On a recent January evening, the stretch of East Ninth Street visible from the rain-smeared window of the salon Lovemore & Do was bleary and indistinct. In the haze of fog and car exhaust, it was easy to imagine the East Village as the grimy heart of bohemia it once was.

With hair swept up in a red bandana, stylist Sue Palchak-Essenpreis looks like the standard-bearer of that fading neighborhood ethos, but that morning she had selected her vintage outfit from a closet in New Jersey. Last summer, Ms. Palchak-Essenpreis and her husband Greg, a social worker, were evicted from their apartment at 50 East Third Street. After 16 years in the East Village, they finally gave up.

“I try not to think about it too much,” she said, pulling at the tufts on the pale blue pillow in her lap as she spoke. “There’s a medical center at the end of the block, so at least we have some sirens that make us feel at home.”

The Essenpreises’ story, at first glance, might appear to be just another retelling of the tale that every New Yorker knows by heart: that dark parable of gentrification and displacement more familiar to us than Little Red Riding Hood’s ill-fated walk through the woods.

But on closer examination, the facts don’t fit that narrative. The Essenpreises were renting a one-bedroom for $2,300, which they expected to rise when their lease came up for renewal. But they were shocked when they, along with all the other market-rate tenants in a three-building portfolio on East Third Street, were told that they needed to clear out. A few months later, the new owner, GRJ, trumpeted the buildings’ transformation into “the most desirable walk-ups in the East Village.”

Ms. Palchak-Essenpreis snickered at the idea of a luxury walk-up, but she admitted that she still walks by the building on a regular basis “like a jealous ex-girlfriend.”

In many corners of the city, professionals who are paying healthy market-rate rents are losing their unremarkable but decent apartments to glossier, shinier homes and the higher rents that go with them. The inexorable logic of Manhattan’s real estate market no longer dictates a series of modest rent increases for a no-frills apartment—the kind of nice-enough place where Jerry Seinfeld lived on his eponymous show—it dictates a super-luxe spruce-up with the power to double the landlord’s haul. Even when the final result falls short of a luxury building (all the Viking ranges, granite countertops and soaking tubs in the world cannot cancel out a fifth-floor walk-up), landlords are managing to fetch luxury prices for their gilded creations.

“These are not low-rent apartments, by any means,” said Wasim Lone, director of housing services at Good Old Lower East Side. “But apartments like those at 50-58 Third Street are not desirable enough for the landlords to charge the significantly higher rents they want. So the owners empty out contiguous apartments, create duplexes, upgrade the finishes.”

The dwindling stock of affordable housing in New York is a long, well-documented battle, but the loss of units affordable even to middle-class professionals—with affordable defined as rent costing no more than 30 percent of household income—signals that the city has entered a new era: the gentrification of the gentrifiers.

Between 2002 and 2011, the number of market-rate rentals affordable to New Yorkers earning the median New York City income ($47,000 in 2011) dropped from 59 percent of available rentals citywide to 33 percent, according to a study from NYU’s Furman Center for Real Estate and Urban Policy.

By contrast, in 1980—before the city’s revitalization—81 percent of the city’s rental units were affordable to New Yorkers earning the median income, according to the Comptroller’s Office.

“At a national level, renters are spending more of their income on housing, but it’s particularly pronounced in New York,” said Ingrid Gould Ellen, co-director of the Furman Center. “Not only is it more expensive to build new housing here, but the growing income inequality, and the number of wealthy, high-income renters, makes it especially attractive for building high-end luxury units.”

The problem isn’t just that developers have been building new luxury housing—that’s all they’ve ever done. It’s that they have also been reclaiming existing buildings. And not even the most emphatically institutional among them has been spared the velvet glove. The most famous (and famously failed) was Tishman Speyer’s attempt to fancy up Stuyvesant Town and Peter Cooper Village, the epitome of ho-hum middle-class housing. Paying a record-obliterating $5.4 billion for the distinctly unglamorous 91-building portfolio, Tishman Speyer expected to get its investment back and then some by upgrading formerly rent-controlled units and then turning them over.

The deal turned into a fiasco for Tishman Speyer, which defaulted on its mortgage and lost the buildings, This fall, tenants whose units had been illegally deregulated won $68.7 million in a class action lawsuit. But the suit was hardly a populist victory—one-bedrooms now rent for $2,885 and $3,584 a month.

