Well, I knew it had to be true. On several occasions I've posted on how Chicago's affordable housing requirements most likely just end up exacerbating the problem, as in this post from 1 1/2 years ago: Chicago's Affordable Housing Quagmire About To Get Deeper. As I said at that time:
So who pays for the cost of this program? Well, it has to be the people who are buying in these developments that have an added cost to them. In other words the program makes housing less affordable for everyone else and just ends up exacerbating the whole housing affordability problem in Chicago.
I've noted several variations of this same conclusion since - all predicated on the fact that adding friction to a system always raises costs and hence prices. #Econ101.
Sure enough a report came out on Monday that focuses on the consequences of Chicago's pilot program that I referred to in my blog post that I linked to above. Looking at the three pilot zones, they basically provide the data to prove my assertions and also point out that this program is costing the city $635 MM in property taxes over the next 30 years. Although I couldn't find the report myself The Real Deal did a very nice job of highlighting some of the findings. In particular they note that "Plans for more than 3,000 new homes, including 300 affordable units, have been 'put on hold or canceled' in parts of the city where affordability requirements were tightened in 2017". More specifically, "At least another 11 projects proposed in the zones were scrapped 'because each of those developers determined that the capital stack does not support the economics of the deal, given the number of affordable units required,' according to Cushman & Wakefield managing director Susan Tjarksen."
Apparently, I had missed another great Real Deal article back in October, based on their own investigation, that came to the same conclusion and provides more specifics: “We’re not just a bunch of greedy bastards.” Developers bristle over city’s new affordable housing rules
Well, duh! The city's onerous requirements destroyed the economics of the projects. Like I've pointed out before, this is why you have had a huge vacant lot for years in Pilsen, just south of 16th Street. As the most recent Real Deal article points out:
The report includes a “case study” for a 224-unit apartment complex proposed in the Near North pilot zone whose net operating income would be about $4.2 million with no affordable units, giving it a 10.3 percent profit return after three years. The same building would reap just a 6.8 percent return if 10 percent of units were affordable, and 4.6 percent return if 20 percent of units are rented below market rate.
You can't fight math. Nobody in their right mind is going to invest money in real estate with a 4.6% return. Although the article does point out that some projects are moving forward despite these new requirements obviously the returns on those projects have enough cushion to absorb this burden. That doesn't change the fact that many projects were cancelled.
I could basically quote the entire article. It's really good. My favorite part of the article is where they quote a lobbyist for the Home Builders Association who points out that this program “put[s] the burden of a societal problem solely on the burden of multifamily [builders]”. This is my issue with all government programs/ regulations that target a particular group.
Now some skeptical social engineers will point out that this study was commissioned by Cushman & Wakefield and the Home Builders Association of Greater Chicago, which has a vested interest in the study's conclusions. However, the facts of the study are the facts. So, before ignoring this study I would suggest these people point out which of the facts they think were simply fabricated.
The bottom line is that the government just can't fight the laws of economics for long. San Francisco has attempted to create affordable housing forever and their attempts have been a dismal failure. We should learn from others' mistakes.
Gary Lucido is the President of Lucid Realty, the Chicago area's full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider's view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.