‘Inclusionary zoning’ excludes Chicago’s poor from housing

They call it “inclusionary zoning,” but in reality the government mandate for a portion of developments to be “affordable” limits supply and drives up costs. Chicago should pull back from this form of rent control.

Housing is too expensive for 43% of Chicagoans, so city government tried to mandate affordability by imposing “inclusionary zoning” – a form of rent control that has helped too few and driven up costs for too many.

If housing costs more than 30% of a household’s income, that family is considered housing burdened. That definition fits 43% of Chicagoans, but among the city’s poor over 2 in 3 spend more than half their income on housing.

Chicago city leaders since 2007 have imposed “inclusionary zoning” to try to fix the problem. While well-intentioned, it has kept housing expensive and supply low.

Inclusionary zoning usually requires developers to “set aside a proportion of units in market-rate residential developments to be made affordable for lower-income households,” effectively capping the rent that can be charged for those units. In reality it is targeted rent control.

It has decreased supply by making it more difficult to build densely in desirable neighborhoods. The best way to improve housing affordability is to increase supply, so better solutions aim to eliminate regulations rather than enforce new ones.

Chicago’s inclusionary zoning policy gets worse with each revision

Chicago’s inclusionary zoning policy, called the Affordable Requirements Ordinance, was first established in 2007. It applied to residential developments with 10 or more units that received a zoning change, including land purchased from the city, received financial assistance from the city or were part of a planned development downtown.

The ordinance established “affordability” requirements on 10% of the units. Rental units subject to the ordinance are typically required to be affordable to someone who makes 60% of the area median income and is limited to residents at or below that income bracket. That would mean an individual making up to $47,100 or a family of four making up to $67,260.

A studio apartment would be capped at $1,123 and a two-bedroom apartment would be capped at $1,429 before utilities. These affordability restrictions for units under the ordinance are managed by the Chicago Housing Trust, which sets the amount they deem to be “affordable” for certain income brackets.

Developers could opt out of this requirement by paying fees. Those fees generated $124 million for the city, demonstrating just how unpopular this policy was for developers. It was regularly used by developers until the 2015 update that limited this option. It increased the fee in high-income neighborhoods, lowered it in low-income neighborhoods and mandated developers had to build at least one-fourth of the 10% rent-capped units.

Southside Weekly reports while inclusionary zoning policies such as the affordability ordinance are theoretically meant to “combat segregation by providing low-income families access to an otherwise exclusive affluent neighborhood,” Chicago’s program has failed. The policy’s tiered fee structure malfunctions in two ways: higher in-lieu fees in affluent areas discourage larger developments precisely where they're needed, while lower fees in lower-income areas make it cheaper for developers to opt out of building affordable units there. This results in less housing construction across all neighborhoods, driving up costs citywide while failing to create the intended affordable units in either location.

In April 2021, the City Council updated the Affordable Requirements Ordinance once again. The changes aggravated the problems. The 2021 update introduced measures to address concerns about displacement in rapidly developing neighborhoods, referred to as gentrification. It established “community preservation areas” in locations where housing market trends and demographic shifts indicated potential displacement of residents.

The revised ordinance also aimed to increase production by increasing from 10% to 20% the total number of units developers are required to set aside as affordable. It again decreased developers’ option to pay fees if they didn’t want to build the affordable units. “Under the new law, developers must build at least half of the required units. The other half can be forfeited in exchange for fees. Developers can decrease that 20% requirement by building family-sized units or pricing [affordable] units below 60% [area median income].”

Early data has already shown these new requirements hurt construction. Rather than being able to pay in-lieu fees to avoid the affordability requirements, the additional limitations are inspiring new workarounds and limiting contributions – ultimately reducing housing supply and hurting affordability.

The Illinois Answers Project reported as of 2023, “city approvals for marquee apartment projects have been smaller and less frequent since the City Council passed [former Mayor Lori] Lightfoot’s 2021 revamp of the city’s Affordable Requirements Ordinance.” Their investigation revealed during “the 16 months before the new rules went into effect, the commission approved projects totaling more than 14,000 new homes, including nearly 1,800 units designed to charge below-market rents without subsidy.”

