Necessary Gentrification: The “Affordable” Housing Gap Cannot be Sustainably Subsidized by Taxpayers.

When talking about “affordable” housing, gentrification, and the revitalization of communities in Chicago and some surrounding suburbs, the conversation is usually focused on predominantly black communities that have been the victims of decades of disinvestment on the South and West Sides of Chicago, and in the case of several predominantly Black South Suburbs, greed and predatory lending practices that caused The Great Recession of 2007 – 2009.  When the data is properly assessed (unbiased), these historical decisions and actions have created the socio-economic conditions that plague many of the communities most affected.  

Over the past several years, I have been an active Consultant and stakeholder in the development of subsidized “Affordable” and Attainable Housing projects, High-Cost Custom Home Development, the redevelopment of residential and commercial properties, the execution of Real Estate transactions, and business consulting.   During this time, I have studied, analyzed, and gleaned insights from various publicly available relevant economic and policy-based data sources, along with private data. I have conducted hundreds of feasibility studies, reviewed hundreds of Sworn Statements, assessed and managed several projects against Prevailing Wage standards, completed multiple Capital Stacks for large projects, qualified P&L Statements, developed Proforma financial statements, and developed and presented data packages/dashboards for elected officials.  Chances are, if it has anything to do with the macro and micro social economics of Real Estate and Development, and all its interconnected industries, I have studied it in one form or another. Because of this exposure and experience, I can say with a high degree of confidence, based on the data, that gentrification is a necessary reality, and that “affordable” housing initiatives are anything but affordable, and cannot be sustainably subsidized to meet demand. 

In the Chicagoland area (Chicago and surrounding suburbs), regardless of how one perceives implementation and participation, subsidized community revitalization and improvement programs focused on development (residential and commercial) abound.  From Building Electrification programs, to NOF’s, Chicago Recovery, IHDA programs, CCLBA programs, Rebuild 1.0 and 2.0, Missing Middle Infill Housing Initiatives, and everything in between, money flows in ways that only those who are stakeholders within the programs can truly understand.  Now don’t get me wrong, all the aforementioned programs are phenomenal and well-intended, however they fall short of responding to the volume of the needs of the marginalized and disinvested communities they seek to serve.  Directly stated, the programs simply aren’t funded with enough money to help the number of people in need.    

Consider this, depending on the reference sourced, the Chicagoland area needs approximately 126,000 “affordable” housing units to fill the “affordable” housing shortage gap.  For perspective, the 2025 cost to build a basic (very basic), code conforming residential home (Single Family or small 2-flat) in Chicagoland is approximately $450K.  The home will look NOTHING like the stately early 20th Century homes that Chicago is known for (e.g. Brick Bungalow with a basement, hardwood floors, oak trim, detached garage, etc.) and will not last anywhere close to 100 years (As the Chicago Bungalow has done).  In terms of quality, the newly built $450K “affordable” home will meet basic quality standards (vinyl or non-brick siding, slab on grade (no basement)), be minimally energy efficient, and have basic finishes. Because of some of the materials used, it will require maintenance within its first 20 years of life (e.g. brick is durable to 100+ years, while vinyl siding is durable to 20 – 40 years).  For comparison, a similar basic modular home built inside a controlled-manufacturing environment and delivered on site costs approximately $350K to build.  As another comparison, the cost to build a high-quality home, leveraging modern materials, elements, and craftsmanship that would produce a home comparable to what homeowners expect in a Chicago Brick Bungalow of the early 20th Century, will cost every-bit of $1M on average (Note: This is not to be confused with a cookie-cutter home built by a developer within a subdivision).   By the way, for the reader who questions the $1M average cost to build a high-quality new construction home, contact an insurance provider and get the “Rebuild Cost” of an Early 20th Century Chicago Brick Bungalow that has been upgraded with 2 or 3 bathrooms and a finished basement and attic….You will be astonished at what you hear. 

Modular Home Design - Basic Quality

When considering the number of “affordable” housing units needed to fill the Chicagoland regional housing gap, and the average cost to build a basic home (as just identified), one will discover that the region needs approximately $56.7B (Not in subsidies, but in the total dollars to produce).  If we shrink the housing gap to 100,000 units, which is suggested to represent the City of Chicago “affordable” housing gap, and apply the Middle Infill Housing subsidy of $150,000 per unit (one of Chicago’s pilot “affordable” housing programs), Chicago will need approximately $15B in subsidies to assist those with “affordable” housing needs.  Add to that, the approximate $9B that the City of Chicago needs to replace the more than 300,000 lead water service lines (the highest in the nation), and the approximate $982M Fiscal Year 2025 budget deficit growing to a more than $1B deficit in fiscal year 2026, and you may come to realize that the housing gap may be a permanent problem if subsidies is the singular strategy.  For additional context at the regional level, consider that the State of Illinois is currently faced with a projected $3.2B deficit in fiscal year 2026 that poses a threat to various program funds.

