What will Governor Pritzker's housing plan mean for existing two-flats?

The impact of upzoning on existing low cost housing

Two-flats on Chicago’s Northwest Side. Photo Credit: Steven Vance via flickr.

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Evan Mast is an Assistant Professor at Notre Dame specializing in urban economics and public finance.

In this year’s State of the State address, Governor JB Pritzker proposed an ambitious set of housing reforms designed to address Illinois’ housing shortage. There’s a lot to like about the proposal. It legalizes Accessory Dwelling Units, caps mandatory parking minimums, and pre-empts local zoning to allow 4-flats on a standard Chicago lot.

But if history is any guide, that last provision is likely to face opposition from some community groups on the Northwest Side. These groups fought the last round of housing reforms, due to concerns that upzoning existing low-cost housing could result in more development pressure in neighborhoods like Logan Square. That’s an understandable concern. So it’s worth taking a deeper look at the research on upzoning and its likely impact on Northwest Side’s stock of less expensive two- and three-flats.

What the BUILD Act does

Governor Pritzker’s proposed Building Up Illinois Developments Plan (or BUILD) includes three major parts: reforms to zoning rules to enable more density, changes to permitting standards to make construction less expensive, and capital investments to homeownership and affordability. Likely the most controversial (and impactful) part of the trio is the zoning reforms. In addition to legalizing Accessory Dwelling Units, the proposal would permit up to four housing units on any lot between 2,500-5,000 square feet, 6 units on any lot between 5,000-7,500 square feet, and 8 units on any lot of more than 7,500 square feet.

This means that in Chicago, where our standard lot size is 3,125 square feet, four-flats would be permitted everywhere. That would be a significant change – today 41% of city land is zoned for single family homes. Notably, it could have an even greater impact in wealthy suburbs, where lot sizes are larger, housing is more expensive and zoning is more restrictive.

It’s beyond the scope of this article to estimate just how big of an effect that BUILD would have. That will depend in part on interest rates, construction costs, and other hurdles to development that the state and cities put in the way of new housing. But it’s a very ambitious piece of legislation – and when pieces of it have been replicated elsewhere, results have been promising.

Building more housing makes housing more affordable

There is a very strong academic consensus that building more housing makes housing more affordable. In large part, that’s because when we build new, market-rate homes, fewer renters have to compete for the remaining space in older and cheaper homes. In a 2023 Journal of Urban Economics paper, Evan tracked the “moving chains” that occur when a new, market-rate development is completed. In aggregate, for every 100 units of new market rate housing created, a city ends up freeing up 60 units of housing in census tracts below the city’s median income. In Chicago, every 10 units built downtown, or in Lincoln Park, means 6 fewer renters battling for a home in neighborhoods like Humboldt Park, Rogers Park, or Bronzeville.¹

Notably, this finding has been replicated in a number of cities and countries. Fang, Kim and Tyndall study the moves triggered by a 512-unit market-rate condominium built in Honolulu, and find that it created 500 local vacancies in units that were 40% cheaper than the new condo building. Researchers have found similar results in Helsinki (where they can take advantage of higher quality administrative data), and Switzerland.

Researchers also consistently find that city or regional up-zonings, such as the one proposed by Governor Pritzker, result in lower rents over time. A City That Works has previously written about research in Minneapolis that finds rents are 17-34% lower than they would be had the city not engaged in a package of zoning reforms that included legalizing three-flats citywide, and denser development on commercial corridors. In Auckland, a citywide upzoning is estimated to have reduced rents by 14-35%. And research from the Pew Charitable Trusts finds that these benefits are greatest for the lowest-cost units in the market, which face less competition when more units are built.

