Real Estate

Urban sprawl: Did gentrification lead to rent surge, or vice versa?

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The relentless search in major cities for affordable yet aesthetically pleasing housing isn't getting any easier.

Real estate firm Douglas Elliman released a report this week showing New York's white hot rental market—one of the most torrid in the country along with San Francisco—experienced a marginal cooling in May. During the month, median rent prices in the city dipped 0.4 percent to $3,358 from a year ago, helped by concessions offered by landlords to prospective tenants. 

The firm added that price trends are expected to "move sideways over the coming months following a two year trend of rising rents that ended in March."

However, last month's modest decline masks what many observers are calling a housing crisis in urban areas. Rents in the Big Apple and the Bay City are still well above the national average of $1,248 in the first quarter of 2016, according to figures from research firm Axiometrics.

In fact, rents in Brooklyn—one of the city's hottest neighborhoods—saw a fifth consecutive month of price hikes across all apartment sizes, Douglas Elliman's report noted. Despite a construction boom peppering New York's skyline with new apartment buildings, very little of that new housing stock is alleviating the seemingly inexorable rise of both prices and demand.

Despite a "leveling off" in some market segments, "excess new supply skewed to the high [end] and tepid wage growth is pushing renters to outer reaches of the city as well as the surrounding suburbs," Jonathan Miller, president and CEO of Miller Samuel real estate appraisers, who authored Douglas Elliman's rental report, explained in an email to CNBC.

The dynamic is being exacerbated by a trend of residents attempting to escape the pricey rents in city centers by migrating to cheaper, often working class areas—which themselves soon experience a spike in housing costs. 

Otherwise known as gentrification, the term has become a pejorative among residents that associate gentrifying areas with frothy rents that often force poor and working class renters to flee.

"Many renters are buying homes further out in the suburbs after reaching their affordability threshold in the city," Miller said. "They aren't necessarily renting in the suburbs and it is why we are seeing a lot of suburban sales growth."

Howver, "renters that move further from the city's core in search of affordability but stay within the city are driving up prices, i.e. gentrification," Miller added.

Affordable housing 'declined sharply'

An apartment building under construction in Brooklyn, New York.
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That effect is apparent in places like northwest Queens, a borough of NYC that has seen a nearly 13 percent rise in average rent over the last year, according to Douglas Elliman's data. That area includes popular neighborhoods like Astoria, Sunnyside and Long Island City that have become home to upwardly mobile young professionals.

Gentrifying areas are hardly exclusive to New York, but are a microcosm of rent inflation being experienced nationwide. U.S. Labor Department data showed that rent prices spiked 3.5 percent in May from a year earlier, at a time when overall consumer prices were largely flat.

Experts say gentrification is a byproduct of factors that include demographics, economics and ethnicity. In a recent research report, New York University's Furman Center found that New York's skyrocketing rent prices are reverberating across the city's neighborhoods and population segments. 

The study found that between 2000 and 2014, up and coming NYC neighborhoods like Williamsburg, Harlem and Astoria saw a large influx of college graduates, young adults, single residents and couples without children. In those gentrifying areas, the report noted a jump in income since 1990 that was not replicated in neighborhoods that had not gentrified, which saw a decline.

During that period, those groups saw "increases in average household income while most other neighborhoods did not," NYU researchers said. They added that at the same time, the share of affordable housing for low-income households "declined sharply in gentrifying neighborhoods."

A big part of the reason behind gentrification is population shifts. The NYU study found that gentrifying parts of New York lost more than 800,000 residents in the decade between 1970 and 1980, with most of that population loss coming from neighborhoods that eventually saw explosive growth in residents and prices.

"As the city experienced population growth in the past few decades, the demand for housing also increased. However, the supply of additional housing units has not kept pace, nor have new units been evenly distributed among the city's neighborhoods."

With housing conditions still historically tight, the NYU study called for "discussions around mitigating the effects of rapidly rising rents" that address the city as a whole, rather than just specific neighborhoods. 

This week, NYC Mayor Bill de Blasio signed legislation aimed at boosting affordable housing stock. However, the problem appears to be an intractable one with few readily available solutions.

"Higher rents bring in new and new types of residential support services and trigger new demand," said Miller. "The higher rent is caused by rising demand that meets inelastic supply, often that higher demand comes from adjoining neighborhoods that are also seeing gentrification."