A Rising Building Lowers All Rents

How luxury construction makes housing more affordable across the board

It’s not just major metros like New York, Los Angeles, and San Francisco; housing affordability is a problem across the country. Internal migration spikes caused by the Covid-19 pandemic brought more people to once affordable areas, seeking cheaper housing since their jobs no longer tied them to a specific city. Moving helped those people solve their problem of housing affordability in big cities. But in the places they moved to, housing became scarce. And with increased urbanization giving rise to megacities,  the places they left still remain unaffordable to many. Building more affordable housing seems like an obvious answer, but many developers are hesitant and NIMBYs are opposed to such construction. The good news is any new construction – even of luxury housing – increases affordability for all income levels.

‘Simple Story of Supply and Demand’

Though it’s often argued that luxury construction decreases affordability, building any new housing makes housing in general more affordable. It really is a “simple story of supply and demand,” write the Upjohn Institute’s Evan Mast and Brian Asquith, along with the Philadelphia Federal Reserve Bank’s Davin Reed, in their paper “Supply Shock Versus Demand Shock: The Local Effects of New Housing in Low-Income Areas.”

Their research showed that new market-rate housing lower rents by 5-7% in the surrounding area. In another study, Mast found that the new construction sets off a chain reaction in which residents of the area leave their homes to move into the new building. That in turn opens up units in the buildings those people left, and on down the chain.

The Upjohn Institute says “building 100 new market-rate units opens up the equivalent of 70 units in neighborhoods earning below the area’s median income. In the poorest neighborhoods, it opens up the equivalent of 40 units.”

That’s borne out by high construction levels in 2022 and 2023 that led to lower rents and home prices in 2024, asserts Forbes senior contributor Bill Conerly.

“Imagine a metropolitan area with a good balance of apartment supply and demand at the upper end and the middle, but strong demand for low-end apartments. Further, imagine that developers have misjudged the market and built only high-end units. What happens?” Conerly wrote. “Those new luxury apartments will not stay empty for long. Landlords would rather accept a lower rent than no rent at all. The upper-end rents drop.”

People living in middle market units take apartments in the new luxury building, with a supply glut lowering rents in the middle market, allowing lower-end renters to move up and vacating low-end units, making them more affordable in turn.

Filtering

Several subsequent studies support Upjohn’s conclusions that building more luxury housing supports people in all income levels. In many cities, though, convincing officials to change zoning regulations and provide tax credits to allow for more construction is a challenge.

“We want to be housing providers for a local solution. That goes back to knowing the community that you’re working with and collaborating with city and state officials and affordable housing agencies to find solutions,” Lisa Kaseman, Executive Vice President of Development & Acquisitions at Conifer Realty, told BOSS. “Advocating at both the state and national level is very important because those policies drive our ability to put good housing out on the street.”

Other factors have also led to a supply crunch, including labor shortages as well as high cost and low availability of crucial materials thanks to pandemic effects on supply chains. The incentive for cities and states to encourage building is high, as affordability draws in young professionals who want to live, work, and play in areas where they can enjoy restaurants and nightlife and eventually raise families, all of which contribute to the economic engine of a vibrant city. When new construction grinds to a halt or barely keeps up, that bustle slows to a crawl.

“When new construction is only just meeting demand from new high-income renters, it means that, in effect, new high-end units are being rented out by new, high-income renters, rather than by current high-income renters trading up to a newer unit, and therefore fewer old units are left to ‘filter down’ to a lower-income renters,” Harvard’s Joint Center for Housing Studies observed.

Analysts at the National Multifamily Housing Council Research Foundation concur, writing that a “substantial flow of new construction apartments, largely targeted to middle- and higher-income groups, has enabled the ‘filtering’ process to create affordable housing opportunities for low-income households.”

While it might seem simple in hindsight, conventional wisdom has taken a long time coming around to it. To make housing more affordable, build more housing, any kind of housing. The benefits will be obvious to everyone across the income spectrum, from the high end to the low end, and to the places where they live, work, and play.