What Would Mass Upzoning *Actually* Do to Property Values?

(Source: Flickr.)

If we are to have a nation of strong towns, one key policy we have advocated here is that every neighborhood in every city should allow the next increment of development as of right. Without nitpicking here over exactly what that “increment” is, the principle is that developed places should always be able to intensify over time. Otherwise, you’re dictating by law a condition in which neighborhoods, once built, are frozen in amber forever—a deeply unnatural and ultimately societally untenable arrangement, as Addison Del Mastro argues in “Is Zoning a Contract?”

As a growing number of cities and states seek to reform their longstanding residential zoning policies in response to the housing affordability crisis, "upzone everything a little" is rapidly becoming the approach with the most political momentum. (Examples include Minneapolis, Charlotte, and the states of Oregon and California.) Instead of picking specific areas to concentrate new high-density housing, like around a transit station or a redeveloped warehouse district, this latest wave of zoning reforms allows the next increment—typically some version of duplexes through fourplexes—on nearly every residential lot in a whole city or state.

To this, a commonly heard objection has arisen, mostly from the defenders of single-family, homeowner-dominated neighborhoods: “Won't allowing more development everywhere set off speculative feeding frenzies? Isn't this tantamount to unleashing rapacious developers upon every neighborhood to transform it?”

The short answer is that no, it isn't. Those who warn of this outcome are committing a classic Fallacy of Composition.

The Fallacy of Composition is a logical fallacy in which you assume that something that applies to the individual parts of a whole must also apply to the whole. For example, consider a concertgoer who stands up in his seat in order to see over the head of the person in front of him. “If I stand up, I can see better” may be true, but if everyone in the audience stands up, the effect is neutralized and nobody actually has a better view than before.

What’s true: Upzoning a property, all else equal, increases its market value substantially.

What’s not true: Upzoning every property will substantially increase the market value of every property.

To understand why the composition doesn't work, you need to understand how zoning affects land value.

How Zoning* Affects Land Value

(*Just to get this out of the way, I'm using "zoning" here as a catch-all for local land-use regulation. This includes not just the regulation of use or density, but also provisions such as setbacks, height restrictions, parking requirements, and so forth—anything that affects what can be built on a piece of land.)

The amount a developer is willing to pay for a piece of property—including an existing home—is determined by their perception of its development potential. They're looking to pay an amount for land that leaves it profitable to build a building on it, after all the costs (including construction labor, materials, professional services, loan interest, and fees) are accounted for. The larger the eventual building and the higher the rent or sale price it will command, the more the developer can afford to pay for the land up front.

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But—and here's the crucial thing—the zoning itself doesn't create development potential. It can only restrict it. What creates that potential is genuine demand for the product: the finished building.

Let's use an absurd example to make this point clear: if Effingham, Illinois, (population 12,511) upzones a block of downtown for a 30-story tower, nobody is going to show up in Effingham to build a 30-story tower. And the land isn't going to sell for a price that assumes a 30-story tower will be built. Nobody would rationally make that deal.

The effect of zoning is like that of a limiting nutrient in biology. If the plants in my garden have a nitrogen deficiency, and I add a nitrogen-based fertilizer, I can see a dramatic increase in their growth. If they are already getting all the nitrogen they need, however, and the thing holding them back is sunlight, or water, or phosphorus, then no amount of nitrogen that I add to the soil is going to have any effect at all.

Suppose you could wave a magic wand and upzone the entire city of Los Angeles—a place where 30-story towers are viable and do exist—to allow 30-story towers tomorrow. Some new towers would definitely pop up. But the primary thing you'd accomplish would be to make zoning largely irrelevant to the question of what gets built where in Los Angeles. Local government permission would cease to be the limiting nutrient for growth.

Why Targeted Upzonings Activate the Fire Hose

Zoning does act as a limiting ingredient in places where more intense development would be economically viable right now: where there would be many ready buyers if it simply weren't illegal. Limiting residential development to single-family homes on spacious lots in a prosperous city with good jobs and schools, for example, tends to drive up the cost of housing, because it restricts the supply of homes in that place. But it also tends to keep the cost of the single-family-zoned land itself down relative to what it would be if that land could be used more intensively.

