How do market rate construction projects affect nearby housing costs?

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The vacant Lexington Parkway and University Avenue lot has been up for sale for over 10 years now, and as far as I know it has been empty since at least the mid-1960s. (Fun fact: 10 years ago 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 huge pile of snow dozens of feet in the air. In the spring, it begins to slowly melt, forming a crystalline substance that persists until the end of May.

That could all change this year, as a new development proposal has surfaced that would build over 200 apartments. The trap ? These would be “market-priced” units, the first to be built in the region for many generations. And their price would be significantly higher than working class homes and apartments in nearby blocks.

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The proposal generated a lot of reaction in the surrounding neighborhoods of Lex-Ham, Rondo and Frogtown about what the building would do for affordability in the area.

“You think of the work we have done with regard to the tram [where] property values ​​have increased, ”said Tia Williams, who works on anti-displacement projects for the Frogtown Neighborhood Association (FNA). “Then you think of the luxury apartments that go up to Lexington. They will displace people.

Williams’ concerns reflect the growing housing shortage in St. Paul and across the region. The lack of affordable housing has hit neighborhoods around the proposed site particularly hard, with areas like Frogtown and Hamline-Midway seeing some of the city’s biggest price increases. In an era characterized by increasing inequalities and housing shortages, the impacts of new housing have become a major concern for housing researchers in recent years.

When you delve into the literature on the effects of the housing market, it becomes devilishly difficult to find convincing evidence one way or another. It turns out that measuring the impacts of new housing depends a lot on geographic scale, time period, local economy, and (most importantly) the group within the society you’re talking about. The more you study the problem, the more complex it can seem, although recent work by researchers in Minneapolis may point to concrete answers in places like Frogtown and Rondo.

The concept of “filtering”

One of the big debates in the housing literature is the role that “filtering” plays in the housing market. The filtering is for different housing segments – everything from high-end luxury housing to the most affordable housing for people living on 30% (or less) of the area’s median income (MAI). (In the Twin Cities, the regional MAI for a family of four is $ 100,000; for St. Paul and Minneapolis in particular, the averages are much lower.) Filtering is the idea that over time, homes and apartments may “filter” or between these different segments as they age. In other words, the ultramodern ranch house of yesterday is the affordable starting home of tomorrow, as styles change and roofs and walls age.

“Screening is a process that takes about a generation,” said Ed Goetz, director of the Center for Urban and Regional Affairs (CURA) at the University of Minnesota. “Although theory suggests that if you add units to the top, every unit exiting will kind of take a cut down. This may not happen immediately, and neither is there [a guarantee] that if it happened, it would happen in the same neighborhood or in the same geographic area.

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In theory, filtering means there is a “trickle down” effect: that building more homes, for any segment of the market, will ultimately contribute to affordability for everyone else.

But there are some pitfalls to the simple rule of supply and demand. The first is that the amount and degree of filtering varies considerably depending on the city you are talking about. In markets like San Francisco, with extreme housing costs, most homes “filter” as they age, thanks to the huge housing shortage.


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The other big problem is that most (if not all) of the effects of building new homes at market price benefit the middle and upper levels of the housing market. Meanwhile, almost nothing is helping the people downstairs, those people who are struggling to find housing at or below 30% of the MAI. And in areas like Lex-Ham, Frogtown, and Rondo, these are the people most at risk.

Study watched 15 years in Minneapolis

Recently, a working paper by Tony Damiano of CURA looked at new construction at market rates in Minneapolis over the past 15 years. Damiano found that the new market-priced units had a mixed effect on nearby rents (1/5 mile): while they helped keep prices low for high-end renters, the new units increased. prices for people at the bottom.

“[On average] rents for new homes at market prices in buildings were around 77% higher than average rents in existing buildings, ”explained Damiano. “[While] these units are in direct competition with the existing better quality housing in this neighborhood, at the bottom of the market, these units do not replace these high quality units as well.

Damiano’s research contradicts other recent studies which found that new construction at market rates lowers relative rents in other cities across the country. The difference, according to Damiano, is that his research has broken down market segments, looking at the impact of new construction on different tenants.

“We have divided the effect by market segment, [and] we have a pretty good mix of older and newer buildings to test, ”said Damiano, graduate research assistant at CURA. “What we are seeing is that rents at the top of the market are seeing a slight decrease in rents, but buildings at the bottom of the market are showing higher rents on average.”

According to the CURA document, the construction of new markets increases costs in neighboring areas for the most vulnerable people. On average in Minneapolis, this translated to rents about 6% higher than they otherwise would have been. For Damiano, this difference is of crucial importance.

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“The goal must be to think of all of this holistically and not a policy or a set of policies per se,” he explained. “We need new homes to keep up with growth and a lot of it will be at market rates. I really think it would do more harm than good to impose a moratorium on market housing. But we have to be aware. We need to think holistically to encourage growth while putting in place policies that protect low-income and vulnerable communities. “

Housing Catch-22

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

What does this mean for the wasteland on Lexington?

A rendering of the proposal "Lexington Project."

Alatus

A rendering of the proposed “Lexington Project”.

“It’s in a small stream right now,” said Chris Osmundson, director of development at Alatus. “We’ve been working on it for a year now; [and we’re] currently in a pending state with St. Paul City Council.

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

“We are well aware of a lot of the problems,” he explained. “One of the things that was difficult was that [term] luxury housing, workforce housing or affordable housing – all those nicknames of housing that get used to. For this project to work, we cannot guarantee rents at rates close to those of a project on Allianz Field. We cannot charge rents close to those charged by Vintage on Selby. In order to make this financially viable and also to create an engaging community, we need to be $ 200 or more in rental price in chunks lower than most of our market comps. “

In other words, in an area that has not seen a new project at market price for half a century, it is very difficult to raise financing for new homes on vacant land.

One thing is certain: Whether the land is landscaped this year or there is a pile of snow left for another decade, house prices and home values ​​will continue to rise in the region. This means that the project falls anyway, the people of the Frogtown Neighborhood Association will still have to fight to prevent the displacement.

We try to find a balance with people, ”said Williams, who often works at the nearby FNA office on Dale Street. “We want development, but without displacement. Yes, let’s develop; yes, but don’t move people. And rent control is long overdue.


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