No gentrification here: neighborhood rents are falling with new construction at market price

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Rents are rising at a rapid pace in California, with evictions a constant threat to long-term tenants. The simplest solution is simply more accommodation – but a recent study questions whether new construction is actually cooling rents or pushing them up even faster.

The main problem with rent is how often it exceeds the income rate of buyers and renters. Units at market rate are priced at the market rate – compared to the alternative of rent-controlled housing.

Market-rate developments have a neighborhood-wide impact, and it’s easy to wonder if new construction is doing more harm than good to existing tenants.

For example, gentrification occurs when rents rise rapidly, forcing out long-term tenants. To protect existing tenants from the negative effects of gentrification, does it make sense to allow more housing in the neighborhood, even when new housing will demand higher rents?

Two arguments should be considered:

  • the supply effect argument that new construction at market price creates more stable prices, thus making nearby housing less expensive; and
  • the demand effect argument, which claims that new market-rate housing appeals to high-income buyers and renters, gentrifying the area and attracting higher-earning households – this creates a pathway for landlords to raise rent, thus making housing more expensive while rental vacancy rates remain low.

The movement of market rates produces both of these effects, but the real question is which has more impact.

Building at the market rate ultimately lowers rents for nearby existing housing, according to a study by the University of California, Los Angeles (UCLA).

For example, the study found that market-priced new homes in San Francisco were:

  • 2% reduction in rents within 100 meters of the developed site;
  • 17% reduction in the risk of displacement for current tenants; and
  • 31% reduction in eviction notices for tenants of neighboring units.

At the same time, new units at the market rate also caused some gentrification effects, including:

  • residential renovations up 16%; and
  • turnover up 22%.

Both supply and demand are at play. But, in terms of benefits for current tenants, the supply effect is the strongest.

The solution for more stable rents

If the solution to more stable rents is the creation of housing at market price, how can more construction be made possible?

Relaxing zoning regulations is key to increasing housing in desirable neighborhoods.

Like industry professionalsreal estate agents and brokers are uniquely positioned to advocate for these zoning changes and pave the way for builders to organically meet demand by adding supply where it’s needed most.

Likewise, California lawmakers are in a place where they can and should reform commercial zoning codes to allow for more residential development. As it stands, many local zoning codes are out of date. Through communication and assistance, legislators can work with builders to find a way to increase new construction and control rent increases.

It takes a village to change things. To get in touch with your local representatives, please visit the US House of Representatives website.

Related article:

What does the end of single-family zoning look like?

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