More importantly, though, doing this across a large enough area creates a lot of pent up demand. Think of the number of people who would like to live somewhere on the Westside of Los Angeles, given the right price point. The giant crescent extending west from downtown L.A. along the foot of the Santa Monica Mountains and then south along the Pacific Ocean is one of the most unaffordable real estate markets in the U.S., in part because it is dominated by single-family detached homes (in most areas) and was aggressively downzoned in the 1970s and 1980s to prohibit anything else. Many of the people who would prefer to live in this vast area currently live elsewhere in L.A.—maybe the San Fernando Valley to the north, or South L.A., or suburbs to the south and east.

In this early 2020 map from the John Hart Real Estate blog, the crescent-shaped area of yellow and red from Los Angeles to Santa Monica and south along the beach represents median home values over $1 million, in an area overwhelmingly zoned for single-family houses. (Source: John Hart.)

That's a lot of suppressed demand for new housing. Now imagine you upzone one little pocket of the single-family residential part of the Westside, and you do so dramatically, allowing six-story apartment buildings to be built. What would happen?

Ever taken a pot boiling aggressively with the lid on, and cracked the lid just a little bit in one corner and watched the WHOOSH of steam rushing to the opening? That.

(Source: Wikimedia Commons.)

This one neighborhood or corridor would now be absorbing all the development pressure from a much larger region around it that has not been upzoned. You would see a construction frenzy, and a speculative feeding frenzy on land. And you'd likely see property owners not only selling to apartment developers, but others holding out for a similar deal, driving prices up into the stratosphere.

This is a story well chronicled in many cities. The one hot neighborhood with a conspicuous flock of construction cranes, fueling the widespread perception of a development boom even though most residents live in neighborhoods untouched by it.

Most of the research on the economic effects of upzoning has looked at scenarios in which specific neighborhoods were micro-targeted for it. For example, a 2020 study by Yonah Freemark found that upzoning of select, transit-served areas in Chicago caused property values to increase. This study is often cited by opponents of upzoning to argue that it will not aid the cause of housing affordability, but it's not at all clear that it is applicable to the blanket upzoning of a whole city, because of that pesky Fallacy of Composition. Freemark has responded to the misuse of his study to this effect, pointing out that the Chicago rezoning he studied involved “a relatively small portion of land (just about 6 percent of the city’s total parcel area), [thus] it encouraged intense interest just in the areas that were affected.”

Broad But Shallow Upzonings Are Different

Think of our boiling pot analogy. This time, instead of cracking a corner of the lid, lift it straight off the pot vertically. You don't get the same rush of steam, because the effect is distributed and thus muted. This is, essentially, the hope of advocates of broad but incremental upzoning applied to an entire city or state at once.

With tens of thousands of new potential development sites to accommodate pent-up housing demand, it's a mathematical certainty that only a fraction of them will be developed. There's not enough population growth to support more than that. (Most U.S. metro areas are growing by 1% to 2% per year or less.) And there are also limits to development capacity: there are only so many construction materials and skilled tradespeople, and in fact a crippling shortage of the latter.

The development that does occur will not be spread like an even blanket across the entire city or region, of course: it will tend to concentrate in areas where demand is strongest and potential profits are highest. But it is unlikely to be anywhere near as concentrated as under the targeted-upzoning scenario, where local government policy forces development into one or two neighborhoods only. If I had to guess at where we'll see the most triplex and fourplex activity in the states and cities that have allowed it, I would say, "Look at the neighborhoods that already have a lot of single-family teardowns and renovations." What would have been a new McMansion might instead be four townhome units. The construction methods and economics are similar, but the result is a greater amount of somewhat less expensive housing.

In fact, the first project application under California's SB-9—a state law allowing four units on most residential lots, which took effect on January 1, 2022—was filed on January 3 in the extremely wealthy and exclusive Silicon Valley suburb of Palo Alto, a place where modest 20th-century bungalows are bought for exorbitant sums in order to demolish them and build back bigger. An architect intends to build four units on what was a single-family lot: No doubt they will not be cheap, but no doubt they will be cheaper than Palo Alto's median home price of $3.5 million.

Outside of those places, the market value of every residential lot isn't going to reflect a fourplex—only in places where buyers are willing to pay the amount that requires building a fourplex to recoup their investment. And they're only willing to pay that amount where they have some reasonable expectation of being able to build one and rent it.

Upzoning an entire city is not going to double or triple the total amount of development that happens in that city. (Though it ought to increase it, by bringing more and, more importantly, different developers into the game.) It is going to redistribute where that development happens, on balance away from the suburban fringe and a small handful of hot neighborhoods where things are happening at a very large scale, and toward, well, everywhere else.

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