Manufactured Modular Home - Basic Quality

As a side note, while there are some who argue that “soft construction costs” (administrative, consultative, professional, etc.) are excessive and drive development costs, the fact of the matter is that “hard construction costs” are high, much higher than what many outside the industry understand, specifically because of the high cost of living in the region. This “soft construction cost” argument, to those who are experienced in the industry and evaluate construction costs as a profession, is unfounded.  Certainly, like everything else in business, there are efficiency improvements that can be introduced, but those improvements don’t overcome the high cost of living which is what drives hard construction costs.    

Why Subsidies?

In most disinvested communities, subsidies are necessary to offset the cost of construction relative to the low market value of the developed property.  Below is what was written in the Chicago Neighborhood Rebuild 2.0 Request for Proposal:

“Rehabilitation of vacant land and buildings in disinvested communities requires substantial subsidy to correct for market conditions that produce after-(re)development-values lower than total costs needed to complete the work. The provision of construction loans is crucial to providing small developers with sufficient liquidity to complete small residential rehabilitation projects, but in disinvested neighborhoods market sales price after project completion is insufficient to pay off the construction loan."

What exactly is gentrification, and why is it necessary?

Gentrification has many different interpretations, and often, it’s frowned upon because of concerns about the displacement of existing residents (e.g. residents being pushed out of their homes).   Fundamentally, however, gentrification can be described as a process whereby the socioeconomic makeup of a less affluent neighborhood changes through the arrival of more affluent residents.  The introduction of wealth encourages investment and development which improves housing values and attracts new businesses.  In the case of the “affordable” housing gap that exists in the Chicagoland region, displacement of existing residents is not an appropriate concern, because development and redevelopment projects are being done on vacant lots and/or abandoned buildings.  In other words, there are no existing residents to displace.

In addition to the fiscal year budget constraints that have been identified, there is a dynamic which strains development program abilities from being impactful at the established targets.  That is, underestimated Program funding requirements due to incorrect perceptions of construction costs.  For several years, I have issued warnings about the risk of incorrectly low construction cost bids/proposals, and how the use of low-cost contractors who don’t fully understand or embrace business operations or the cost of adhering to building code, could adversely affect the market and communities.  These inaccurate bids set an incorrect expectation in the market, which can spill over into Program Charters when impact and benefits are planned.  The Chicagoland region, as large as it is, is very small and interconnected when it comes to real estate and development in predominantly black neighborhoods.  When Program impact and benefits were determined, it appears (I have not seen Program Charters or Business Cases, so the statement is speculative and based on off-the record information that some administrators have shared with me) that they were based on construction cost models that were simply incorrect, skewed, and not aligned with industry standards (Industry standards, which considers the cost of living for the region).  As an example, a small Construction firm or General Contractor who self-performs, can keep its operating cost low (sometimes unrealistically low and operating in a continuous deficit), while inefficiently delivering 2 or 3 projects a year, or perhaps 1 large project.   While this may work temporarily for a handful of projects, it fails to deliver projects at scale based on the needs of the community.  As a result, when Programs seek proposals from entities who can deliver at scale (with or without the use of prevailing wages (typically a requirement when using government funding)), decision makers quickly discover that the cost models used to approve the Program were, again, incorrect and skewed at best.  

As an example of a lower cost non-industry standard construction model in practice, consider the Cook County Land Bank (CCLBA) redevelopment model. CCLBA, which is the largest land bank in the country (funded by taxpayers), has successfully renovated 2000 properties over a 10-year period (despite some of its indiscretions, concerns about transparency, and blemished record (one past employee was convicted of wire-fraud)).   Under the CCLBA operational model, they partner with small developers to revitalize distressed properties throughout Cook County.  The small developer, specifically because of its size and inefficient operational model (common for small businesses), doesn’t have the capacity and/or bandwidth to fulfill the needs of the community it serves (Remember, Chicagoland needs approximately 126K “affordable” housing units). The CCLBA Program model does not require small developers to adhere to prevailing wage requirements, which allows developers to renovate far-below industry cost standards.  If Program leaders were to leverage the CCLBA model as a reference for Program funding, the Program budget would fall short. 

