, a Texas-based company, raised $207 million from investors last year to work on 3D-printed homes and has partnered with a more established homebuilder. Another 3D-printing homebuilder, Mighty Buildings, based in Oakland, California, has raised $100 million, TechCrunch reported.

But there have already been warning signs of how tech-industry thinking can go wrong when applied to housing construction.

Katerra, a Bay Area startup that styled itself as a kind of Tesla for housing, declared bankruptcy last year after raising nearly $3 billion from investors. The Information, a tech news website, reported the company fell short of sales goals and that employees exaggerated financial reports.

Another Bay Area startup focused on modular construction, RAD Urban, went out of business last year despite a promising start.

And in December, Alphabet folded its “smart city” division known as Sidewalk Labs into Google. Toronto had earlier backed away from a high-profile partnership with Sidewalk Labs.

“We’ve seen people move into this field as innovators without taking the time to fully understand the problem they’re trying to solve and why that problem has been created,” Boyd said, without referring to specific companies.

“At the end of the day, we live in a physical house. We don’t live in the metaverse, so there are limits to how much software can help,” she said.

A primary obstacle to construction remains local political opposition, as people who live near proposed developments often oppose them, citing increased traffic, noise or other objections. Zoning regulations in most cities often limit apartments, in particular.

That’s not something tech startups have been able to do much about, said Kevin Erdmann, who writes about housing as a senior affiliated scholar at the Mercatus Center, a libertarian institute at George Mason University.

“I think it’s commendable what these companies are doing, and I think they’re accomplishing interesting innovations,” Erdmann said. “But the innovation we really need to make housing affordable is a political innovation.”