Trying to spot the next hot urban neighborhood before it “pops”? Get in line. Everyone has their own opinions about the early signs of urban renewal and gentrification, but what does the data say?
You’ve probably heard the case made that artists are harbingers of higher rents. Think SoHo fifty years ago, or Brooklyn twenty years ago, or Bushwick or Peckham or Williamsburg. Case studies of artists moving into poorer urban neighborhoods because it’s what they could afford, and transforming it. Bohemian bars, coffee shops, art galleries and the like started opening to meet the demands of these new residents, and the neighborhood suddenly has a “cool vibe”. Then some better-off hipsters arrive, then the rest of the young professionals, then empty nesters with French poodles named Sandra. Critics cry that longtime residents were priced out of these neighborhoods, but their complaints are amply reported and can be read elsewhere.
A thoughtful critic might instead look deeper into cause and effect in those neighborhoods. Was there already a centralized force pushing redevelopment there? Would the neighborhoods have gentrified regardless of the artists’ influence? Is there actual research data to support a causal relationship between artists and gentrification, or just a handful of case studies?
The most oft-cited case study is SoHo, the South of Houston Street neighborhood in New York City. Close inspection reveals the artist-fueled renaissance there was directly driven by one wealthy experimental art guru, George Maciunus. Maciunus converted abandoned industrial space into artist cooperatives and cheap live-work spaces, and it turned out that there were so many poor artists in New York City in the 1960s desperate for large, cheap spaces that they flocked there.
What happens if you analyze Manhattan’s real estate values block-by-block, and correlate their change with the opening of nearby art galleries? Urban policy analyst Jenny Shuetz did just that, and looked at values before and after art galleries opened nearby. She found that galleries tended to come after the development tipping point, and did not cause it.
In an academic study last year entitled Gentrification and the Artistic Dividend: The Role of the Arts in Neighborhood Change, the authors also found little evidence to suggest that artists caused dodgy neighborhoods to turn around. There were connections, but they appear more incidental; yes art galleries and coffee shops pop up as neighborhoods improve, but they look more like catalysts than causes. The authors found that other, external forces stimulated growth, usually large investments by local governments to target specific areas.
The study also found different effects for “fine arts” versus “commercial arts”. Fine arts, such as museums, art schools and performing arts companies, tended to appear in areas that were already stable and only gradually appreciating in value. If there was any causal relationship between the arts and gentrification, it came from an influx of nearby commercial arts jobs – graphic design firms, film agencies, music studios. In other words, when high-paying jobs for skilled workers opened in the area, local neighborhoods saw a spike in values. Not exactly the bohemian image of starving artists transforming poor neighborhoods.
Which is not to say that artists can’t or don’t improve neighborhoods’ real estate values. Young, educated, temporarily poor people (like artists and hipsters) often have a pulse on neighborhoods with cheap rents but improving prospects. But by the time the artists and hipsters start buzzing about it, there’s already probably been significant investment.
Aside from attending city council meetings and hanging out in hipster bars looking for tips on up-and-coming neighborhoods, investors might pay attention to another harbinger of higher values: Starbucks. The company has a frighteningly strong record of predicting hot neighborhoods. Some even say causing appreciation directly.
Consider that from 1997-2013, the average U.S. home appreciated by 65%. But homes near a Starbucks appreciated 96% in that period, appreciating almost 50% faster than the national average.
Not convinced? Try this: five years after a Starbucks opens, homes within a quarter mile of it appreciate 21% on average. Farther homes between .25 and .5 miles from a Starbucks appreciate by less: a lower – but still significant – 17%.
Starbucks has a vast team of real estate experts armed with the best data available. The Starbucks brand also has cachet – people like living within walking distance of a Starbucks. It also makes the neighborhood more walkable (a growing trend in neighborhood desirability), having cafés like Starbucks within easy walking distance.
Sharp real estate investors can leverage the research already performed by Starbucks’ experts, and simply track where Starbucks coffee shops are scheduled to open. Of course, it may still be fun to have a beer at the hipster bar down the street, and ask around about where the artists are flocking these days – after all, diversification is the name of the investing game.