Despite fears that new luxury housing developments will drive up rents and spur gentrification in surrounding areas, a 2020 study (Do New Housing Units Next Door Raise Your Rents?) finds the opposite effect in New York City. The research by NYU's Xiaodi Li examined the impact of new market-rate high-rises on residential rents, sale prices, and restaurant openings within 500 feet.
Why it matters
The findings challenge the idea that new luxury housing makes nearby housing less affordable. It suggests that, at least in the short term, the increased market-rate supply helps absorb demand and slow rent growth for existing apartments. The research could influence the heated debate over how to address housing affordability and gentrification in cities nationwide.
By the numbers
Li analyzed rents and sales prices for properties near 1,241 new buildings at least 7 stories tall that were approved between 2000-2010. She found:
For every 10% increase in housing supply from new high-rises, rents in market-rate buildings within 500 feet fell by 1% on average. Rental buildings 500-1000 feet away saw little effect.
Declines were smaller in central areas with more substitute housing options. Within neighborhoods, rent reductions were significant for high-end and mid-range apartments, but not for the lowest tier.
Sales prices of condos within 500 feet also fell by 1% for every 10% increase in condo supply. Co-ops and single-family homes were unaffected because they were not directly competing.
The rent and price reductions were driven by the increased housing supply rather than any negative impacts of the new towers, such as blocked views, shadows, or construction disruption.
New high-rises did attract an average of 0.11 new restaurants within 500 feet. However, the supply effect outweighed this amenity effect, decreasing rent overall.
Yes, but
While the study suggests luxury developments can marginally improve rental affordability nearby, some people even argue they do little to produce units affordable to low—and middle-income residents who are most burdened. They also expressed concerns they could accelerate gentrification over longer time spans.
What to watch
As cities across the country grapple with rising rents and housing shortages, this evidence that new market-rate supply, even at the high end, can improve local affordability will likely be seized on by YIMBY advocates who want to see more housing built overall. However, the long-term gentrification question still looms large in the debate.
Bottomline
This study injects important empirical evidence into the contentious debate over luxury development, supply, and gentrification. At least in the short-to-medium term in NYC, it is found that new high-end housing has lowered rents and prices for immediately surrounding properties. It suggests that even market-rate supply can be part of the solution to housing affordability issues.