There’s a crucial role that coffee seems to play in American culture. Don’t believe me? The National Coffee Association discovered that two-thirds of Americans drink coffee each day, which is more than any other beverage including tap water. Coffee has also become a staple of office work. The typical American office worker consumes 1,040 cups of coffee each year, totaling to 20 cups per week. American office workers love guzzling a cup o’ joe so much that the coffee pot has replaced the water cooler as the symbol of workplace camaraderie. With so many office workers cradling a cup of coffee throughout the day, is it any wonder that there is a strong correlation between an office’s rent and its proximity to a Starbucks store?
The “Starbucks Effect” has been talked about for a while when it comes to residential properties. Many have pointed out that the values of homes increase whenever they’re near a Starbucks coffee shop. But does the same thing apply to commercial buildings? According to CompStak’s new data, the answer is yes. So why it is that an office property located near the famous coffeehouse with the green siren will ultimately be worth more than the property that isn’t?
CompStak actually tracked the movement of office rent growth in the regions with the most closed and opened Starbucks outlets during the COVID-19 pandemic. They found that in the last two years, office rents exceeded pre-pandemic levels in cities where Starbucks opened more stores. During 2022 to date, the average effective office rent in the areas with the most Starbucks openings had climbed by 47.5 percent from the pandemic low and by 24.9 percent from the final quarter of 2019. On top of that, the average office base rent, which is the starting rental rate before escalations or concessions like free rent or tenant improvement allowances, jumped up 55 percent in 2022 year to date from the pandemic low for the cities with most Starbucks openings. This eclipsed the 25 percent increase from the pandemic low in the cities that had the most closed stores.
Good things brewing
On the surface, the “Starbucks Effect” sounds as if the presence of a Starbucks is a transformational phenomenon that skyrockets property values. But, this might be a case of seeing correlation as causation. Values of properties near a Starbucks do go up after a new location for the international coffee chain opens. But rather than it being a sign of the market willing to pay more for a nearby mocha frap, it may be a testament to how good Starbucks is at their location analysis.
As Alie Bauman, Director of Real Estate Intelligence at CompStak, a commercial real estate data platform, explains, “the ‘Starbucks effect’ more likely describes Starbucks’ keen ability to identify strengthening markets, rather than the cause of real estate appreciation in its chosen markets.”
One of the reasons that Starbucks continues to reign supreme in the world of quick-service food and beverage is because Starbucks chooses each of its sites so meticulously. The proximity of a Starbucks to other businesses is important since it impacts customer growth. Starbucks prefers to set a shop in intersections with several entry points. Since they want to be as noticeable as possible, they select the main path with simple entry and exit places (which is why it’s not uncommon to see a Starbucks across from a Starbucks, much to comedian Lewis Black’s dismay).
The other principle that Starbucks employs during the site selection process is that Starbucks favors locations in commercial districts, particularly spaces within those districts that are close to educational institutions and, of course, office buildings. Palombo said that Starbucks “both follows and fuels pricing trends in residential real estate,” but perhaps more importantly, “it may have further affirmed how office rents have trended in suburban markets where Starbucks has stores and where remote workers have flocked during the pandemic.”
The value of a nearby Starbucks also might derive from the signal to investors of an improving (dare I say gentrifying?) neighborhood. Starbucks is known for focusing on metropolitan areas experiencing an uptick in population and wealth growth. After all, large, crowded city centers with lots of people with disposable income is typically a good place to attract a steady stream of customers for any product…but particularly coffee.
Coffee consumption is habitual. Most coffee shops make the majority of their revenue off of regular customers, many of whom place the same coffee order every day. This generates a dependable clientele and with it dependable foot traffic. This foot traffic can further influence the perceived value of the property as many investors take foot traffic counts into consideration when evaluating a deal.
Even when the COVID-19 pandemic usurped our day-to-day by shutting offices down and prompting mass migrations throughout the country, the connection between Starbucks and offices didn’t wane. Last summer, Earnest Research, a data analytics company geared to investment firms and consumer brands, used Starbucks foot traffic to measure return-to-office behavior. Instead of tracking commuter data or even key card swipes into an office building, Earnest honed in on consumer foot traffic in Starbucks locations near large office buildings in dense urban areas, and ultimately found that methodology effective. By November, Earnest expanded the methodology by including daytime foot traffic data to isolate morning traffic patterns at Starbucks for a more thorough analysis of office markets.
Starbucks is undergoing a bit of a growth spurt with no real end in sight. During an investor event in late 2020, Starbucks announced plans to increase its then-footprint by 22,000 new stores within the next decade, and they seem to be following through with that projection. Throughout the pandemic, Starbucks opened more locations than fast-food giants McDonald’s and Subway. With so many stores opening without any plans to slow down, the correlation between Starbucks openings and rising office rents might not remain as strong. But for now, when you see a “Starbucks coming soon” sign you can be sure that the offices in the area will stand to benefit, in one way or another.