Fires in San Francisco Lead to More Housing
The clear identification challenge is that the timing and location of new construction are endogenous: developers are likely to build in the same areas that are already experiencing increased rents, displacement, and gentrification (Green et al., 2005; Li, 2019; Asquith et al., 2020).
Thus, she uses a clever identification strategy.
I exploit exogenous variation in the location of new construction caused by serious building fires. Regulation and geography combine to make San Francisco one of the most difficult places to build housing in the United States (Albouy and Ehrlich, 2012; Saiz, 2010). Serious fires, like the one shown in Figure 5, increase the probability of construction on the burned parcel by making it cheaper to build there. Removing incumbent tenants eliminates the need for costly buyouts. Under San Francisco just cause eviction law, landlords who want to sell or redevelop must either wait for tenants to voluntarily leave, or negotiate a buyout agreement to pay the tenant to leave. In 2015, the median buyout per tenant was $18,000 and the maximum was $325,000.19 Serious fires also streamline the permitting and construction process. Controlling for project size, construction on unburned parcels takes nearly a year longer to complete than projects on burned parcels (p=0.007).
I know what you cynical readers are thinking! Some fires are set on purpose to drive the tenants out! Well, that happens in the movies but it’s much rarer in real life when then there are very serious penalities for arson and homicide. In anycase, Pennington looks only at accidental fires, not arsons, and she finds that that the lots on which there were fires have similar rates of rental incrase and gentrification as other lots.
Amazingly, it still takes a long time to build on these burned lots–nearly five years to get a permit approved and 7.2 years before completion! Nevertheless, burned lots are much more likely to be redeveloped than similar unburned lots. The bottom line is that burned lots are a good as-if experiment for what would happen if a random set of lots were developed.
Pennington concludes that new housing has a “hyperlocal” increase in gentrification–basically richer people move into the new housing and there’s some very local increase in things like more up-scale restaurants–but overall rents are reduced and fewer people must move elsewhere to find cheaper housing.
I find that rents fall by 2% for parcels within 100m of new construction. Renters’ risk of displacement to a lower-income neighborhood falls by 17%. Both effects decay linearly to zero within 1.5km….Building more market rate housing benefits all San Francisco renters through spillover effects on rents.