An “upzoning” proposal before the Common Council could actually harm the low-income renters it’s meant to help.
Illustration by Jeremy Nealis.
Housing prices are exploding in Madison—like they are in most cities right now—as low interest rates fuel a housing bubble with no clear end in sight. The housing crisis predates the pandemic, but the economic effects of COVID-19 have only made it worse. Madison is a majority-renter city where most renters are “rent-burdened,” meaning that they spend over 30 percent of their income on rent. The average listed rent in Madison, according to Rent Cafe, is $1,312. Home prices are up 17 percent since last year, according to Redfin, because of low interest rates on mortgages and the proliferation of financial investment vehicles focused on real estate. Meanwhile, homelessness and unemployment have soared.
In the midst of this crisis, Madison’s city planners have been working on a set of proposed zoning changes to increase housing density in the city, or “upzone,” arguing that it will help make housing more affordable.
Ultimately, such a proposal is more likely to hurt than help our lowest-income, rent-burdened population, though there may be some minor benefits to the proposed ordinance changes. To explain why, I will shed some light on the research about urban upzoning and its impact on housing prices.
Upzoning is no replacement for a meaningful and comprehensive affordable housing strategy. In the rush to increase density, even if it is advertised as “good” for affordable housing, we risk hurting the most vulnerable. Instead of making an ill-informed and poor argument that upzoning will reduce displacement pressures for the lowest-income people, Madison could push for clear and bold policies that truly help our rent-burdened population in the midst of a housing crisis in a growing city.
A proposal to streamline for density
The upzoning proposal (which city Planning and Zoning Staff summarized here) that came to the Common Council on March 30 nominally sought to address affordable housing needs by increasing the permitted density in particular zones in Madison. The zoning ordinance changes would streamline the approval of higher-density housing in most of the city’s multi-family (small and medium apartment buildings) and mixed-use (commercial and housing) districts by not requiring the Plan Commission to review and approve certain developments. This means there will no longer be public hearings for some higher-density developments. It also eliminates requirements in mixed-use districts throughout the city to have commercial space on the bottom floor, and allows for more dense housing in those districts instead. The proposal has invoked strong feelings both in opposition and support at committee and Council meetings.
The change to the mixed-use zones is a concern in some areas of the city, as former Alder Rebecca Kemble has noted, because it threatens to eliminate important commercial pockets where rents still remain somewhat affordable for working-class and POC-owned businesses. Instead of protecting these vulnerable commercial corridors with zoning, this proposal opens them to redevelopment that could price them out.
Some residents are appalled at the idea of increasing allowable “by-right” density of developments—meaning that larger developments will be allowed in certain zones without the opportunity for the public and the Plan Commission to review them. These opponents of the proposal argue, for example, that “Citizen participation isn’t an impediment—it’s an opportunity for the community and developers to create better projects by working together” and “it’s the neighbors who implore developers to include affordable, family-friendly units instead of all market-rate one-bedrooms.” On the flip side, the public input process at Plan Commission can also be a platform for residents with not-in-my-backyard (NIMBY) attitudes to voice concerns that end up killing opportunities for affordable housing developments.
A number of developers (including Madison Development Corporation, one of the largest local nonprofit developers) have noted their support of the upzoning proposal, particularly because it helps them plan and budget for a faster process as they would have more certainty of approval for higher density projects. The Realtors Association of South Central Wisconsin also “strongly supports this proposal,” as do the real estate developers who make up Smart Growth Greater Madison. But some community activists and affordable housing developers and advocates have voiced their concerns about the increased gentrification and displacement this proposal might bring.
Most people giving public commentary on either side of the debate were ostensibly in favor of the concept of affordable housing, so the discursive waters have become thoroughly muddied. Given the conflicting views over the proposal, the Common Council postponed the item and will take it up again at its June 1 meeting.
Upzoning and affordability
Proponents of the ordinance argue that increasing density and housing supply will help with our affordable housing crisis. A March 30 staff presentation on this proposal included a quote from city staff’s analysis of the proposal (see slide 13) that says: “Low-income renters benefit because as more luxury units are delivered, affluent renters do not need to rent modest rent units because they have more options.” In other words, city staff argue, the addition of luxury units will have benefits that trickle down to low-income renters.
More housing should help meet the demand and bring prices down for everyone, right?
From a scientific research-based understanding of housing markets, the reality is more nuanced than that. Adding luxury units may somewhat impact the demand for market-rate units, but on the lower-priced end of the housing market (where the most demand is), new construction in response to upzoning is likely to increase rents.
