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How do market-rate building projects affect nearby housing costs?

A proposed St. Paul apartment complex has sparked a lot of pushback in the surrounding Lex-Ham, Rondo, and Frogtown neighborhoods over what the building would do to affordability in the area.

The lot at Lexington Parkway and University Avenue as it currently stands.
The lot at Lexington Parkway and University Avenue as it currently stands.
MinnPost photo by Bill Lindeke

The vacant lot at Lexington Parkway and University Avenue has been for sale for well over 10 years now, and as far as I can tell it’s been empty since at least the mid-1960s. (Fun fact: 10 years before that, it was the site of Lexington Park, home of the Saint Paul Saints, then a Brooklyn Dodgers farm club.)

Most winters, the 2-acre site is used for snow storage, as dump trucks and plows slowly erect a massive snow pile dozens of feet in the air. In the spring, it begins to slowly melt, forming a crystalline substance that persists well into late May.

All that might change this year, as a new development proposal has surfaced that would build more than 200 apartments. The catch? They’d be “market-rate” units, the first built in the area in many generations. And they’d be priced significantly higher than the working-class homes and apartments on the blocks nearby.

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The proposal has sparked a lot of pushback in the surrounding Lex-Ham, Rondo, and Frogtown neighborhoods over what the building would do to affordability in the area.

“You think about the work we’ve done as far as the light rail [where] property values have been going up,” explained Tia Williams, who works on anti-displacement projects for the Frogtown Neighborhood Association (FNA). “Then you think about luxury apartments going up on Lexington. They will displace people.”

Williams’ concerns reflect the increasing housing shortage in St. Paul and the region as a whole. The lack of affordable homes has hit especially hard in the neighborhoods around the proposed site, with areas like Frogtown and Hamline-Midway seeing some of the steepest price increases in the city. In an era with rising inequality and a lack of housing, the impacts of new housing have become a big focus for housing researchers over the past few years.

When you dig into the literature on market-rate housing effects, it becomes devilishly difficult to find convincing evidence one way or the other. It turns out that measuring the impacts of new housing depends a lot on geographic scale, the time frame, the local economy, and (most important) which group within society you are talking about. The more you study the issue, the more complex it can seem, though recent work by researchers in Minneapolis might point to some concrete answers in places like Frogtown and Rondo.

The concept of ‘filtering’

One of the big debates in housing literature is the role that “filtering” plays in the housing market. Filtering involves the different segments of homes — everything from high-end luxury housing down to the most affordable homes for people living at 30% (or below) of the Area Median Income (AMI). (In the Twin Cities, the regional AMI for a family of four is $100K; for St. Paul and Minneapolis specifically, averages are far lower.) Filtering is the idea that, over time, homes and apartments can “filter” up or down between these different segments as they age. In other words, yesterday’s state-of-the-art ranch home is tomorrow’s affordable starter home, as styles change and roofs and walls get older.

“Filtering is a process that takes about a generation,” explained Ed Goetz, the director of the Center for Urban and Regional Affairs (CURA) at the University of Minnesota. “Although the theory suggests that if you add units at the top end, every exiting unit will sort of take a notch downward. That just may not happen immediately, nor is there [a guarantee] that, if it does happen, it would happen in the same neighborhood or in the same geographical area.”

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In theory, filtering means that there is a “trickle-down” effect: that building more housing, for any segment of the market, will eventually help with affordability for everyone else.

But there are a few catches to the simple rule of supply and demand. The first is that the amount and degree of filtering varies greatly depending on what city you’re talking about. In markets like San Francisco, with extreme housing costs, most homes actually “filter up” as they age, thanks to the huge dearth of housing.


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A recent study by researchers at Freddie Mac shows that Minneapolis has a relatively fluid housing market, where homes do relatively well in “filtering” between market segments.

The other big problem is that most (if not all) of the effects of building new market-rate housing benefit the middle and upper tiers of the housing market. Meanwhile, almost nothing helps people at the bottom, those folks struggling to find housing priced at or below 30% of the AMI. And in areas like Lex-Ham, Frogtown, and Rondo, those are the people most at risk.

Study looked at 15 years in Minneapolis

Recently, a working paper by CURA’s Tony Damiano looked at new market-rate construction in Minneapolis over the last 15 years. Damiano found that new market-rate units had a mixed effect on nearby (1/5 of a mile) rents: While they helped keep prices lower for renters at the top end of the market, new units raised prices for people at the bottom.

“[On average] new market-rate units’ rents in buildings were about 77% higher than average rents in existing buildings,” explained Damiano. “[While] those units compete directly with existing higher-quality housing in that neighborhood, at the bottom of the market, those units aren’t as good of a substitute for those high-quality units.”

Damiano’s research contradicts some other recent studies that have found that new market-rate construction lowers relative rents in other cities around the country. The difference, according to Damiano, is that this research disaggregated the market segments, seeing how new construction impacted different renters.

“We split up the effect by market segment, [and] we have a pretty good mix of older and newer buildings to test,” explained Damiano, a graduate research assistant at CURA. “What we’re finding is that rents at the upper end of the market see a slight decline in rent, but buildings at the bottom of the market show higher rents on average.”

According to the CURA paper, new market construction drives up costs in nearby areas for the people who are most vulnerable. On average in Minneapolis, this resulted in rents that were about 6% higher than they would have been otherwise. For Damiano, that difference is critically important.

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“The goal needs to be thinking about all of this stuff holistically and not about one policy or one set of policies by itself,” he explained. “We need new housing to keep up with growth and a big chunk of that is going to be market-rate. I definitely think that it would do more harm than good to put a moratorium on market-rate housing. But we need to be cognizant. We need to think holistically about encouraging growth while putting in policies that protect low-income and vulnerable communities.”

Housing Catch-22

When it comes to housing, there’s always a catch. While neither Goetz nor Damiano thinks that no market-rate housing should be built, they insist that other policies need to be in place to protect those at the bottom of the market — like the many of people in St. Paul’s Rondo and Lex-Ham neighborhoods.

What does that mean for the vacant lot on Lexington?

A rendering of the proposed "Lexington Project."
Alatus
A rendering of the proposed "Lexington Project."
“It’s in a little flux right now,” said Chris Osmundson, the director of development at Alatus. “We’ve been working on this for a year now; [and we’re] currently in a pending state with the St. Paul City Council.”

The most recent proposal would have put 250 units of new market-rate mixed-use housing on the lot, along with a handful (6-15) of subsidized affordable homes, as well as a commercial space that Osmundson calls an “incubator” for small businesses in the area.

“We’re keenly aware of a lot of the issues,” he explained. “One of the things that has been difficult is this [term] luxury housing, or workforce housing, or affordable housing — all those housing monikers that get used. In order for this project to work, we cannot underwrite rents at rates close to what a project over at Allianz Field will be charging. We can’t charge rents close to what Vintage on Selby is charging. In order to make this financially viable, and also create an appealing community, we have to be $200 or more in chunk rental pricing less than a lot of our market comps.”

In other words, in an area that hasn’t seen a new market-rate project in a half century, it’s very difficult to get the financing together for new homes on a vacant lot.

One thing is for sure: Whether the lot is developed this year, or whether it stays a snow pile for another decade, housing prices and home values will continue to go up in the area. That means that, either way the project falls, folks at the Frogtown Neighborhood Association will still have to struggle to prevent displacement.

We’re trying to strike a balance with people,” said Williams, who works often at the nearby FNA office on Dale Street. “We want development, but with no displacement. Yes, let’s develop; yes, but don’t displacement people. And rent control is long past due.”