In this market, one luxury condo can kill four smaller ones in single swipe, or nearly 20 of them in the case of Zeckendorf project 18 Gramercy Park. Its 16 residences, priced between $14.7 million and $42 million, were crafted from 300 mini-efficiencies that rented to female students and young professionals for about $1,000 a month, including breakfast, dinner and weekly maid service.

“The traditional mix of any rental building has always been a heavy dose of studios, ones and twos,” said Gary Malin, the president of Citi Habitats. “But developers have started building larger apartments. A lot of people want family-sized apartments. If they can afford it.”

Larger apartments mean even fiercer competition in a place where the vacancy rate is below 2 percent. When the wealthy take up huge swaths of real estate, everyone else scrambles for what’s left.

Shavon and Eric Martin, who are 49 and 64, live in a one-bedroom apartment at The Croydon, a massive prewar building at 12 East 86th Street, for which they pay $2,750 a month, going up to $2,850.

Ms. Martin, who works as a vice president at J.P. Morgan, earns a good salary (they’re living on about $150,000 a year), but the couple is looking to conserve their resources because Mr. Martin recently retired from his job as a technical writer. They’ve been hunting for a one-bedroom in the $2,500 range for themselves and their dog, Sadie. But Ms. Martin has been shocked at the difficulty of the hunt. The market is so tight that many buildings that were once pet-friendly are now unwilling to accept dogs.

She explained that she’s always loved the freedom that renting affords. But facing a future of diminished income and rising rents, she and her husband can’t help but wonder if they should have bought.

“We always thought, do we really want to get stuck in one place?” she said.

He nodded. “I’ve always felt that with no mortgage and no car, I’m a free man.”

“But now that we’re trying to keep monthly expenses as low as possible …” Ms. Martin trailed off.

Part of the reason why so little middle-class housing gets built in New York City, according to Bruce Beal Jr., president of The Related Companies, is that it’s not profitable for developers, and unlike low-income housing, it’s not federally subsidized. National lawmakers are just not that empathetic to middle-income New Yorkers. A senator from another part of the country “looks at a family making $130,000 a year and says, ‘Those are rich people,’” Mr. Beal said. “In New York, those are teachers, fire fighters and police officers.”

That the city finds itself in this situation is not altogether unexpected. New York revels in competition, attracting people who shunned the comforts of the good life for a chance at the best life. They came here because they wanted to make it. But many of those people, having made it, find that there’s no place for them.

It’s something that Damian Panitz has been forced to consider. The New York native moved to Florida after high school and worked as a mechanic until he was 24. He remembers being under a car one day, thinking: “Do I really want to be doing this when I turn 40?”

Now he is nearly that age, a filmmaker and musician who teaches at NYU. His wife is a registered nurse who works at Beth Israel. They make a combined income of around $110,000 a year and live in a three-room railroad flat on East First Street with their 3-year-old son, who has cancer.

When they moved in three years ago, a friend owned the building, and they felt insulated from a harsh rental market. But their friend, facing medical expenses, sold the five-story walk-up building under duress to 9300 Realty. Shortly after the company bought the five-story walk-up, it started remodeling one-bedrooms into two-bedrooms and upping the rent. In June, their rent will leap from $2,100 to $4,100 a month.

It’s effectively an eviction; their son’s medical bills have already strained the couple’s finances. They offered to pay a 3 percent increase, which was rebuffed by the management, then a 10 percent increase, also rebuffed.

Admittedly, the confluence of a serious illness and a 95 percent rent increase is an unusually bad situation, but the promise of being middle class once meant having the wherewithal to handle bad situations.

“I work for the biggest real estate owner in this area,” said Mr. Panitz, referring to NYU. “I feel like I should get paid enough to allow me to live here.” He talked about how much he loves his neighbors, how nice it is to walk down the street with his son, and how hard it is to imagine living in any other city. His wife feels differently.

“Give me a reason to stay. The schools? That chichi restaurant down the street that’s not appealing and I can’t afford anyway? Paying $4,100 in rent?” she said.

“I’m a little too old to grow up a neighborhood. I don’t want to move to Bushwick.”

Not that they could afford it.

kvelsey@observer.com

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