This has been a very hot topic in housing research and advocacy in recent years. In California, for example, there’s been a public war of ideas between the Yes In My Backyard (YIMBY) movement, which advocates for building more units of any type, and the farther-left tenants’ rights advocates and critical housing scholars who stop at nothing less than building truly affordable units.
The filtering effect
The YIMBY argument is based on the idea that reducing development regulations will allow the market to intervene and meet the demand of residents to reduce overall prices. This argument is largely based on the phenomenon of filtering, whereby older units become cheaper over time, and more “naturally affordable” to lower-income populations. The argument goes that policymakers can deliberately encourage filtering by attracting developers to build more nice, new units that attract higher-income people away from their older units. And as higher-income people move into new units, they leave more “naturally affordable” units to the lower income population. Trickle-down housing.
To be clear, filtering does happen in housing markets, to some extent. The crucial questions are (1) how quickly does it happen, and (2) what other factors get in the way that can contradict the positive impact of filtering on affordability?
Under the best conditions, filtering takes decades
How quickly does it happen? Filtering can take generations. A 2006 study of housing prices by Andrejs Skaburskis explored the filtering process over decades in Montreal. Skaburskis argues that “welfare filtering”—or filtering at a level that would impact housing prices for people with the lowest incomes—is unlikely to happen given the policy tools available at a municipal level.
Skaburskis shows that the era with the greatest filtering effect was driven by the processes of suburbanization and white flight. Like the US, Canada instituted national-level policies that encouraged suburbanization, such as state-backed mortgage insurance (which of course were imbued with white supremacy), low interest housing construction loans, and the development of a publicly subsidized highway system, which led to the fast-paced growth of the suburbs and left many cities with cheap housing in the inner city as a filtering effect. This process was, of course, not racially just: housing and living conditions in urban centers were notoriously bad, especially in the US. But it was mostly cheap. Skaburskis asserts that the confluence of factors that led to the post-suburbanization era filtering would be hard to reproduce. Even if it could be reproduced, the author said, it would take 30 to 40 years to see the impact on housing prices for the lowest income brackets (this 30-plus-year timeframe is in line with what other studies have found as well, if enough housing is produced to see an impact).
Hot markets, yuppies, and new luxury housing
What other factors get in the way that can contradict the positive impact of filtering on affordability? We will not be able to know all of the factors in advance to fully predict filtering impacts of upzoning, but we can generally understand the process by looking at a few key variables.
Filtering happens even more slowly in hot markets, like Madison or much of California, because overall housing prices are increasing so quickly. Overall, then, housing prices may still go up even when developers are creating more units, and it will be even harder to build enough to make prices go down.
Cities with hot markets usually have high population growth, particularly of young professionals, so new housing is primarily built for them, and it is usually very expensive. This means that the effect of filtering is reduced because there is not a one-for-one abandonment of older units for new luxury units by the rich. Some become inhabited by fresh faces in the tech industry moving from another locality, and sometimes even locals moving between units may simply be taking up more space (having multiple homes, or multiple bedrooms).
Even the idea that one could build more units on a given parcel of land (due to upzoning) increases the property value of the parcel so that property taxes go up, appraisals are higher, and it becomes implausible to not tear down and rebuild at the “highest and best use” allowed by zoning for that parcel. The buildings torn down may be relatively affordable, and tear-downs and construction are expensive, so even if more units are produced, they tend to be more expensive ones than were there before.
And those expensive units will stay expensive for a while. Data from the Bay Area shows that in a very hot market like the Bay, it could take new market rate housing 15 years to filter down to people earning 80 percent of the Area Median Income (which is $79,900 in Madison for a family of four), and 50 years to filter down to those making 50 percent of the Area Median Income ($51,550 in Madison for a family of four). The case of Vancouver shows us that as luxury units were added, vacancy rates also went up, and rents went up even as supply met demand. Therefore, we cannot expect the owning class to lower rents even if housing is over-supplied.
To throw another wrench into the YIMBY argument, most new three- to seven-story new multi-family construction uses wood frame construction on top of a concrete base—a relatively new construction method that architects have critiqued for its low quality. If the filtering effect of all the new units takes 30 years, and these units have to be rebuilt in 30 years, they will ultimately never filter down to a semi-affordable rung of tenants.
Madison is expected to grow a lot in the coming decades, and we have to figure out how to manage that growth. But the question shouldn’t be, “How do we accommodate high-income newcomers?” Instead we should ask, “How do we protect the already rent-burdened populations who want to stay here?” As it stands, upzoning on its own helps the highest-income and does not do much if anything to protect the lowest-income residents we already have.
