The Dollars and Sense of ADUs in Chicago
Housing Plus assists property owners to add accessory dwelling units (ADUs) within existing properties. As a volunteer-led group, we have offered scores of project opportunities across 20 aldermanic wards since 2005. Successful projects ranged from adding a single ADU in a 2-flat to reconfiguring relatively unproductive ground floor office and storage space to 10 new apartments in a mixed-use building.
Kudos to the Urban Land Institute (ULI) for encouraging the City of Chicago to adopt a new ADU ordinance and convening dozens of participants to help produce “Unlocking Accessory Dwelling Units in Chicago,” a 42-page report and list of recommendations. The ULI report insightfully challenges the City to relax procedural barriers and other restrictions to building ADUs and offers justification in referencing initiatives that have achieved modest success in other parts of the U.S. Fewer restrictions = more ADUs. By engaging community, industry, and public stakeholders, ULI Chicago also laid the groundwork for building community support for a new ADU policy.
Not all ADUs are created equally. We recommend the City pursue two ADU strategies. One can be for residential property owners interested to add a unit in their basement, on the back of their house, or as a new freestanding structure. The other should aim to harness the substantial production potential within existing commercial buildings by converting unproductive space into new apartments. We think the focus should be on the latter and will explain why.
Understanding the Economics
The ULI report defines ADUs as “smaller, independent dwelling units with a full kitchen and bathroom, (that) can be attached or detached from a primary residential building. ADUs can be created in new construction and existing residential buildings by repurposing basement and attic spaces, by building an extension or as detached units in the backyard.”
The report presents cost scenarios for adding ADUs. Projects involving more structural work and enhancements to systems (water, sewer, electric) tend to cost up to 2x the cost of converting existing space with existing systems and structural elements. Putting it plainly, it is cheaper to build inside a building envelope than not.
Our experience suggests a high-quality rental unit can be produced by converting unproductive space within the building envelope for $70-85,000/per unit, soft costs included. Economies of scale kick in to drive down the cost per unit when adding more than one unit, which further enhances the viability of an adaptive re-use ADU project. While ADU projects will never generate windfall profits, a modest return can make sense to an investor owner, especially if the owner maintains the option to adjust rents to the market over time.
An influx of ADUs support neighborhood affordability. If the objective is to produce affordable units, i.e. those with capped rents to serve low or moderate-income households, producing units efficiently and en masse should be the top policy drivers.
The Production Potential
Estimates show Chicago is short at least 120,000 units, including tens of thousands that need to be either fully accessible to accommodate persons in wheelchairs or at least livable for people with modest mobility difficulties. At the current pace of production and with current approaches, simple arithmetic says it will literally take 100 years to close the gap.
Very few U.S. cities are fortunate like Chicago to have its estimated 30,000 or so multi-family properties, with space and economic justification to add 2 or more units at or near grade level. These buildings offer a production potential of 115,000 new units. Our estimates are based on research and practical experience with that inventory; a tall empty basement beneath a tier of above-grade units is very common across all Chicago communities. Factor in hundreds of linear miles of surplus store fronts and the adaptive re-use potential is that much larger. Owners of these neighborhood multi-family properties and store fronts bring a combination of rehab experience, access to capital, and management experience to make them the ideal partner in affecting mass production of new units via the low-cost ADU approach.
The ULI report also notes there are an additional 70,000+ smaller rental properties with a full basement space from which to create one new unit. These are more likely to be owner-occupied properties where the owner profile is more like a single-family homeowner than a commercial property investor. Ramping up production via this market segment requires building out programmatic infrastructure, financing tools, marketing and public education, and technical assistance services. The time it will take to do all that, given the city’s fiscal constraints, make it unrealistic to focus on small property owners as the central target of the successful ADU strategy. And, it is even less useful to focus on single family owners who may want to add a coach house or granny flat atop a garage. Any units produced through that approach should be viewed as a bonus, but not the focus of concerted policy promoting affordability.
There is no evidence that relaxing restrictions will lead residential owners to collectively add units at anywhere near the scale needed. In every place where an ADU policy has been adopted, the production of new units is well below what is needed for a city like ours. The ULI report identifies many significant impediments. To begin with, the lack of financing options, limited owner equity, and absence of technical expertise are among the issues that must be addressed to engage residential owners in a substantive way. And, to make the option even more questionable, the report also casts serious doubt whether coach houses and granny flats will make economic sense in most Chicago neighborhoods.
By contrast, commercial owners – those who own multi-family or mixed-use properties, readily recognize the business logic behind ADUs. Converting unproductive space to rental units makes economic sense and these owners will do that if given the opportunity. Moreover, neighborhoods across the city have multi-family buildings and a store front surplus offering adaptive re-use opportunities, so new units can be integrated into neighborhoods across the city and at the appropriate neighborhood scale.
Chicago faces three housing crises: fair housing and the segregation of housing opportunity; a dire shortage of affordable housing; and an acute shortage of accessible housing. A thoughtful ADU policy that particularly maximizes production from the housing producer segment of the market can go a long way to address all three.