Who's Afraid of New Apartments?

Here's an interesting update to a story I wrote about back in early 2019.

One of the biggest points of controversy in the debate around housing, neighborhood change and gentrification is what happens to the surrounding neighborhood when a new market-rate apartment or condo building opens.

Does the new building act as a pressure-release valve where there is already intense demand, absorbing a bunch of people who would otherwise have bid up rents on existing homes in the neighborhood, and thereby keeping nearby rents lower than they would have been? This is essentially the Econ 101 answer, and it has fierce adherents.

“In part, it’s easy for this issue to descend into ideological trench warfare because it’s really hard to actually trace the butterfly effect of all the ways a new building alters its surrounding block, neighborhood, and city.”

Or does the new building, along with any swanky amenities it contains, act as a beacon to higher-income apartment-hunters who otherwise would not have considered the neighborhood, announcing to them, "Hey, this is a hip, desirable place to be!" And does that in turn prompt nearby landlords to raise their rents, and thus accelerate gentrification? This is the answer of many a low-income renter or tenants' advocate, and this narrative also has fierce adherents.

If both of the above factors are in play, which one is more powerful?

People tend to bring their ideological preconceptions to this question, bolstered by anecdotes, and to be unpersuadable in their certainty that they know the answer.

In part, it's easy for this issue to descend into ideological trench warfare because it's really hard to actually trace the butterfly effect of all the ways a new building alters its surrounding block, neighborhood, and city. Most of the research on the subject uses things like Census data that can only show correlation, not causation.

Which is why the ongoing work of scholars at the Upjohn Institute to actually document migration chains—who moves into new housing, and who moves into the housing they moved out of, and so forth—is so fascinating. It's the housing equivalent of ecologists studying a food chain who, instead of taking overall species counts, figure out how to track which individual mosquitoes are eaten by which individual frogs, and in turn which owls gobble up the frogs.

I wrote about Evan Mast's work on this topic last year, in which he showed convincingly that the migration chains resulting from a new home in a high-end neighborhood stretch not just into other high-income areas, but into the lowest-income parts of the surrounding city in surprisingly few steps. We're all more connected than we think. Think of it like the party game Six Degrees of Kevin Bacon.

Now Mast has a new paper along with co-authors Brian Asquith and Davin Reed. It's called Supply Shock Versus Demand Shock: The Local Effects of New Housing in Low-Income Areas, and it's different from the previous "migration chains" research in that this time, the scholars use the same data sources ("USPS change of addresses, county assessor records, magazine subscriptions, phonebooks, et cetera") to track migration specifically into the vicinity of a brand new, large apartment building.

The paper's major finding is that, on balance, new market-rate apartments in a low-income neighborhood tend to reduce nearby rents, not increase them, and lead to more low-income people moving into the area, not fewer. Here's the paper's summary of its key findings:

While there is a strong observed correlation between new construction, rising rents, and demographic change, this is because new buildings are typically constructed in areas that are already changing. When these new buildings are completed, they actually slow rent increases and demographic change in the nearby area. The average new building lowers nearby rents by 5 to 7 percent relative to trend, translating into a savings of $100–$159 per month....

In addition, we find that new buildings increase low-income in-migration, implying that this improved affordability can foster more integrated, economically diverse neighborhoods that may provide low-income residents with greater economic mobility (Chetty, Hendren, and Katz 2016; Chetty et al. 2018).

The study authors examined a sample of 1,483 buildings with over 50 apartments each, completed in the 2010s in 11 cities: Atlanta, Austin, Chicago, Denver, Los Angeles, New York City, Philadelphia, Portland, San Francisco, Seattle, and Washington, D.C. They then analyzed a data set of nearly 2 million moves to areas within 800 meters of these buildings. They were able to reach their conclusions by comparing both migration patterns and asking rents in two ways: 1) between areas near and slightly farther away from the newly-constructed buildings, and 2) between areas where a new building was completed in 2015-2016, and similar areas where a new building didn't open until 2019 (too recently to really affect the market).

There's a huge amount of fascinating detail in the study itself, a lot of it concerning caveats that might affect the results—so if you’ve got your Econ 101 celebratory hat on right now, calm down just a bit. Complex systems are complex. The authors are careful not to discount the notion that a new building can kickstart neighborhood transformation by bringing upscale amenities to an area previously not perceived as desirable, and inciting more development as a result. Indeed, they say explicitly that there’s plausible evidence for this.

It’s just that it seems like in more cases than not, that effect is more than balanced out by the rent-reducing effect of an increased supply of homes for people who want them.

(Cover photo via Flickr — Creative Commons license)