As another example, the Chicago Rebuild 2.0 Program, which received a $20M grant from The Illinois Housing Development Authority (IHDA) to help expand its impact, seeks to work with local developers to renovate properties on the South and West Sides of Chicago.  Under this program, developers must adhere to prevailing wages and certify payrolls.  Consistent with other Chicago programs, the Rebuild 2.0 Program will assist in acquisition, and offer other “right-sizing” incentives to help offset the cost of construction relative to property values. Similar to CCLBA however, developers qualified to participate in the 2.0 Program must be local, which suggests that they may not have the capacity and/or bandwidth to deliver at scale.  If the Rebuild 2.0 Program leverages performance data insights from the CCLBA model, or the Rebuild 1.0 Program model (another Chicago Rebuild redevelopment program which did not require prevailing wage),  the Program outcomes and benefits will be over-estimated, and the Program costs underestimated (The Program Manager would incorrectly assume that more projects could be delivered than what the budget allows for).   

Regardless of the dynamics around Program value, let’s assume, as a Chicago “affordable” housing scenario, that small local contractors have the bandwidth and capacity to deliver within the parameters of Program funding and expectations.  Under the Rebuild 2.0 Program, again, as a scenario, let’s apply the Middle Infill $150,000 per unit subsidy to the $20M IHDA grant that has been allocated to expand impact.  Based on a straightforward calculation, approximately 133 properties could be completed with the subsidy.  Add to this number, the CCLBA yearly averaged throughput of 200 properties (which includes all of Cook County), and we have 333 properties returned to the South and West side communities within the course of a year.  Using this logic and adding an aggressive throughput assumption to determine scenario-based Program impact, let’s assume that all “affordable” housing Programs were successful at cumulatively delivering 500 “affordable” housing units per year. At this throughput rate, it would take 200 years to fill the current 100,000 “affordable” housing unit gap in Chicago, and 252 years to fill the “affordable” housing gap in the region.  And for this singular reason (there are many other reasons that can be investigated) gentrification is necessary.  The Chicagoland Region, and the citizenry therein, for a multitude of reasons, cannot afford to wait 200 years to fill an “affordable” housing gap (It’s an unrealistic and unintelligent timeline by any standard).  At the rate at which inflation currently outpaces incomes, the region also can’t financially afford to subsidize 126,000 “affordable” housing units over 200 plus years. 

For historically disinvested and Great Recession affected communities to become sustainable, unsubsidized development must occur at market rate to allow for an infusion of wealth to help invigorate communities and add desperately needed tax revenue to aide government operations and fund government programs (e.g. “affordable” housing programs).  Without market rate development, affected communities will continue to be dependent on the government and other taxpayers, who are already over-taxed, to subsidize one of the most basic elements of life as an American (housing).  Further, because of the global economy and its effect on inflation, and the threat of reduced Federal assistance, ongoing reliance on subsidies will cause Chicago and the State of Illinois to continuously face budget deficits which will require governments to seek additional revenue, which in most cases, is limited to additional taxes… Again, on the backs of already over-taxed citizens.  Further, other government mission-critical obligations (e.g. infrastructure improvements, such as Federally required lead water service line replacements) will be at risk. 

Are there any alternatives?

There are always alternative solutions to every problem.  The challenge, however, is that alternative solutions have been investigated and studied for years, while taxpayers continue to be heavily taxed, and affected communities continue to suffer; and herein, the problem rests.  We are at the crossroads of a money problem.  Chicago and the State of Illinois need more money, people need places to live, and time is limited.  The reality, under our current governmental business and operating model, is that there are very few levers for Chicago and the State of Illinois to pull to increase revenue, eliminate the deficit, and continue to fund various programs, specifically “affordable” housing programs.  Unless citizens are prepared to pay more taxes, or a significant fund reallocation towards “affordable” housing is done (which doesn’t help the deficit), gentrification is the best immediate alternative.

What’s Next?

In the very near future, the recently formed City of Chicago Budget Working Group, and the State of Illinois will be required to make some excruciatingly difficult decisions about the budget.  Under-performing, low impact, and slow return on investment programs will get adjusted (including “affordable” housing programs).  Now, whether the current administrations in Chicago and the State of Illinois are prepared to introduce significant cuts remains to be seen (cutting “affordable” housing program budgets may not align with political platforms or ideologies); however significant reductions are inevitable and unavoidable.   

Until the results of the Zero-based budgeting efforts are completed, stakeholders should continue moving forward with confirm funded/escrowed “affordable” housing Programs and associated projects.  In parallel, business models and marketing strategies should be focused on appealing to a more diversified market (don’t limit the business strategy by focusing on Black Money, Hispanic Money, or Purple with Green Polka-Dot Money, instead, develop Green Money strategies around housing and development).  

Whatever one believes or supports, gentrification or no gentrification, understand that significant budget cuts are coming, and they could be catastrophic if fresh perspectives are not embraced.