Build Baby Build?: Housing Submarkets and the Effects of New Construction on Existing Rents

Keywords: housing supply, housing submarkets, neighborhood effects, gentrification
Abstract Type: Paper Abstract

Abstract

There is vigorous debate amongst policy makers, scholars, and activists about the role that new market-rate apartments play in alleviating housing affordability issues. Prior research suggests that new market-rate construction may result in more affordable housing in the long-run, but much less is known about how this type of new development affects neighborhoods in the short run. This study evaluates how new construction affects rent for nearby apartments soon after a new market-rate building is completed. We use a panel of building-level rents in Minneapolis, MN from 2000-2018 and a difference-indifferences study design to compare rent trajectories of units within 250 meters of new construction to a comparison group 250 to 600 meters away. While we find no effect in the single market model, our submarket approach suggests that lower-priced rental housing close to new construction had 4.1 percent higher rents compared to the comparison group. New construction had no effect on middle-tier submarkets. New construction had the opposite effect on higher-priced housing; rents were 1.6 percent lower close to new construction, however these results are not statistically significant. This study reiterates the importance of understanding housing as a collection of submarkets rather than a singular market. Our findings are important for planners and policymakers who seek to balance growth and protect existing lower-income communities.