It’s true that if you look hard enough, you can find a paper that challenges these findings. There will always be heterodox findings and edge cases. And it’s healthy for researchers to continue to test this consensus. But policymakers should understand that among the field’s leading researchers, this is a consensus. When researchers at New York University’s Furman Center completed a comprehensive review of recent research on this topic, they reached an unambiguous conclusion:

“1) Increases in housing supply reduce rents or slow the growth in rents in the region; 2) In some circumstances, new construction also reduces rents or rent growth in the surrounding area; 3) While new supply is associated with measures of gentrification, it has not been shown to heighten displacement of lower income households; and 4) The chains of moves resulting from new supply free up both for-sale and rented dwelling units that are then occupied by households across the income spectrum.”

Pushback from parts of the Northwest Side

But even if the Governor’s plan is a good thing in the aggregate, it can still raise concerns in specific neighborhoods. Last year the state legislature considered a bill that would’ve legalized 4-flats on any lot above 5,000 square feet. Even though that change wouldn’t have impacted most Chicago lots, his bill faced pushback from a group of Northwest Side advocacy organizations.²

Advocates were concerned that denser zoning designation would encourage developers to redevelop existing low-cost 2-flats into new, expensive three and four flats. In their view, that might mean marginally more housing, but it could speed up the destruction of lower cost “naturally occurring” affordable housing in the process. Even if the City and State broadly became more affordable, that’s cold comfort to residents trying to hang on in neighborhoods where rents are rising now.

These advocates are not necessarily opposed to more density (notably, the recent Northwest Side preservation ordinance upzoned much of the area to enable two-flats to be built by right). But their efforts have been focused on restricting demolitions of existing naturally affordable housing stock, rather than building new market rate housing. And if history is any guide, they are likely to oppose broader upzoning efforts unless parts of the Northwest Side are carved out.

Displacement is the status quo

Unfortunately, it’s difficult to see how this approach will succeed. Logan Square, and nearby neighborhoods like Avondale and Humboldt Park are on the front lines of a wave of displacement spreading across the North Side from East to West. As Bo McMillan noted last year, the zip code centered around Logan Square lost 45% of its low income households between 2013 and 2023.

It’s also worth noting that the market pressures to demolish existing low-cost housing have already hit the neighborhood with ferocity. According to data from Redfin, over the last two years the median older 2-3 flat in the neighborhood sold for $610K. The median single-family home sold for more than twice that ($1.3M). Even high-end older multifamily buildings are worth hundreds of thousands of dollars less than the cheaper new single family units coming onto the market.

That creates an extremely strong incentive for buyers to purchase two- or three-flats today and either demolish them or convert them into single-family homes.³ Data from the DePaul Institute of Housing studies indicates that’s exactly what’s happening. Between 2013 and 2019, 9.8% of Logan Square’s 2-4 flats were lost to deconversions or new construction. Given the existing price premium for a new single family home versus an older two-or three-flat, it’s highly unlikely that there are many locations that are economically unfeasible to de-convert to a two-flat, but would be worth demolishing for a single family home. Instead, the question is whether an aging two-flat gets replaced by one unit or four.

And while ever-tighter rules against demolitions and deconversions may slow this trend, it’s hard to imagine that they can stop it entirely. The Northwest Side preservation ordinance mentioned above, raised demolition surcharges to $60,000 for single-family homes and two-flats. That’s still a fraction of the difference between the value of an older two-flat and a newer single-family home. And even a demolition surcharge can’t prevent a gut rehab of an existing two-flat that results in significantly higher rents.

Finally, it’s worth remembering that most of this naturally occurring two- and three-flat housing stock is over 100 years old. Over time, some combination of gut-rehabs, intensive maintenance, or demolitions will still be required to maintain the quality and livability of these buildings. Without more units to go around, that will translate into higher rents as well.

New four-flats are a much better alternative

Four-flats are good for other reasons. There haven’t been many three and four-flats constructed and sold in the greater Logan Square area over the last two years. But if you expand the sample over the last five, units in four-flats are going for $683K. That’s a lot of money - but it’s also just over half the price of a single family home over the same period ($1.2M). It’s also an attainable figure for a pair of CPS teachers in the first 5-10 years of their career, making roughly $100K a piece.⁴

It’s also worth noting that these units become a lot more affordable after a couple of years. Here’s a freshly renovated 4-bed townhome in Avondale listed for $455K. Just as the two-flats of the past have formed the bulk of our housing today, four-flats built now will help lock in affordability for future generations of Chicagoans.

