Ever heard of the Starbucks Effect? What about the Whole Foods Effect? Or the Wal-Mart Effect?
Don't worry if none of these ring a bell, the concept is pretty simple – when (insert popular retailer here) moves into or near your neighborhood, you can expect to see your home’s property value increase at a higher rate than usual because people want easy access to their favorite place to shop or stop for coffee.
A 2015 study by the real estate information company RealtyTrac analyzed this trend. The study included 4 million homes located in a ZIP code with either a Whole Foods or Trader Joe’s location, finding that average property values in a ZIP code with Trader Joe’s appreciated by about 40 percent since they were purchased, while homes with a Whole Foods in the ZIP code appreciated by nearly 34 percent, which matches the national average increase according to the survey.
Various national and regional retailers have been recognized as having an impact on home values in the immediate area of their location, and it certainly makes sense since people like the convenience and familiarity of their favorite brands.
But are the popular retailers playing an active role in the average value increase, or are they just great at recognizing areas that are poised for greater interest in homebuyers?
Any major retailer considers several factors before choosing a new location – not only the right size space, but also the cost to rent or build in the area, whether there is an abundance of existing clientele and the potential to reach a wider customer base. Retailers make a lot of their decisions through research with companies like Esri, an information and technology company that offers mapping software that compiles demographic information and sales success by geography. Companies like Starbucks, Walgreens and Lululemon Athletica use Esri's software for their expansion decision-making.
And when a retailer decides to open a new location in an area undergoing widespread changes, it becomes an investment for future customers years down the road. In 2013, Whole Foods opened a location in downtown Detroit, the first national grocery store chain to open in the city in more than a decade. In the same ZIP code as the Detroit Whole Foods, median home sales went from $19,000 in 2009 to $80,000 in 2015, according to a report by the Detroit Free Press.
The same analysis found the median home price citywide had quadrupled in that time period, as American and international investors bought up commercial property, more local businesses opened up and other businesses relocated or expanded operations within Detroit's city limits. Clearly, more is going on in the city than the opening of a Whole Foods to bring about the change in property values, but a Whole Foods opening could be considered a noted shift in more widely recognized brands operating in the city.
Once a grocery store or popular meeting place establishes its roots in an area, its presence becomes a strength of the neighborhood, explains Ronald McInerney, owner of Domus Appraisals, a real estate appraisal company that operates out of Yonkers, New York, and Warwick, Rhode Island. "If you remove those businesses, it's not as desirable," he says.
But if you hear word of a Starbucks or Wal-Mart going in a quarter-mile away, don’t go putting your house on the market expecting a better sale price just yet. A community’s progress doesn’t have an immediate effect on where people are looking to move, and as a result, home values take time to increase.
People already know where to look. When it comes to house hunting, proximity to necessary community amenities like a grocery store and coffee shop are definitely a part of the decision-making process. But they’re typically considered earlier in the homebuying process than one might think.
“Homebuyers oftentimes ask those questions but usually more often know the answer to those questions already,” says Greg Hague, CEO of Real Estate Mavericks, a real estate coaching firm based in Scottsdale, Arizona.
The house hunting process often begins with a decision on communities and neighborhoods the homebuyer would consider living in – even before they pick their real estate agent. Whether it’s a conscious consideration or not, Hague says people will look at areas near stores they’re used to frequenting because it provides a comfortable atmosphere.
"People decide to live in a community, because generally you look [for a home] by community," Hague says, noting clients often know where their preferred grocery store locations are and how easy it is to get to them from where they're looking to move.
Even for people who may not be familiar with the area, driving around to check out neighborhoods can lead homebuyers to focus on neighborhoods near shopping centers that meet their typical needs.
“With so much information available out there, and people just in their own self-interest are going to be driving around the area whether you’re with them or not as an agent, and they’re going to know all about that neighborhood,” says David Michalski, president and principal broker of Fairfax Realty in Falls Church, Virginia. “And it does add value in the minds of most consumers.”
Just don’t expect a change overnight. While a popular retailer’s new location can certainly drive up interest in an area, the positive effect on your home’s value isn’t going to be immediate.
Market valuation appraisals aren’t going to see an instant change in home value thanks to nearby commercial change, McInerney says. A real estate appraisal draws its conclusion largely from comparable home sales in the area, making an estimate as to how much a buyer would be willing to pay for the property. Appraisers look at homes with similar bedroom numbers, square footage and level of upkeep to determine the value. While nearby stores do have an impact, something like a new roof is going to have a bigger influence on the market value of your home compared to the other houses nearby.
While a new Trader Joe’s could draw increased interest from homebuyers in the area, a significant bump in home value will typically take place over a few years. “With a new store or bigger store coming in, it really affects the community, but it still takes time to impact property values,” McInerney says.
A 2014 study by researchers at the University of Chicago and Brigham Young University found homes located within a half-mile of a new Wal-Mart location experienced increased home sale prices by just 2 to 3 percent from 2000 to 2006, an average of about $7,000 per home. The study included 159 Wal-Mart stores, and the average home price was approximately $267,000 within the study area. While researchers saw an increase in the amount buyers were willing to pay for homes near the Wal-Mart, the effect was certainly not immediate or significant, especially when factoring in the natural tendency for a home's value to increase.
McInerney adds that a convenient location to retail is often apparent in existing town centers. In the suburbs of New York City, for example, town centers are typically where the train station is, taking many people to work in the city every day. With the combination of shops and transit to work, homes that are “more proximate to the village center or downtown area, they hold higher appeal,” McInerney says.
It’s important to note, however, that individual markets across the country vary significantly for a variety of reasons – from the type of work most popular for residents to the typical form of transportation and general geography of a city. While a Trader Joe’s or Starbucks could be a good reason to expect an increase in home values down the line, McInerney says, “It doesn’t hold true for all communities.”
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at firstname.lastname@example.org.