Last fall, when the city expanded its affordable housing requirements on apartment and condo construction in gentrifying areas, developers warned that new construction in those zones would dry up.
While affordability advocates expressed disappointment with the October 2017 rule’s narrow scope, property owners complained the new measure would whittle away profits, punishing builders and the residents the ordinance was meant to help.
The amendment to the city’s 2015 Affordability Requirements Ordinance directed developers to lower rents on up to 20 percent of their units in market-rate buildings inside the zones. That amount is up from between 2.5 and 10 percent of units under the original ordinance.
One year later, those same developers are pointing to an apparent slowdown in construction applications inside the designated pilot zones as evidence the amended ARO has failed. The ARO zones encompass the West Loop and chunks of the city’s West and Northwest Sides.
A review by The Real Deal of applications introduced into the City Council over the past two years shows a steep drop-off in those neighborhoods after the measure went into effect. While the total number of proposed units fell by 27 percent over that time, the number of affordable units cratered, dropping by 47 percent.
From November 2017 through September 2018, developers submitted plans for nine multifamily projects totaling 2,160 units inside the pilot zones. Of those, 225 units — or 10 percent of the total — were set aside as affordable. Only three of those proposals included plans to meet the 20-percent affordability mandate, and the rest were exempted because they were amendments to plans that had been approved before the new rules went into effect.
By comparison, from November 2016 to September 2017, developers filed applications for 15 apartment complexes in those areas totaling 2,948 units. Those include 423 affordable rental units, or 14 percent of the total.
While it’s still early, the drop in planned residential construction aligns with the near-consensus in the real estate industry that the new rules have pushed builders to roll up their blueprints and look elsewhere. The city, meanwhile, says it is still on pace to meet its goal of creating 1,000 affordable units in the zones by 2020.
Steven Fifield is among the developers who lobbied against the measure.
“Trying to make a living”
“We’re not just a bunch of greedy bastards,” said Fifield, who runs Fifield Companies with his wife, Randy. The firm owns 14 apartment complexes in Chicago, according to its website. “We’re just trying to make a living, and keep our heads above water while our costs keep going up.”
Fifield last year persuaded the initiative’s lead architect, Alderman Walter Burnett (27th), to soften the mandate by allowing developers to build some of the affordable units elsewhere in the zones. Even with that provision, Fifield thinks the policy puts too heavy a burden on builders.
Integra Realty Resources’ Ron DeVries agrees.
“Even under the old ARO program, where you could pay a buyout, you really had to squeeze the margins on construction costs to make the numbers work,” said DeVries, an appraiser who helps developers draw cost-benefit analyses of potential projects around the city. “Between rising construction and land costs, a lot of these deals were barely penciling out — and when you take another hit off that rental income, it becomes even more difficult.”
City planning department spokesman Peter Strazzabosco countered that the “pace of projects moving forward in the pilot areas is meeting city projections.” He added there were hundreds of new units set to be proposed at this month’s meeting of the Chicago Plan Commission.
“It’s worth noting that some of the same developers who claim the ARO pilots portend the doom of the housing market had said the same thing about the ARO amendments in 2007 and 2015, yet they continue to compete for development opportunities,” Strazzabosco added.
But projects like Fifield Companies’ 220-unit Logan’s Crossing development would have been nearly impossible to finance under the Milwaukee-area pilot zone’s 15-percent affordable mandate, Fifield said.
“We developers are subject to the whims of the banks and institutional investors that put up 95 percent of the money for these projects,” he said. “Investors will typically only invest if the yield is around 6 percent … and when you plug these lower rents in, it brings a 6 percent yield down to 4.7 or 5 percent.” Fifield Companies has built 15 million square feet of apartments and offices worth more than $7 billion in seven markets, its website says.
The new ARO’s early results don’t surprise brokers, who also opposed the new rules, according to Brian Bernardoni, a lobbyist and public policy director for the Chicago Association of Realtors.
“The market is reacting exactly the way we predicted it was going to react, and that’s unfortunate in light of the demand in many markets for affordable rental units,” Bernardoni said. “Developers are realizing that deals can’t pencil under these requirements. And if builders can’t build, realtors can’t sell.”
Lawmakers underestimate how difficult it can be for developers to absorb additional units with lower rents, said Noah Gottlieb, principal of Property Markets Group. The firm is eight months into a legal tug-of-war with Alderman Danny Solis (25th) over how many affordable units to include in its 465-unit “Parkworks” apartment complex in Pilsen.
“It costs the exact same to build an affordable unit as a market-rate unit,” Gottlieb said. “So if I’m losing money on 20 percent of my units … that can suddenly cut my [profit] margin in half. We have a choice where we build, and if you can get half the margin in Chicago as you can in Dallas, where are you going to build?”
Fifield and other developers have proposed alternatives, like tax incentives and density bonuses, that they say would get more affordable homes built in the neighborhoods that need them.
“A resilient bunch”
But Burnett stands by his policy.
“Developers have always been trying to come up with their own ways of doing things,” said the alderman, whose ward includes Fulton Market and most of River West. “But I’ve been doing ARO since before the city had ARO, and developers have never stopped knocking down my doors begging to do stuff in my ward.”
He pointed to five planned developments proposed so far in his ward that will meet the 20-percent affordable mandate. Riverside Investment & Development’s 4,100-unit River District mega-development and an upcoming Bond Companies mixed-use proposal will also play by the new rules, he added.
Rob Bond, president of Bond Companies, said “developers tend to complain” about the new rules, “but they’re a resilient bunch, and some will always figure out a way to make it work.”
Alderman Joe Moreno (1st), who co-sponsored the new measure, has “not seen development projects diminish,” according to an emailed statement from his chief of staff. But so far, only one big proposal in his ward — GW Properties’ 109-unit complex at 1750 North Western Avenue — has submitted official plans to meet the new mandate.
Multiple developers, including some who declined to speak on the record because their proposals are pending, described a “mad rush” to get their projects approved by the Chicago Plan Commission before the Nov. 1, 2017, deadline.
Burnett said providing 20 percent affordable is not “a big deal” for most developers, adding that the cost is “no different” from the money developers would have to pay through an opt-out fee under the 2015 ordinance. But setting such a hurdle could also hobble construction, said Matt Fiascone, whose Habitat Company builds affordable and market-rate apartments across the Midwest.
“In the affordable [development] world, the amount of available capital stays the same every year, for better or worse,” he said. “But the market-rate world is very sensitive to returns, and when you increase costs and flatten out the income, the music stops.” Fiascone added, “I think that’s what we’re seeing today.”