Research: Increasing new housing supply decreases rent in nearby neighborhoods

There’s been two lines of debate about building housing in a housing crisis: On one hand, there is the belief that if we build housing—any housing but especially market-rate housing—that classic supply and demand will take over; that is, with the new units online, the rents of surrounding units will go down. On the other hand, there’s the fear that focusing on market-rate housing will increase surrounding rents because those newly minted, pricey units will also attract more expensive businesses to the area.

Both of these approaches have vastly affected the way cities and states develop their housing policy, including Long Beach. Our city’s Downtown Plan was entirely built around the idea that we need more market-rate housing and that it will benefit our more marginalized neighborhoods. Our neighbor to the north, Los Angeles, has also been following this model.

The result has been an influx of new housing that is seemingly out-of-reach for most: New apartment complexes like OceanAire and The Current fetch over $2,000 per month in rent for studios and one-bedroom units.

While there is plenty of research that increased housing supply creates a regional decrease in rents, what about the immediate surroundings, particularly low-income and working-class neighborhoods where construction is happening? Does it increase affordability or does it exacerbate displacement and gentrification?

New research from the Upjohn Institute tackled this question directly because there simply isn’t enough substantiated research to back one line of argument or the other. They studied 11 cities, specifically focusing on low-income neighborhoods where new construction has occurred: Atlanta, Austin, Chicago, Denver, Los Angeles, New York, Philadelphia, Portland, San Francisco, Seattle, and Washington, D.C.

“This is a controversial topic and both ‘tales’ are plausible,” said co-author Evan Mast. “This story has had substantial influence in the policy debate, leading many policymakers and residents to strongly oppose new market-rate housing developments in low-income areas. However, there is currently very little evidence for or against the idea. Our recent working paper fills the gap in knowledge by testing this theory directly.”

Most market-rate buildings come into already-changing places

In one of the more intriguing aspects of the research, the authors discovered that the vast majority of new market-rate housing follows gentrification rather than leading it.

In other words, developers have not built in areas that aren’t already changing: Neighborhoods that had already seen an increase in average income and education level—two of the leading factors behind gentrification—are the places that developers seek to build, not low-income neighborhoods with high vacancy rates and unchanging statistics.

“New developments are correlated with gentrification,” the research read, “but they follow it rather than precede it. This is likely because relatively high rents are necessary to make new construction feasible, so developers do not build in areas where they cannot charge those rents.”

New buildings decrease nearby rents by 5% to 7%

According to their research, new housing construction slowed rent increases in nearby apartments and increased migration from other low-income neighborhoods.

Arriving at this conclusion was complicated: Developers focus on areas where rent is rising fast and is expected to continue rising for their profits. Comparing rents in areas that did and did not receive new construction could show rent increases but not necessarily prove that it was because of that construction or lack thereof.

What the researchers did was compare rents both near and far and across two different time spans: One focused on areas that had new construction in 2015-2016 and another focused on new construction in 2019.

“In both cases, we find that rents were following similar trends before the buildings were completed, but rent increases slow sharply after the buildings’ completion,” Mast said. “We note that this effect is relative to what rents would be had the building not been constructed; our finding does not mean that rents decreased in absolute terms.”

Wealthy people want to live in wealthy places

From a policy angle, Mast and his fellow researchers want to emphasize that housing policy has become contentious—and that contention is often driven by fear that new buildings make rents skyrocket and spur displacement.

“Our evidence suggests that this is typically not the case,” Mast said.

On top of slowing nearby rent increases, the research also suggests that new buildings increase the ability of individuals from low-income neighborhoods to move to the nearby area.

Surely, neighborhoods containing these new buildings gain more affluent residents but that “gain is concentrated in the new building. This effectively diverts high-income individuals from outbidding low-income individuals for units in the nearby, pre-existing buildings. The new housing thus helps absorb the pressure from the increasing number of high-income individuals that want to live in central city neighborhoods.”

Moreover, according to the research, new housing helps neighborhoods remain economically diverse, an aspect that has largely been considered essential for promoting economic mobility for low-income residents.

“On the whole, new market-rate housing appears to benefit not just the region but also the local neighborhood,” the research read. “This suggests that market-rate housing should be an important part of any solution to the housing affordability crisis. Fears of increased rents near new buildings should not prevent governments from implementing desired reforms to regional housing supply.”

There are caveats…

Mast and his fellow researchers noted three major caveats to their research:

  1. The way people view the amenities of a new building or the character of a neighborhood is highly contextual—and therefore difficult to measure in a single study. These context-centric appeals could very well increase gentrification and rents if they outweigh supply.
  2. The sample areas chosen for this study were in areas developers actually chose to build. In other words, researchers can’t speak on what would happen if construction suddenly appeared in low-income neighborhoods with high vacancy because development hasn’t occurred in these areas.
  3. Land-use regulation is complicated, differs by region, and has a deep effect on housing; such zoning laws can not only affect supply but the effect of that supply.

Brian Addison is a columnist and editor for the Long Beach Post. Reach him at [email protected] or on social media at FacebookTwitterInstagram, and LinkedIn.

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