Imagine two apartment complexes in Chicago: one that will cost $380,000 per unit to build and another where expenses are $790,000 per unit. The second might conjure up images of luxury amenities and waterfront living.
But in reality, the $380,000-per-unit tower is the ritzier of the two. The market-rate high rise, currently being built by Vista Properties, is in the city’s trendy Fulton Market neighborhood, just west of the Loop. It will have a rooftop pool, a golf simulator and a 24-hour doorman, among other luxury amenities.
The $790,000-per-unit building is an affordable housing development in progress on the Far North Side of the city where tenants can expect to spend up to an hour on public transit getting to and from the Loop and return home to amenities that aren’t luxurious.
Huge gaps between affordable and market-rate development costs aren’t exclusive to Chicago. A slate of recent studies and news reports indicate that in many U.S. cities, building affordable has become pricey, with some developments in Washington, D.C. and San Francisco passing the $1 million-per-unit threshold.
This is a conundrum in a country purportedly dedicated to solving a housing crisis for residents whose incomes aren’t keeping up with living costs.
“If you’re spending $800,000 or $900,000 on one unit, that’s a unit that doesn’t get built,” Chicago-based developer David Doig said.
Want to build more housing, particularly affordable? Then, “we should be laser focused on how we can get the most amount of units with the least amount of cost,” he said.
The hefty price tags aren’t a revelation for those in the know. But as Americans increasingly push for more housing options, the contradiction — that affordable development is expensive to create — has trickled out to the mainstream. Debates over how we got here and what to do about it have been gaining traction on social media and making headlines in the Washington Post, the Wall Street Journal and regional publications.
What drives up spending? Affordable housing developers have to pay for the usual line items: debt, materials and labor, all of which have been going up across the country.
But they also spend to comply with extra layers of bureaucratic red tape from whichever government agencies are subsidizing their project. And, they may shell out for amenities that the private market might not support, like four-bedroom units for families or on-site daycare facilities, meaning that price-per-square foot comparisons may not be apt.
“A lot of times, the news headline is just the per-unit cost without taking into account any apples-to-apples comparison about the deals … It can drive me crazy,” San Diego-based affordable housing developer Jimmy Silverwood said.
Still, there may be hope for making the development of affordable units more affordable. A slew of public policy changes and solutions from the private market are showing that housing can be built for less, even while making deals more appealing to investors.
The blame game
The costs of debt, construction materials and labor are putting a strain on developers of all kinds. But when it comes to determining what factors drive up the costs of affordable housing specifically, there’s plenty of blame to go around, developers say.
A majority of affordable housing developments in the U.S. are funded by the federal Low Income Housing Tax Credit, or LIHTC, system, which awards either 4 or 9 percent tax credits to affordable housing developers. Those developers then sell the credits to institutional investors or banks in exchange for the capital needed to get their project going.
While the system helps developers secure funding to complete a project and offer discounted rent, it also means developers have to wind through a labyrinth of regulations to win the tax credit allocation in the first place.
Developers also typically apply for additional funding from city or county housing agencies that may attach their own set of requirements — and expenses.
“The only restrictions should be that they pass inspections and that everything is done according to code. But they create this race where it’s impossible to get to the finish line.”
Take a recent $66 million project proposed by affordable housing developer National CORE.
The projected cost to build the 81-unit apartment complex in the Los Angeles suburb of Agoura Hills comes out to about $800,000 per unit. A typical market-rate building in L. A. County costs about half as much to build, a recent study from the Rand Institute found.
In its LIHTC application, CORE noted that it set aside $2.1 million for local impact fees (which apply to projects of all types), $1.8 million for architectural and engineering costs, $777,000 for permit processing, $285,000 for energy and prevailing wage consultants, $145,000 for legal and other consulting costs and $70,000 for an environmental audit for a total of about $6 million in costs that could be impacted by changes to affordable housing regulations.
“You’ve got to hire a consultant to design and implement. You’ve got to hire a sustainability consultant, you’ve got to have a compliance consultant, and you’ve got to have an architect that’s LEED certified,” Doig said.
Dozens of design standards required by the Los Angeles County Development Authority dictate details from the number of washers and dryers in a building to the thickness of its floorboards. The goal is to prevent developers from cutting corners only to justify the lower rents, not require them to get fancy.
“If you didn’t know a lot about the industry, you might think that somebody’s selling a $900 toilet seat,” Wayne Beals, a Chicago Realtor who specializes in sustainable developments, said. “That’s not what’s happening here.”
