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The Starbucks Effect

The Original Starbucks in Motion by Brad Telker on 500px.com

https://500px.com/embed.js

This afternoon I was chatting with some friends about Toronto real estate (which is something that happens a lot in this city), and we started talking about “The Starbucks Effect.”

Basically, we were talking about how this neighborhood just got a Starbucks and how that neighborhood already has one. We were, like a lot of people, using Starbucks as a proxy for neighborhoods that are emerging and neighborhoods that have already arrived.

There’s been a lot of discussion about the correlation between home prices and the presence of a Starbucks. But the big question is what comes first: the home prices or the Starbucks?

Earlier this year, the CEO, Spencer Rascoff, and Chief Economist, Stan Humphries, of Zillow.com argued that the mere presence of a Starbucks can cause gentrification. 

They argued that Starbucks knows the next hot neighborhood before anyone else does and that they are “the fuel, not the follower.” And through their data they demonstrated that homes (in the US) near a Starbucks appreciated significantly faster than homes not near a Starbucks, or even homes near other coffee shops such as Dunkin’ Donuts.

But I – as well as others – wonder if this isn’t an oversimplification.

I certainly believe that Starbucks could help fuel home prices in a neighborhood. I think it gives people a comfort level that the neighborhood has arrived and that there are people in the area who are willing and able to spend money on discretionary items.

But I suspect that for Starbucks it’s a balancing act. They would never want to be late to an emerging neighborhood (and miss that prime corner property), but they also don’t want to be in the business of placing bets on neighborhoods with very few vital signs.

So I think it’s both. I think Starbucks is analyzing the data and watching home prices like a hawk (the follow) and when it reaches a certain point, they move. And that likely causes a further acceleration of neighborhood change (the fuel).

What do you think? I would love to learn more about their site selection process.

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