And while a deconversion creates fewer units, replacing a two-flat with a four-flat adds supply. Remember the 60% rule noted above – it’s reasonable to expect that every four new units of market rate housing free up two or three units of low-cost housing on other blocks. If a young family moves out of an older two-flat or courtyard apartment into a new four-flat, we’ve just freed up a new, low-cost unit in the neighborhood. The new four-flat still might’ve replaced an older two-flat, but it can free up space in other low-cost buildings in the process.

Importantly, under the Governor’s plan Logan Square would also benefit from greater housing construction in other neighborhoods. Right now, neighborhoods farther east are even more expensive, which is pushing newcomers priced out of Lincoln Park or Bucktown further north and west. By adding more housing in wealthier neighborhoods, the Governor’s bill will reduce the number of people clamoring to buy a new single-family home or gut-rehabbed two-flat in Logan Square.

Evidence from other cities indicates that the supply side effects of building more housing everywhere dwarf the potential impacts of demolition. In California, displacement is twice as likely in low-income census tracts with low levels of market rate housing construction. In Seattle, 7 times more affordable units have been lost to rising rents (a problem the BUILD Plan would help address) than demolitions. And in Salt Lake City, just 1% of the housing stock lost between 2020 and 2022 was a result of demolitions for new development. As the City’s planning department noted, “By far the largest driver of displacement is rising rents and the growing gap between incomes and housing prices.”

To put it simply, over time we can expect the Governor’s plan to translate into more naturally occurring affordable housing on the Northwest Side. Demolition pressures are already being driven by single-family homes. Greater three and four-flat construction will free up more housing stock, create relatively more affordable new homes, and seed the future stock of lower-cost housing. And broad-based increases in housing supply elsewhere will help reduce displacement pressures in Logan Square.

Approach carveouts with care

Against this backdrop, policymakers should be careful about carveouts that could weaken the overall structure of the bill. It may be fine to maintain (or strengthen) penalties for demolitions and deconversions of existing two- and three-flats, or add additional density or floor area bonuses for low-cost units. It might also make sense to re-program some of the proposed $250M in capital grants to rehab and preserve existing low-cost housing in neighborhoods like Logan Square.⁵

But a wholesale exemption of the Northwest Side from the provisions of the Act would make displacement more likely.

It would also create a loophole that other communities may try to exploit. To-date, the loudest opponents of BUILD have been super-wealthy suburbs, fighting to maintain zoning codes that lock out all but the wealthiest. The Mayor of Barrington Hills, which currently maintains a 5-acre minimum lot size,⁶ has declared that zoning for multi-family housing would “destroy our town.” You can bet that they’ll look to take advantage of any potential tools that would let them opt out. If that catches on, it could quickly undermine much of the value of the bill.

A path forward

Displacement is a serious problem in and around Logan Square today, and community leaders are right to be worried about existing low-cost housing stock. But the status quo isn’t working. We operate in a regional housing market, and individual neighborhoods cannot regulate their way to affordability. Instead, broad-based upzoning coupled with targeted supports to avoid displacement offers our best chance to preserve affordability on the Northwest Side.

1. To put that in context, Chicago’s ARO currently requires that most new market rate buildings include a 20% affordability threshold. So the “moving-chain” based benefits of the new 100 units are around 3x as important for creating affordable units than the city-regulated ARO requirement.

2. Notably, the bill passed the Housing Committee in the House, but never made it to the floor of either chamber.

3. For more on this, we’d recommend Charlie Cohen’s Death of the Chicago Two-Flat, and Zak Yudhisthu’s look at deconversions and population change in North Center.

4. Based on Zillow’s home calculator and CPS’s teacher salary tool, at 8 years of experience.

5. This may also be helpful in rural parts of the state, where pressure for density is lower, but affordability challenges also exist.

6. To account for all horses, stables and riding trails. Seriously.