Let’s make it cheaper to build

Construction costs are a major driver of Chicago's affordability challenge

Construction downtown. Credit: Michael Curi

We spend a lot of time talking about the cost of housing around here. It’s particularly concerning for the Chicagoans who are homeless or struggling to make rent. But housing costs matter for everyone – housing is the single biggest expense for most families. A more affordable city also has an easier time retaining existing residents and attracting new ones. Conor has a nice post about why growth matters – not only is it something to be proud of, but adding more taxpayers would help spread the burden of fixed costs like infrastructure and pension debt.

If we want less expensive housing, we need to build more of it – giving tenants more leverage with landlords and increasing opportunities for first-time homebuyers. We’re not building nearly enough today.

To justify new construction, developers need to believe that the value of the apartment rents (or condo sales) in the new units they build will exceed their costs to buy land and construct a building, plus earn a return on their investment. These are commonly referred to as ‘break-even rents.’ In a 2023 paper, economists Michael Erikson and Anthony Orlando estimate those costs for 50 US cities, by collecting data on construction costs, land prices, and required rates of return (measured by the capitation rate of buildings at time of sale).

In Chicago, they find that construction costs have increased break-even rents by 18.6% for 3-story projects, and 14.5% for 12 story projects. Compare that to a national increase of 16.6% and 12.2% respectively: on both an absolute and relative basis, construction in Chicago is getting more expensive.

Chicago wasn’t exactly cheap to build in to begin with. RSMeans, a construction cost data provider (and source for Erikson and Orlando’s estimates) creates an index to compare the costs of like-for-like construction across cities. According to their data, we’re the fourth-most expensive big city to build in, after New York, San Francisco, and San Jose.

At the end of the day the cost of building new housing determines how high rents need to go before we get new units (which then help put downward pressure on rents). Recent reporting from Crain’s points out the next step: developers look to lower-cost markets to build, leaving Chicago with fewer units and rising rents. And unlike high land costs, which can be mitigated by upzonings, there isn’t an easy solution to make the building itself cheaper to construct.

You can also see the effects in city permit data. Yonah Freemark points out that Chicago has seen significant construction downtown, and to a lesser extent on the well-off North Side, where development has been limited by land-use restrictions. But there has been minimal permitting in South and West Side neighborhoods.

Source: Urban Institute

This is a serious problem for the long-term health of the city. And high construction costs a key contributor to a lot of our other challenges:

• Higher Rents: When construction costs are high, developers can only build projects that command high rents. Projects geared to moderate income residents don’t pencil, and sorely needed housing can’t be built in low or moderate-income neighborhoods until rents have risen and displacement is already underway. That’s a recipe for displacement in gentrifying neighborhoods across the Northwest Side. It’s also why we have thousands of vacant lots across the South and West sides, but also have a shortage of 120,000 affordable housing units.

• Poorer Housing Quality: High construction costs and low rents create twisted incentives for property owners. When home values fall below the cost to replace them, there’s not much economic incentive to maintain existing properties (and it can be cost-prohibitive if rents fall below the cost of maintenance and property taxes). Landlords don’t have to worry about competition from new buildings. Earlier this year, Injustice Watch ran a series of stories documenting exactly this problem primarily on the South and West Sides – landlords who slowly run buildings into the ground as building code violations pile up, while their tenants have nowhere else to turn.

• Less Publicly Funded Housing: High construction costs are just as problematic for City-funded projects – that’s part of how we ended up spending almost $600,000 per unit on affordable projects in 2023.[1] When construction costs rise and budgets are tight, we’re forced to build fewer affordable units than we otherwise would. And if we could drive down construction costs, we could build a lot more city-funded housing with the money we have.

This is a (somewhat) solvable problem

I’m not going to pretend that there’s an easy solution here – or that reducing construction costs on their own will be sufficient to drive new construction across the city. But can make it easier for new housing to pencil. Here are some starting points:

Legalize 7 and 12-story buildings: Total rent paid increases linearly with building height – adding 20% more units generally means you can collect 20% more rent. But construction costs are more complicated. In a different 2022 paper, Orlando and Erikson show that the marginal cost of adding another floor spikes from three to four stories (when builders generally shift from wood frame to steel) and then again from 7 to 8 stories (when buildings require a deeper substructure, faster elevators, and more expensive electric, water, and fire alarm systems).

The authors then calculate the required break-even rent per square foot for a typical building at each height. You can see the calculation for Chicago below. The dashed red line is the average rent in Chicago across zip codes – representing the fact that in large parts of the city, new multifamily housing doesn’t pencil out today.

Required break even rents for new multi-family construction, by number of stories

Chicago, 2018

(Orlando and Erikson, 2021)

I think this research is fascinating, and I’d like to spend more time on it in future pieces. But the immediate takeaway is that there are sites across the city where it might not be worth it to build 4 or 5 stories, but it would be worth it to build 7. Alders exploring new commercial corridor upzonings may want to take that into account. For example, maximum heights for B3-3 zoning, which was used for the recent Western Avenue upzoning, range between 50 and 70 feet depending on lot frontage and the number of on-site affordable units. Slightly higher allowable heights could make the difference between low-rise units (or empty lots), and significantly more investment.

