The Starbucks Effect

The Starbucks Effect - How Lattes Perk Up Home Prices

In the book Zillow Talk: The New Rules of Real Estate, Zillow’s CEO Spencer Rascoff and Chief Economist Stan Humphries describe what they term the Starbucks Effect. The Starbucks Effect is a phenomenon where home prices within a quarter mile of a Starbucks, tend to appreciate more quickly than homes elsewhere.

Specifically, between 1997 and 2014, homes within walking distance or 0.25 miles of a Starbucks appreciated 96% as opposed to the national average of just 65%. Interestingly, homes near a Dunkin’ Donuts also showed a similar historical trend. While proximity to a Dunkin’ Donuts appreciated faster than the national average at 80%, they didn’t appreciate as much as being near a Starbucks.

The Starbucks Effect - How Lattes Perk Up Home Prices

Zillow took the research a step further to determine whether this trend was more due to a coastal or urban effect as opposed to the presence of a Starbucks. So they analyzed home values in a tight quarter mile ring adjacent to Starbucks and compared them with nearby home values a quarter to a half mile away. They compared these two rings (adjacent and 1/2 mile away) over 5 years after the Starbucks had been opened. Zillow found that the homes next to Starbucks (within 0.25 miles) appreciated a little more than 21% over 5 years. While the nearby homes (0.25 to 0.5 miles away), appreciated just under 17%.

Below is data for 20 of the country’s largest metro areas, tracking the median value of homes near a Starbucks versus the median value of all homes in that metro from 1997 to 2014. Faster appreciation for homes near a Starbucks can be seen in several major markets. The Starbucks Effect is clearly noticeable in Boston from 2013. There you can see a distinctly larger slope in the homes near Starbucks (green line) as compared to all other homes (blue line).

 

The Trader Joe’s & Whole Foods Effect

Like the Starbucks EffectInterestingly, Zillow updated their analysis this past year to study whether there was a similar effect with other popular grocery chains. In particular, Zillow looked at what effect Trader Joe’s and Whole Foods had on home values. It turns out, a similar trend was found. Homes within 1 mile of either a Trader Joe’s or a Whole Foods appreciated faster than other homes in the same city.

According to Zillow’s press release, “two years after a Trader Joe’s opened, the median home within a mile of the store had appreciated 10 percentage points more than homes in the city as a whole over the previous year.” Similarly, faster appreciation was found in the median homes within 1 mile of a Whole Foods when compared to homes in the same city.

My Own 2 Cents

In the book, Zillow Talk: The New Rules of Real Estate, the authors make a case that the Starbucks Effect is fueling the rise in home values. They flat out say that “it looks like Starbucks itself is driving the increase in home values.” As for me, I’m not convinced. I definitely agree that there’s correlation between home values and Starbucks locations, but let’s remember the following:

Correlation does not mean causation.

Jumping to the conclusion that Starbucks is what is driving home values is not accurate in my opinion. If Starbucks was the cause of rising home values then we would not see the same trend with Dunkin’ Donuts, Trader Joe’s, or Whole Foods for that matter. Home values may rise from a myriad of factors. The introduction of a coffee shop alone does not drive real estate value.

What I do believe is that these corporations are very good at identifying gentrifying neighborhoods that are on the upswing. Before selecting a location to invest millions of dollars, you know Starbucks will have done their homework. The same is true for Trader Joe’s and Whole Foods.

So as a real estate investor, we should keep an eye on where the big corporate guys are setting up shop. Knowing where the next Starbucks or Trader Joe’s will be located is a great indication for what communities the corporations are betting on.

How do you interpret Zillow’s analysis? Have you found these trends to be generally true in your market area? 

Leave a comment below.

4 thoughts on “The Starbucks Effect

  1. How interesting. I think you’re absolutely right about it being correlation, not causation. It’s certainly something to keep an eye out for before buying a property, though!

    It would be great if there were some way to get your hands on the criteria used by those companies before they put a store in. E.g., what demographic information they look for, or traffic patterns, or things like that. Then you could buy in a place that doesn’t have a Starbucks yet and get the full run-up in appreciation, instead of buying after some of the accelerated appreciation has taken place. Because it’s got to level off after some period of time, right?

    • Would be awesome to beat Starbucks to the punch. The good news is that I think much of the data driven demographics (i.e. an area’s traffic patterns and business activity) that help identify these areas are becoming more accessible to everyday folks like us. Though since you invest locally, you definitely have an added advantage in seeing trendy areas and new businesses pop up before outsiders do 🙂

  2. Excellent summary and conclusion on your part. Without having read the book it seems almost unbelievable to me that the basic point of correlation vs causation is missed by the authors. Big corporations that depend on customers naturally do their research before committing to an area.

    I wonder whether there are similar statistics on McDonalds? As Ray Kroc famously said, “We are in the real estate business, not the hamburger business”.

  3. Thanks for stopping by TW! I was surprised that an economist would so easily jump to that conclusion as well. Though I suppose “Starbucks fueling appreciation” makes for a better headline!

    It’s so true that retail & service businesses are often in the real estate game. By knowing who their targeted customers are, an investor can get a better understanding as to what kind of neighborhood that business is located in. While not hard data, I’ve generally observed that certain businesses can also be an indication of areas where I don’t like to invest. Clusters of payday loans, title loans, and pawn shops in an area are generally not a good sign for me. Also, out in the midwest (KC & Indy at least), a Church’s Chicken often happens to be located in class C or lower neighborhoods with higher crime. Just pull up a google map, do a search, and you’ll see what I’m talking about.

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