Housing & Mortgage
Do New Market-Rate Units Accelerate or Slow Gentrification?
More housing, mostly, helps temper price hikes and displacement
Nearly a year ago, an aging duplex situated kitty-corner from my (also aging) apartment in Los Angeles was razed to make way for a new four-story apartment building.
I’m a proponent of increasing my city’s housing supply. Los Angeles is in dire need of more affordable places to live. But I’ll admit I still felt worried. Current rents in my neighborhood are 16% lower than the Los Angeles average, which is still about $1,000 more than the national average as of August. Could this new development, which may even be considered a “luxury” apartment building, inspire my landlord to raise rent?
I’m far from the only renter to fear this. Many people believe new construction catering to middle- and upper-income residents in areas with older buildings is a bellwether of gentrification. And low-income communities, which are often disproportionately made up of people of color, face displacement from this type of real estate development in so many major metropolitan areas.
But after digging into a report by researchers at UCLA’s Lewis Center for Regional Policy Studies, I’m less worried. The studies suggest the new development, by adding to housing supply around me, will help temper price increases, not accelerate them.
The supply effect vs. the demand effect
In their report, the authors review several working papers that examine the impacts of new market-rate developments on neighborhoods — and in one case, citywide — rents. They describe market-rate units as “unsubsidized homes whose price often places them beyond the reach of lower- and middle-income households.”
This is a more granular approach than has typically been studied in the past. At this point, the authors note, it’s clear that more housing supply can lead to lower prices across a region. But what happens to rents at the neighborhood level? In my case, what happens when you can see the new building from your bedroom window?
Most housing advocates, the authors say, assume a new market-rate development will either a) increase the supply of homes and thus relieve pressure on nearby housing stock, thus reducing (or tempering the rise of) rents — known as the “supply effect” — or b) attract wealthy renters, bring new amenities, and encourage landlords in the area to raise existing rents — known as the “demand effect,” and a stereotypical explanation of gentrification.
These two views may sound mutually exclusive, but while reviewing the data sets, the UCLA researchers find that reality is a mixture of both. So, they set out to explicate which effect is stronger. In other words, what’s the net outcome?
Setting off a 'migration chain’
In five of the six working papers reviewed by the UCLA researchers, rents in neighborhoods with new market-rate developments became more affordable over time — that is, any rent-raising effects, if present, turned out to be smaller than any rent-reducing effects. (The sixth paper found mixed results, which the researchers say could be attributable to the market segment studied and the fact that the research didn’t adjust rents for inflation.)
One paper, published in 2019, found that market-rate development often leads to lower rents in that immediate area because it kicks off a “migration chain.” Basically, people with above average incomes tend to move into the new units, freeing up their previous home for people with somewhat lower incomes, and so on. After several moves, a new unit in a lower-income neighborhood becomes available. When this happens on a large scale, it “creates slack in the lower-end housing market."
Another paper, from 2021, looked at housing production in San Francisco. It found that within 100 meters of a market-rate development site, rents go down by 2%. Further, the risk of a lower-income renter in the neighborhood being displaced falls by about 17%. There’s also a 31% drop in eviction notices for rent-stabilized homes, likely because landlords have less incentive to evict tenants when prices of non-rent-stabilized homes are slowing or stagnant.
Exclusionary zoning hinders new development
Of course, erecting new non-subsidized apartment buildings isn’t a panacea for the housing affordability crisis, the UCLA authors note — especially when the only development that’s happening is concentrated in low-income neighborhoods. New development needs to be welcomed into affluent communities, too. And yet, we’re at a standstill in Los Angeles because new development has been blocked in many wealthier, largely white neighborhoods that take a firm Not in My Backyard (NIMBY) stance. This exclusionary zoning worsens the affordability squeeze in low- and middle-income areas.
The researchers say that as long as there is demand for affordable housing, there should be new development. By way of caution, they point to data from Echo Park, a neighborhood in central Los Angeles that’s seen as “a poster child for gentrification and the painful dislocations that accompany it.”
From 1970 to 2018, the housing supply in Echo Park increased by only about 10%, but the population of Los Angeles ballooned. Many existing homes were renovated or torn down and rebuilt, but new developments were scarce. During that same period, rents nearly tripled and the area’s median income almost doubled. “Preventing development did not prevent change,” the authors write.
Here’s the upshot: Building new market-rate rental units can be a valuable tool to stabilize or even slow rents in a neighborhood or a city at large. But development by non-governmental companies works best when accompanied by public measures like rental subsidies, tenant protection policies, and yes, residential up-zoning.
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