Reform the planned development process: In another recent article, Yonah Freemark notes that 58% of new housing units built in the city were part of planned developments (PDs).[2] Those are special, one-off projects that require round after round of review from the plan commission, zoning administrator, and Department of Planning and Development Staff staff, along with zoning committee and city council approval (which continue to defer to the local alderman in almost all cases). He notes that process can cost tens of thousands of dollars and fees and take more than 250 days to complete, which drives costs up further.

There’s a wide range of potential improvements that could be made here – likely including process changes to limit the number of rounds of separate departmental review. One starting point might be minimum allowable density thresholds based on the acreage of the PD site. That would provide a lower density bound on the bargaining space between developers and the city, giving developers the option to walk away from the PD process with a degree of density in a timely manner—and certainty that they can get something built.

Embrace standardized development: Repeatable designs with common materials and assemblies are an important part of keeping costs down. They make it easier to train a workforce, buy materials in bulk, and steadily improve construction processes. That’s why so much of Chicago’s older housing stock is so recognizable. Bungalows were built out of kits, six at a time on a single block. But too often today, Alders reject developments for being too ‘copy-paste’ or similar to other nearby projects.

Low cost, copy-paste housing. Credit: Chicago Architecture Center/Eric Allix Rogers

The economics on bungalows have changed in the last hundred years, but there are still opportunities to support more standardized, repeatable housing forms. One promising approach here is the Reclaiming Communities initiative, which is building units at scale on the South and West sides. Standardization is an important part of the approach—Kinexx, a local modular home builder in Chicago is building some of the units.

Issue permits faster: Time is money – especially when interest rates are high. According to Chicago Cityscape data, in the last 30 days the average building permit took 118 days from application to issuance.[3] It’s very hard to standardize that metric relative to other cities, but shorter timelines would help. In Phoenix the Planning and Development Department recently announced a range of steps to speed up building timelines, including cutting a range of required permits. The department sets and reports turnaround times for a range of permit categories and is also auditing performance with secret shopper checks and customer satisfaction surveys.

Simplify the building code and design guidelines: Every new design guideline and code requirement adds costs. I’d also bet that these costs compounds during periods of inflation. Usually, if materials get more expensive, developers can try to substitute with other products or construction designs. But that’s impossible if specific materials or designs are required by code. Single-stair reform is the item here that gets the most attention, and elevator design requirements are another. I’d like to dive in deeper in the coming weeks. Chicago's building code rightfully updated to the International Building Code format and adopted many IBC standards, but we’re now on the 2018 for most of them. We’d likely benefit from aligning to the 2024 version (with the exception of items like single stair and elevators).

There are also opportunities to get rid of design requirements that have nothing to do with the code. Thee city has nasty habit of layering on special zoning districts and design guidelines that make it steadily more expensive to build. It’d be nice to start moving in the opposite direction.

End mandatory parking minimums: In Chicago, underground parking costs $36,000 a spot to build, but a third of them go unused overnight (when utilization should be at its highest). The 2022 Connected Communities ordinance made it a lot easier to waive the city’s parking requirements near transit, but the process still requires approval from the Zoning Administrator, which takes time. Developers will still build the parking that residents are likely to demand, but there’s no reason they should be forced to spend time or money dealing with rules to require them to build any more.

Technically hard, but maybe politically possible?

Nationally, YIMBY-style land use reforms have gotten a lot of attention because they’re so straightforward (“legalize more housing”), and because they present such a big opportunity in the highest-cost cities. But in Chicago, and in lots of other non-coastal cities, rising construction costs are likely a bigger problem.

That doesn’t mean land-use reforms aren’t helpful. We need all the housing we can get, and there are places where more flexible land use rules can make construction more cost effective. But if we want to make real progress on affordability, we can’t just make it possible to build in more places. We also have to make it cheaper to build everywhere.

A lot of this stuff is technically hard to figure out, and I certainly don’t have all the answers. But as Andrew Burleson notes, while solutions to construction costs may be harder to figure out that simply upzoning, they may be politically easier to implement. The Mayor’s Cut the Tape initiative aims to speed up permitting, consolidate design reviews, and end mandatory parking minimums. And at the state level, a report released last week by the Ad-Hoc Missing Middle Housing Solutions Advisory Committee also identifies construction costs as a major burden to address.[4] Given the scale of the problem, these initiatives are just a starting point – but we have to start somewhere.

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[1] It’s not the only reason – we’ll dive deeper into the other reasons affordable units are so expensive in future pieces.

[2] These pieces are part of a collaboration between the Urban Institute and Chicago’s Metropolitan Planning Council. I’m really excited to see where this goes and think it could be a smart (and repeatable) model to translate academic research into Chicago-specific policy ideas.

[3] That includes time that permits sit with applicants for revisions during the process, which I think is the right number to worry about. The goal is to build faster, and we should be trying to identify ways to reduce the number of days that applicants have to spend on revisions and updates.

[4] This report is exciting for a bunch of other reasons as well – again a topic for another day.