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Does the ‘Starbucks Effect’ Still Apply to Real Estate?

Among the fast-food giants, Starbucks is unique because of the influence it wields over mainstream culture. The iconic Pumpkin Spice Latte is the bellwether of fall. The yearly tornado of speculation that their holiday cup designs incite has practically become a winter tradition. Starbucks has even trained us to think that “grande” means “medium-sized,” even though the word literally translates to “large.” 

Starbucks is the largest coffee chain in the world, with nearly 34,000 stores, over 15,000 of which are in the United States. A Starbucks location can have a huge impact on the neighborhoods they are placed in, so much so that it’s coined a real estate principle: the “Starbucks Effect.” The term has come to describe the phenomenon of the increases in value of the real estate adjacent to a new Starbucks location. While it might be fun to think that the value of a neighborhood could be automatically boosted by yet another purveyor of frappuccinos, it’s not accurate when you consider the context. A Starbucks store does not magically increase property value, but it does signal to developers that the neighborhood is rising. However, that may be less true after the pandemic changed the value of gathering places.

Two homes with identical characteristics can have wildly different price tags depending on proximity to a Starbucks. Zillow’s CEO Spencer Rascoff and Chief Analytics Officer Stan Humphries explained that they “found that homes within a quarter-mile of a Starbucks rose in value an average of 96 percent between 1997 and 2014, compared with 65 percent for all U.S. homes” in their book Zillow Talk. That skew in value is hard to ignore. 

Our third space

Perhaps those correlations were owed to Starbuck’s initial strategy, which was to deliberately construct an experience in which its physical locations would be just as much of a draw as its coffee. Each coffee house was supposed to be more than a restaurant, they were created to serve as a “third space” in our lives, a place that would complement both the stiff, formal environment of the office and the familiar coziness of our own homes. But the correlation is probably not evidence of causation. Perhaps Starbucks is just better at pinpointing up-and-coming neighborhoods before the rest of the market.

Starbucks often gets lumped in with Whole Foods for its ability to change its surroundings. Even though both chains examine micro-demographics and predictive analytics like every other retailer, Whole Foods looks exclusively for places that appeal to the affluent and highly-educated, it prioritizes education levels before median income. Starbucks, on the other hand, prioritizes areas that appeal to the working upper class (business executives and their spouses). 

When it comes to Starbucks, their timing was a huge factor in their success. Starbucks came onto the scene at the same time that shopping malls were on the decline, so communal spaces were becoming less available. At the same time, the freelance economy beckoned a wave of self-employed people who could make a living from their laptops, so there was a growing demand for spaces with an internet connection and, of course, caffeine. 

It’s not uncommon to see a Starbucks within view of another Starbucks, with a Starbucks operating inside a Target nearby. Though it might look cannibalistic at first glance, there’s a point to this. Starbucks purposefully looks for locations along the side of the road to catch people on their commute to work. Commuters are more likely to stop for a coffee if they pass a storefront on the same side of the road. The same principle applies to areas where most people walk through the city to get to work. Starbucks wants to make it as easy as possible for people to walk past their location.

Follow the fuel

Harvard economist Edward Glaeser and his colleagues Michael Luca and Hyunjin Kim don’t buy the idea that Starbucks wields direct power over the real estate market. Instead, they posit that “Starbucks locations are chosen by individuals with excellent judgment about where prices are going to increase.” The company’s analysts know how to identify socioeconomic, demographic, and economic patterns, as well as other important local characteristics. That said, there’s a conversation to be had about the role of Starbucks when it comes to gentrification. 

Referring back to Zillow’s Rascoff and Humphries, Starbucks is apparently “the fuel, not the follower” of gentrification. Boston Magazine reached out to Humphries to elaborate, and he said that Starbucks was both the cause and the effect of neighborhood gentrification. “Starbucks is both following home price trends and neighborhoods, and in turn is fueling those trends,” he said. However, Boston Magazine found ample evidence to refute that claim, a point was that retailers are very aware of development timelines as they work with local brokers. 

There are also fundamental demographic differences between Starbucks and its competitors. Homes and commercial properties near a Starbucks appreciate more than those close to Dunkin’ Donuts. In comparison, Dunkin’ Donuts has a significant presence in small towns and economically depressed areas, like the Rust Belt, where property prices have yet to recover from the recession.

Treating the opening of a new Starbucks as a real estate crystal ball may have made sense a few years ago, but a lot has changed. Indoor dining is tentatively open depending on where you are, so Starbucks had to rethink their dine-in strategy, much to the chagrin of their baristas who are now perpetually swamped with hefty UberEats orders. Starbucks announced in June of 2020 that it would shutter 400 of its stores within the span of 18 months, 40 of which were in Manhattan (where their population was the densest). 

Then again, if we’re thinking of Starbucks’ presence as a precursor, this may only reveal that locations that weren’t considered so valuable in the past are going to become more valuable markedly soon. The pandemic accelerated flights to the suburbs, not just for people who were freed from their over-saturated cities once their jobs went remote. Offices followed suit. Once-obscure cities like Grimes, Iowa, or Leesville, South Carolina are seeing populations increase and, with it, new coffee shops. However, Starbucks is at a disadvantage now. The factors that led to their explosive growth (limited shared space and the desire for dine-in) aren’t as prevalent now. What remains the same is that people still want their coffee, so we’ll have to wait and see if Starbucks is able to remain an influential part of modern culture.

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