Upzoning and gentrification
Another impact of new high-end development is the increase in surrounding property values and subsequent displacement of working-class people, particularly in “naturally” affordable neighborhoods. So even if enough units are added to marginally decrease housing prices over the metro area, upzoning can accelerate gentrification in the most at-risk neighborhoods.
When developers build new luxury units, surrounding property values are likely to go up. Even on parcels that have not been upzoned but may be nearby, the increasing popularity of the area may create a “rent gap” between what a landlord makes in rent and what they could make in rent. Due to rising property taxes, it becomes irrational to not raise rent prices, and perhaps rehabilitate or rebuild to gain from the potential rent (there is a lot of evidence of this effect. For example, see this and this study).
YIMBYs tend to point to data that says average rents across a metro area can go down with increased building. This is not always true, but even when it is true, calculating the average rent hides the impact on the people with the lowest incomes. Rents on the lower end can actually go up with the addition of market rate and luxury housing. At the neighborhood level, the results can be devastating, where rising rents and displacement mean that the lowest income people are hurt the most by upzoning. A study just published on Madison eviction filings by UW-Madison Professor Revel Sims showed that eviction rates go up in the immediate vicinity of new multi-family developments. Another recent resegregation report looking at data from the Bay Area shows that when this displacement happens, people tend to move to worse-off (and cheaper) neighborhoods and end up more segregated than they were before. This result is particularly insidious, given that proponents of upzoning often frame it as a social justice-oriented correction to earlier exclusionary zoning codes that enforced segregation.
Even at the bird’s-eye level, looking at the whole city, upzoning can lead to higher average property values, which translates to higher rents. A study of the impacts of a zoning change in Chicago, for example, showed upzoning around transit corridors led to quickly rising housing prices but no new construction in units in the first five years. Another study looking at data from a variety of US cities concluded that broadly enforced upzoning will “unleash market forces that serve high income earners, [and is] likely to reinforce the effects of income inequality rather than tempering them.” Both of these studies are well worth reading and available online, and they also give summaries of the research informing the debates.
Investment firms and the housing market
It’s no secret that a series of real estate investment firms took advantage of the 2008 mortgage crisis by buying up foreclosed houses and renting them back to families who lost their homes. Real Estate Investment Trusts (REITs) like BlackRock tend to be known for high rents and poor management—they know how to maximize their returns. Plus, with millions or billions in assets internationally, many of these firms are so large that they can easily pull equity out of their brick-and-mortar real estate and put in cash offers 20 percent over the asking price on a building. For a seller, it can be hard to say no to such an offer. As a result, REITs and pension funds are on another buying spree (taking advantage of low interest rates) and coming to dominate the rental market.
As faceless, absentee, investor landlord conglomerates, these real estate giants are helping to fuel the rapidly-increasing rents and property values in many cities right now both by increasing rents far above the average and buying properties a magnitude above their appraised value. While we may not yet know the direct impact on Madison of investment firms, we do know they’re having a field day in Milwaukee and making 10 to 20 percent profit margins by renting single-family homes to low-income people.
Meanwhile, incomes are stagnant, and renters across the US are getting squeezed. The impacts of REITs and other real estate investment vehicles on housing markets are just now being studied, as their scale of influence is relatively new. To my knowledge, no one has been able to study the long-term filtering effects of upzoning in the new era of real estate investment firms. Surely, as private equity firms come to more readily dominate the housing market (with or without zoning changes), rents will continue to rise faster than inflation and faster than units can trickle down to the lowest income. We might also see that investors become attracted by upzoning to increase their profits, especially in neighborhoods where the price of land is relatively low. Real estate investment firms certainly have more financial resources to take advantage of the development opportunities encouraged by upzoning than do local, nonprofit housing developers.
Where do we go from here?
When it comes down to looking at the data, we really cannot fully predict the impact of an upzoning proposal like Madison’s. But we can make a few guesses based on what we’ve seen in other cities. Would enough housing be built to have a significant impact on the availability of affordable units for the lower-income people? Probably not. Will the proposal increase displacement of the lowest-income people living near the upzoned areas? Most likely. Will the affordable housing crisis get worse with or without this ordinance? Almost certainly.
A few scholars (here and here, for example) bridge both sides by saying that some upzoning may be necessary to house a growing population, but we need to find ways to reduce the negative impacts on the lowest-income renters and strongly support the development of more affordable housing simultaneously. Taking these steps in tandem is crucial.
