Do new apartment buildings cause displacement?

In much of Cambridge, including my neighborhood, the city’s rules for new construction (“zoning”) require that houses have strict height limits, and new construction is restricted to only single family homes and (if you’re lucky!) duplexes. The City Council is discussing changing zoning to allow construction of multi-family mid-sized buildings—4 to 6 stories, with some caveats—across all of Cambridge.

I’m very excited about this, and I think you should be too! As I’ve written previously and will no doubt write more in the future, building more housing is extremely valuable in addition to any potential for lowering housing costs for renters.

Not everyone is happy with this change, though. Many opponents claim new construction will increase the number of renters getting priced out and being forced to move out of Cambridge, which we’ll call “displacement” as a short-hand. And in a literal sense, yes, anyone living in a building that’s being torn down is going to have to move. But from a big picture perspective, large-scale construction is a lot better than the alternatives.

In more detail:

• One commonly cited reason for displacement—shifting neighborhood demographics—is at this point irrelevant to Cambridge.
• Displacement is happening already, despite construction of mid-sized buildings being illegal in much of Cambridge.
• Building mid-sized (or even better, taller) buildings is the only displacement mechanism that has financial incentives to minimize displacement, and at the same time also mitigates the problem.

The changing-neighborhood-demographics argument is irrelevant to Cambridge

“Gentrification” means different things to different people, but let’s consider one common dynamic that falls under that umbrella. Consider a neighborhood that is very unpopular. The people who live there have a lower income, there’s a limit to how high landlords can raise rents, and a corresponding lack of maintenance and renovations.

Then, some trigger improves the perception of the neighborhood, and the potential market of tenants increases. The still cheaper-than-elsewhere rents attract more people, buildings get renovated, and over time a feedback loop kicks in: wealthier tenants means rising rents and renovations means ever-wealthier tenants. The low-income people who used to live there are forced to move elsewhere.

In many cases, construction of new housing is blamed for starting the feedback loop of rising prices. Whether or not this is always true (I suspect new construction is often a symptom, not a cause), in Cambridge’s case it’s clear new construction can’t trigger this feedback loop.

In particular, Cambridge has no inherently unpopular neighborhoods where rents are low. If you renovate a crappy apartment anywhere in the city, you’ll be able to raise the rent significantly. If you sell a crappy apartment anywhere in the city, you’ll still get a large pile of money. Building new housing won’t trigger a feedback loop of rising rents; we already have rising rents, and have for decades.

For our purposes, this means that displacement from new construction probably only impacts the people living in the house that will be torn down to enable the new construction.

Displacement without new construction

Even if Cambridge completely outlawed teardowns of existing buildings, we would still see ongoing and significant displacement.

1. The slow grind of rising rents

Given rents going up for decades, at a pace much higher than most people’s incomes, there will be displacement with no property changing hands. The slow grind of rent rising ever year keeps adding up, with more and more people forced to move elsewhere.

2. A new landlord accelerates the rise in rent

There are a few landlords in Cambridge who ask for significantly less-than-market rate. And there are also landlords who don’t raise rent as much they probably could, because they value having reliable long-term tenants.

But here’s the thing: they can do this only because it’s financially viable for them to do so. They likely bought the building years ago, when prices where lower, which means they have a smaller mortgage. In fact, if they bought long enough ago, they don’t have a mortgage at all.

But what happens when a building gets sold to a new landlord? The new landlord will likely use a mortgage to buy the building, and a much larger mortgage than the previous owner’s, because real estate prices have gone up so much. So they will likely have to raise rents, not necessarily because they’re any greedier than the previous landlord, but because they have much higher bills to pay.

3. Renovations

Some of the housing stock in Cambridge is cheaper because it’s in bad shape. If an apartment or whole building is renovated, the landlord can either charge significantly more rent, or do a condo conversion and sell the apartments off.

For all of these reasons, even with zero new construction we will continue to see significant displacement. After all, that’s the status quo already in much of Cambridge. (Rent control if done well can help somewhat, but even in the best case that still leaves condo conversions.)

Displacement from new construction

What about new construction? How will this impact displacement?

A very simplified model of costs of new construction

Imagine the city creates a real estate development non-profit that builds new buildings, and then sells or rents at cost, keeping no profits. Their key goal would be lowering per-apartment cost of creating housing, because that would be the cost to buyers or renters. Commercial developers will want a markup over this minimal price, but the price they charge is still heavily constrained by the cost of creating the housing.

So let’s consider a simplified model of how much it costs to build a new apartment building: the cost of purchasing the real estate, plus the cost of construction. The cost of a plot of real estate is the sum of:

• The cost of the land.
• The cost of any existing building on the land. All things being equal, a larger building will cost more.