Sometimes, regulations bake in goals that do not have a direct bearing on the finished apartments. Political objectives can include prevailing wage requirements, which push up labor costs in exchange for well-paying, union-backed jobs. Environmental regulations might mean developers have to include drought-resistant landscaping or energy-efficient appliances.
The environmental standards can, however, reduce operational costs in the long run, Beals noted.
“We need to be building buildings that are resilient, that have a vision for a low-energy, cheap-energy future,” he said.
And then there are the soft costs, which tend to escalate more significantly for affordable developers. Paperwork-related costs and fees on service providers like architects, engineers, consultants and lawyers came out to about $187 per square foot for LIHTC developments compared to $84 per square foot for market-rate developments in California, according to the Rand Institute.
Plus, there is often more community pushback on affordable projects which can drag timelines out and rack up costs.
While the price gap isn’t exclusive to the coasts or big cities, it does vary somewhat. In Texas, for example, the delta between market-rate and affordable housing soft costs is smaller. The typical LIHTC development carries $60 per square foot in soft costs while a market-rate development has about $22.
Some states are taking action.
In Colorado, where state legislators have passed a series of builder-friendly policies, affordable housing developers actually carry about $50 less per square foot in total costs than market-rate developers.
Cutting red tape
A recent streak of YIMBY-style policies has taken effect across the U.S., as municipalities try to make it easier to build.
Some of the ideas are immediately controversial. Allowing the use of non-union construction for affordable housing in Chicago, for example, could be a political landmine.
Others have not yet proven their value, like streamlining permitting processes or clearing up other administrative hurdles that add time — and money — to a project.
New York City’s “City of Yes” initiative sheds parking minimums and legalizes accessory dwelling units in most neighborhoods. Passage by the City Council was a victory, but it’s still early days in the real world.
Chicago Mayor Brandon Johnson issued an executive order integrating the processes for approving both residential and commercial building projects. The program, known as the “Cut the Tape” campaign, targeted 14 different departments.
And in California, some housing projects have been exempted from prevailing wage requirements and certain aspects of environmental review.
While reforms can be helpful and drive construction costs down, they don’t always address the specific delta between market-rate and affordable housing development costs.
“The only restrictions should be that they pass inspections and that everything is done according to code,” Chicago’s South Side Builders Association President Andy Schcolnik said. “But they create this race where it’s impossible to get to the finish line.”
Politicians hear a different question: how many corners are they willing to cut to get more housing built as quickly as possible?
“We’re trying to solve labor, we’re trying to solve social inequality, we’re trying to solve workforce development and we’re trying to solve all this stuff with low-income housing, when really we should be trying to solve housing,” Beals said, picking up a common metaphor for this approach: the everything bagel.
“I am with them on this bagel problem,” he said, suggesting that housing could be exempted from having to meet such a handful of social goals. “However, just because an everything bagel is horrible and tastes bad doesn’t mean we have to have a plain bagel.”
Financing fixes
The law of supply and demand holds in the world of affordable housing. Because of stagnant wage growth and high inflation, more Americans want affordable places to live, driving demand, while the expense of building tamps down supply.
Some real estate players and investors are taking notice of this dynamic.
One is Safehold, which is creating a ground lease structure for affordable housing developers that allows them to reduce upfront development costs.
Similarly, the Shidler Group has begun shifting away from its business in office ground leases in favor of multifamily. In 2022 alone, the firm acquired the land under 13 multifamily properties with more than 3,900 units, which could lower starting costs.
“These folks are seeing this as an annuity, especially for the long-term ground leases. They’re saying, you know, the risk is little to none, right? This development has 1,000 people on the waiting list,” Silverwood, the San Diego developer, said.
Another policy effort seeks to cut borrowing costs.
At the federal level, the nation’s largest funding source for affordable housing, the Low Income Housing Tax Credit, will increase from a 9 percent subsidy to a 12 percent subsidy in 2026.
Meanwhile, the city of Chicago established a $135 million revolving loan fund that essentially allows the city to issue low-interest loans to affordable housing developers. Interest collected on the loans goes back into the fund.
“[LIHTC] certainly comes with a lot of requirements that are imposed by the federal government in terms of how you implement the affordability portion of it and so that drives up the cost per unit,” Chicago’s Deputy Mayor of Economic Development Kenya Meritt said. “But when you think about our other models … those costs per unit are more in alignment with what you’ll see in the private market.”
A series of units subsidized by Chicago’s new “Missing Middle” funding program which gives grants to developers in specific neighborhoods were recently approved. They range from townhouses to six-flats, totaling 108 units across 30 buildings and are collectively valued at $39.4 million. The total cost per unit? About $365,000.