In the 16 months after the new ordinance passed, the council approved just under 6,900 units. Daniel Hertz, director of policy for the Chicago Department of Housing, said the sharp drop-off of over 7,000 units shouldn’t be taken as a sign the new policy is failing. Then again, it sure is not a sign of success.

Inclusionary zoning hurts more than it helps

While there are often major disagreements between economists on the right and the left, there is near universal consensus among economists on the harms of mandated inclusionary zoning as a form of rent control. In his book “Nowhere to Live,” James Burling of the Pacific Legal Foundation describes a 1990 survey asking U.S. economists of all political persuasions what they thought about a series of statements about economic theory: “When presented with the statement: ‘A ceiling on rents reduces the quantity and quality of housing available,’ 93% agreed. There was more agreement on that statement than for any of the other 39 propositions.”

Economists are not the only ones who agree about the harms of these policies. Builders consistently criticize rent control policies, including inclusionary zoning, for the extra costs they impose on developers and building owners. The National Apartment Association explains mandated inclusionary zoning “distorts the housing market by acting as a deterrent and disincentive to develop rental housing. While the intent is to generate affordable housing, these mandates increase costs for consumers overall.”

The left-of-center Brookings Institution asserts while a rent control policy, such as inclusionary zoning, can sometimes appear to make a difference for current tenants in the short run, “in the long run [it] decreases affordability, fuels gentrification and creates negative externalities on the surrounding neighborhood.”

Reforming Chicago’s housing the right way

The crisis of housing affordability that Chicago is facing needs to be addressed, but it can’t be through more regulations that hurt more than help. Instead, city and state leaders should reduce regulations that limit supply and in turn hurt affordability. There are proven ways policymakers can create a real impact on housing costs.

Chicago policymakers need to recognize rent is a function of how much it costs to build and run a unit of housing, how much housing is on the market and how much demand there is for that housing. They can impact costs and supply through sensible reforms, particularly those related to building fees, permit wait times and other costs that target developers. Recently and historically, this has proven to be the best method for large cities seeking to fight housing crises.

Chicago’s housing reforms should include:

1. Streamlining the permit approval process. Chicago needs to permit more new housing units. Chicago currently approves fewer units of housing per capita than any of the top 10 most-populous cities in the country. During the past five years, the city only approved 209 permits per 100,000 people. Austin, Texas, performed the best, approving 1,713 per 100,000 people. Housing will never be affordable in Chicago unless enough of it is built, and that requires permits. Making the process easier and quicker would save developers money. Those savings would translate to lower rents.

1. Reducing development costs. Policymakers could also work to reduce the fees and city-imposed costs associated with building. New residential construction comes with a minimum fee of $3,450. In Houston, this cost would be a little over $1,500. These are additional costs artificially imposed by the city that increase the cost of building and make housing less affordable. Many developments require a lengthy approval process through the City Council (in October it averaged 96 days). The process is slow, but these barriers – and costs – add up quickly.

1. Expanding multi-family zoning. Reducing zoning restrictions is another reform that would lower the cost of housing. Increasing the number of units that can be built on a lot naturally spreads out the costs of the land and construction, making it more feasible for owners to charge lower rents. This kind of solution is blocked in Chicago by restrictive zoning regulations: only about 21% of the city is zoned for multi-family housing. Loosening these restrictions and streamlining the process would also lower housing costs.

1. Removing mandates such as the Affordability Requirements Ordinance. Chicago should remove the Affordability Requirements Ordinance. Housing affordability issues are, at their core, an issue of housing supply. Policies like this that disincentivize building or pressure builders to look elsewhere are a temporary fix at best and an accelerant at worst.

While inclusionary zoning and rent control policies may seem appealing as short-term solutions to housing affordability, evidence shows they often worsen the problem in the long run. Instead, Chicago should focus on proven reforms that would encourage housing development. Increasing the housing supply will ultimately lead to more affordable housing options for residents of all income levels.