To give an example: I used to rent an apartment with roommates in a triple decker on Tremont St. The city assesses the property’s value at $2.2 million, of which the land is $700,000 and the building is $1,500,000. (You can look up assessed values here.)

We’ll assume construction costs scale linearly with number of units; in practice it’s more complicated, e.g. there are height points where you have to switch to more expensive building technologies.

Our final (heavily simplified) formula for the cost of creating housing:

Cost to create new apartment =
  $ Construction per apartment +
  ($ Land + $ Existing building) / (# of new apartments)

What can a real-estate developer do to lower costs?

To lower the cost of creating new apartments, a real-estate developer (non-profit or for-profit) would at minimum want to do two things.

First, build more apartments on the property, so that the fixed cost of buying the property is spread out across more new apartments.

Here’s a real example: the affordable housing project at 52 New Street spent $9.3 million to buy the property, and built 106 apartments. So of the total creation cost per apartment of $600,000, $88,000 was due to the cost of buying the property: $9,300,00 / 106 = $87735.85. If they’d built only 50 units, the cost of buying the property per each newly created apartment would be $9,300,000 / 50 = $186,000. Assuming linear construction costs, the per apartment cost would’ve been almost $700,000, a 16% higher cost. The same math applies to commercial projects.

Second, buy property that has the cheapest possible existing buildings and structures.

Buying land is necessary if you’re constructing a new building, but any existing structures on that land just adds expenses (purchase + demolition) and provide no value. In the assessment example I gave above, 2/3rds of the cost of buying that property on Tremont St would be the building, which would be of no use to someone who wants to tear it down. The ideal is to buy an empty lot!

This is pretty good news—let’s see why.

Displacement from new mid-sized and tall buildings isn’t as bad as other causes of displacement

First, we’ve learned that the developers of new buildings prefer buying lots with as little existing structures as possible. Buying a parking lot is the ideal, because then they’re not paying for a building they’re just going to immediately tear down. That means their incentives will as a side-effect tend to minimize how many people get displaced: new building developers are not going to buy an existing mid-sized apartment building and tear it down, they’ll want a small house on a big lot.

Meanwhile, other causes of displacement impact all buildings, both small and large. The building complex where my wife and I used to rent has 120+ apartments; I doubt anyone is going to tear down those two very large buildings. But rent is up 100% in the past 15 years, whereas the consumer price index (which also includes housing, albeit across the US) is only up 50%.

Second, unlike every other cause of displacement we’ve discussed, any 10+ unit new building will include new subsidized lower-cost units. So there’s significant mitigation of impacts on a broader scale, even if not directly for the individuals who get displaced. The city’s Community Development Department did some projections, and the numbers look great.

Using the zoning scenario where new buildings are allowed 4 stories by default, and 6 stories if they include subsidized units, they project that by 2040 there will be 235 projects, resulting in the creation of 4475 additional apartments, of which 920 will be subsidized affordable units. For every building that gets torn down and its tenants displaced, on average the city will get:

• ~4 additional subsidized affordable apartments.
• ~15 additional market-rate apartments (plus replacements for any apartments lost by tear downs).

I’ve been told the city’s number may be over-optimistic. Nonetheless, even if the city’s numbers are off by a factor of two (or a factor of four!), that’s still quite good mitigation.

Summarizing what we’ve learned

So long as housing prices are rising, displacement can and will happen even with current zoning limitations. Just because a building is left standing doesn’t mean displacement stops.

Enabling construction of mid-sized and taller buildings will cause displacement in buildings that get torn down, but:

• Developers are financially incentivized to tear down as small a building as possible, reducing how much displacement is directly caused by construction.
• Unlike every other form of displacement, once buildings of 10+ units are constructed (and the incentives to do so are strong), the result will be the construction of subsidized affordable housing quite possibly at a higher number than the removed apartments.

• New zoning may also result in construction in locations where right now there is no housing at all. For example, on Forest St around the corner from me there is a parking lot.

  The real estate rental company that owns it isn’t going to build a duplex or single family home; easier to make a bit more cash from the tenants of their neighboring buildings. But with new zoning that allows for 6 stories, that lot could fit a building with 20 new apartments, 4 of which would be subsidized affordable housing.

Newer, denser housing is:

• Needed to deal with emigration caused by politics and climate change.
• Vastly more sustainable.
• Likely to at least slow down rising rents via increased competition, and potentially stop rising rents altogether if we build enough.
• The displacement caused by new construction is both minimized and inherently mitigated, unlike other forms of displacement.

So building many more mid-sized and taller buildings in Cambridge seems like a an excellent idea.

A bit more

• Further reading: A Better Cambridge has lots of details about the proposed zoning changes in Cambridge being discussed in January/February 2025.
• Song of the day: Large Tortoise, by Cut Capers (2019).