Rents are rising at a rapid rate in California, with eviction a constant threat for long-term tenants. The most straightforward solution is simply more housing – but a recent study questions whether new construction actually cools down rents, or accelerates them even faster.

The main issue with rent is how rampantly and frequently it exceeds the pace of income for homebuyers and tenants. Market-rate units are priced at the market rate— compared to the alternative of rent-controlled units.

Market-rate developments make an impact on a neighborhood-level scale, and it’s easy to wonder if new construction does 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 into the neighborhood, even when the new housing will demand higher rents?

There are two arguments to consider:

  • the supply effect argument, which claims new market-rate construction creates more stable prices, thus making nearby housing less costly; and
  • the demand effect argument, which claims new market-rate housing caters toward high-income buyers and tenants, gentrifying the area and attracting higher-paying households — this creates a path for landlords to increase rent, thus making housing more costly while rental vacancy rates remain low.

Market-rate developments produce both of these effects, but the real question is which has more of an impact.

Market-rate construction ultimately reduces rents for nearby existing housing units, according to a University of California Los Angeles (UCLA) study.

For example, the study found that new market rate housing in San Francisco corresponded with a:

  • 2% decrease in rent within 100 meters of the developed site;
  • 17% decrease in risk of current tenants being displaced; and
  • 31% decrease in eviction notices for tenants in nearby housing.

At the same time, new market-rate units also caused some gentrifying effects, including:

  • residential renovations increasing by 16%; and
  • business turnover increasing by 22%.

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

The solution for more stable rents

If the solution to more stable rents is the creation of market-rate housing, how do we make it possible for more construction?

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

As industry professionals, real estate agents and brokers are ideally placed 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 legislators are in a place where they can and must reform commercial zoning codes to allow for more residential development.  As it is, many local zoning codes are outdated. With communication and aid, legislators can work with builders to find a way to increase new construction and reign in rent increases.

It takes a village to make change. To get into contact with your local representatives, please visit the United States House of Representatives website.

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