Part 2 + take action: Do new apartment buildings cause displacement?

In yesterday's email I talked about how we have displacement, and will continue to do so, even if we have no construction at all. But what happens if we allow developers to buy property, tear down houses, and build mid-sized or tall buildings?

Displacement from new construction

A 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).

Even if the city's numbers are off by a factor of two, 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.

Take action!

On Wednesday, starting at 5PM, the the City Council's ordinance committee will be accepting public comment on the proposed zoning change to enable building 4 to 6 story buildings across the city. Public comment a really impactful way to pressure the Council to allow building more housing. You need to sign up in advance here; you can call in from home via Zoom. If you sign up earlier, you'll speak earlier so you can get on with your evening.

If you need help with understanding how public comment works, please email me, I'm happy to help talk you through it and make suggestions on how to make it easier.

Don't have time to call in? Email council@cambridgema.gov and CC clerk@cambridgema.gov so it's in the public agenda.

In either case, tell them you support changing the zoning to enable multi-family housing and build taller buildings. A Better Cambridge has lots more details, talking points to use, and answers to FAQs.

A bit more

Song of the day: Large Tortoise, by Cut Capers (2019).