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New York City Submarket Spotlight

The Impact of Gentrification and Evaluating Signs of Potential Growth

The city that never sleeps bustles with people from all walks of life, with food and cultural attractions that represent all corners of the globe. But, calling New York City home can be an expensive decision. Despite rent growth decreasing in recent months, New York still contains eleven of the nation’s top 15 most expensive submarkets.

Take Brooklyn for example, once known as a more affordable option to living in Manhattan, Brooklyn has served as a poster child for both the benefits and challenges that come with gentrification. As the cost of living in Brooklyn continues to rise, pricing many people out of the market, one is left to wonder where people are going to move next?

While no one can be completely certain, here are a few things to consider when evaluating New York submarkets for a potential real estate investment.

Changes in Vacancy Rates and Rent Growth

Examining fluctuations in vacancy rates is a key part of the equation when determining market health. While people are concerned about the market being in the later stages of a real estate cycle, it is important to consider that the vacancy rate in New York has consistently remained lower than the national average for the past 50 years. 

New York Rental Vacancy Rate

In the past 12 months, New York City’s 2.6% apartment rental vacancy rate indicates robust overall demand when compared against the nation’s apartment rental vacancy rate of 7.17%. However, it’s important to understand that each submarket within New York City will be experiencing its own unique storylines, independent of the greater trends.

Take Northwest Queens for example, which has maintained an average 1.3% vacancy rate over the past 12 months, which is half the 2.6% city-wide rate. Also, looking at rent prices of $1,900 per unit, which have appreciated by 12% over the last five years, one can see that rent growth has been positive, but it is important to consider the bigger picture. That price is still roughly 30% cheaper than rents in Long Island City/Hunters Point, offering considerable savings in exchange for living further away from Manhattan, a potential compromise welcomed by those who are working in Manhattan, but also trying to save money.

Job Growth

Job growth is also an important consideration when evaluating submarkets for potential real estate investments. Known for being an epicenter for the hipster movement in New York, Brooklyn has experienced considerable economic growth, evidenced by an annual job creation rate of 2.3% from 2001 to 2015, more than double Manhattan’s rate of 0.8%. New jobs often bring new residents to the community, who could spill over to the surrounding neighborhoods such as Bushwick and Ridgewood in search of cheaper rent prices.

 

Change in Average Income

While many people choose to save money in the hopes of eventually buying a house, in some cities like New York City, buying a house or condo is so expensive that many people are forced to rent for longer periods of time. While making more money means you can afford to pay more in rent, people might choose to maximize their savings by living in cheaper areas. Tracking changes in household income can be an indication of a neighborhood on the rise.

For example, in neighborhoods like Elmhurst, Jackson Heights, and Ridgewood, the number of households making more than $75,000/year has been on the rise. From 2012–14, households in the three neighborhoods making more than $75,000 per year increased by more than 1,700. Of that group, 35% made $100,000–$150,000 and 27% made more than $150,000, considerable income gains that have, and will continue to change the demographic makeup of the submarket.

Staying Ahead of the Curve

With the data available at RealtyMogul, one can look back at the gentrification of Brooklyn and analyze the factors that contributed to such a drastic change and use them to try and predict where gentrification will strike next. We are also fortunate to have previously invested in multifamily assets in Brooklyn and Queens, and our asset management team provides live performance feedback from our existing portfolio.

With Brooklyn rental prices pushing many people out of the market, Bushwick has begun to experience a transformation as well. As a domino effect, people are beginning to leave Bushwick for new neighborhoods, such as Ridgewood, which is becoming a new hot spot for creative types such as artists, musicians and young renters affected by the gentrification of Bushwick. This change in socioeconomic status is evidenced by fluctuations in household income. From 2012-2014, over 400 renter households making $35,000–$75,000 per year left the neighborhood, and were replaced with roughly the same amount of people making more than $75,000 in the same two-year period.

While no one truly knows what the future holds for New York City, it is important to do your homework and make an educated decision based on data and statistics. While the statistics presented above are factual, past performance is not indicative of future performance. Individuals considering investing should always consider the risks and make sure they are comfortable with the amount of volatility when measured against their long-term goals.

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As always, investors should understand the risks associated with real estate investing and that nothing is guaranteed. Investors should also consider risks when investing in New York, such as the amount of new supply that is set to hit the market. In the next few years, around 61,000 units could be delivered, unlike any development the New York area has seen in the past 30 years. Additionally, as this new supply floods the market, rent growth can decelerate. Specifically, 4 and 5-star luxury properties can be particularly impacted, and concessions, which have been typically rare in the market, are on a rise.

All statistics were sourced from CoStar unless otherwise specified.

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