We might be able to upzone in ways that are less detrimental, perhaps: focusing on areas that are already expensive rather than at risk of gentrification (Alan Mallach says it makes more sense to upzone the suburbs, for example); or placing a few more conditions on the zoning code such as allowing owner-occupied homes to add a unit as a duplex or accessory-dwelling, or allowing conditional use (with public input in Plan Commission) for higher density in multi-family areas. Alder Grant Foster proposed an alternate zoning ordinance (staff summary here) based on concerns about the lack of public input in the original proposal. Some more tweaks could be made to minimize potential negative impacts. For instance, rezoning could focus on particular areas where resources could be coordinated to support affordable housing development in those rezoned areas. Upzoning in a more strategic and precise way can allow for affordable housing developers to partner with the City to build more dense affordable housing developments.
As housing journalist Miriam Axel-lute reminds readers, filtering can happen from the bottom up as well. Creating more affordable housing is at least twice as impactful as market-rate housing for reducing displacement pressures.
The first step is to understand and mitigate any negative consequences of upzoning. If we do pass changes to the zoning ordinance, they should be paired with a package of clear proposals to strongly support affordable housing.
A comprehensive affordable housing strategy for Madison
Those who try to balance the needs of the lowest income residents while increasing density say that upzoning may be okay if we have rent control to limit yearly price increases on rents. But the difference between Madison and the Bay Area or New York is that we have very few legal protections for tenants from displacement, and we have a state government that prohibits the cities from passing most types of progressive housing policies. Wisconsin’s rent control preemption, for example, came right out of the ALEC handbook in the Scott Walker era. And we are not able to require a certain number of new units to be affordable, either, due to the inclusionary zoning preemption in the same state law. Sadly, the state also preempts any kind of minimum wage to be set by municipalities, so while income inequality is a strong driver in housing inequality, Madison will have to address this crisis on the housing side until state or federal law on these issues can change.
The authors and proponents of the upzoning proposal on March 30 placed it alongside other recent developments in affordable housing: namely, opening up the city’s Affordable Housing Fund to smaller developers, and continuing to develop a city land banking fund policy to guide City investment in land for development (note that affordable housing advocates have critiqued both of these funds for being under-capitalized and ill-equipped to address the affordability problem).
Then on April 14, Mayor Satya Rhodes-Conway released “Housing Forward,” a vague housing agenda summarizing several areas of focus, including these zoning changes. As the plan reads now, the strategies are fairly broad, such as “Catalyze the development of new affordable housing through City funding sources.”
Given the harm that the proposed zoning changes could create, particularly for the lowest income residents, the city needs a more robust and clear affordable housing policy package: a strategy for affordable housing that is developed in a holistic way alongside the zoning changes and passed simultaneously. Waiting to develop a clear and robust affordable housing strategy will only hurt our lowest-income renters in the short term.
Our local Affordable Housing Action Alliance has come up with a list of recommendations, below.
The city could potentially pay for these recommendations with funds from the American Rescue Plan Act, which includes $50 billion for housing, or perhaps the infrastructure bill coming through Congress, which includes $213 billion for housing (time will tell how flexible these one-time federal dollars for housing will be). Or, for ongoing spending on housing, why not take the funds from the Madison police budget? We could also add expenses to high-end real estate activity through means such as linkage fees (fees tied to the development of luxury housing ) and property transfer taxes on expensive property, to pay for affordable housing initiatives.
As Sam Stein reminds readers, zoning has become the focus of many local housing debates, although it is a blunt instrument and ineffective tool for enforcing affordability. The focus on zoning “encourages housing activists of all stripes to expend a great deal of energy arguing over housing densities as a proxy for housing costs.” He says,
Zoning itself is a rather weak means for low-cost housing production and retention, especially when compared to classic methods: public housing, particularly, but also rent control and community land trusts. We need plans in place to preserve housing for the poor and working class, and ensure that new construction meets our needs as we define them.
The Left can’t avoid zoning fights: zoning is too central to cities’ gentrification strategies and suburbs’ exclusion strategies to ignore. But we must remember that zoning is just the beginning—not the end—of our struggle. We need real planning, and we need to build popular power to control planning’s parameters.
Like Stein says, the upzoning proposal in Madison is a distraction from a sincere and holistic affordable housing strategy. It has been framed as an affordability tool, although it is likely to harm our most at-risk residents.
If Madison is going to move forward with upzoning, the proposal needs to be coupled with and passed at the same time as other protections for renters and policies to scale up the development of affordable housing. Passing it prematurely with some notion of doing the important work later will only perpetuate the inequalities we all claim to care about.
The Common Council will be voting on a revised version of the zoning ordinance changes May 18 at 6:30 p.m. and you can register to speak on the virtual meeting portal here.
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