Build baby build? Housing submarkets and the effects of new construction on existing rents

Abstract

There is vigorous debate among scholars, and activists about the role that new market-rate apartments play in alleviating housing affordability issues at the neighborhood level. This study evaluates how new large (>50 units) market-rate apartment buildings affect rents in nearby buildings. In contrast to other recent work, we posit that the effects of new construction may vary by the quality of existing housing. We test this hypothesis by using a panel of building-level rents from Minneapolis, Minnesota, observed between 2000 and 2018. While we find no effect of new high-end housing on the market overall, we find countervailing effects of new construction on different parts of the rental market when broken out separately. We find that lower-priced rental housing close to new construction had rents 4.4% higher than those in other low-quality buildings farther away in the first 5 years after new construction. In contrast, we find that new construction had the opposite effect on higher-priced housing: rents were 1.7% lower near new construction. This study reiterates the importance of housing submarket theory and how focusing solely on average effects of housing interventions may miss important and nuanced effects across different parts of the market.