You Can Get Anything You Want At Alice’s Restaurant, Starbucks, and Whole Foods Because It Makes Housing Grow

November 25, 2024
  • Remembering The Alice Of Alice’s Restaurant Fame
  • Premium Grocery Brands Like Whole Foods, Drive Apartment Rents Higher
  • The “Third Place” In A Neighborhood Such As Starbucks Fosters Entrepreneurialism

The woman who owned the restaurant made famous by Brooklyn’s Arlo Guthrie in his 1967 song Alice’s Restaurant Massacree just [gift link>] passed away. It’s a tradition that this fun song always gets played a lot during the Thanksgiving holiday due to the storyline. I was only seven when the song came out, but two years later Guthrie came up with the Motorcycle Song, another talking folk song. I remember sitting in the back seat of my parent’s car headed to Thanksgiving dinner and the song came on the radio. My Dad, who never seemed to particularly enjoy music, excitedly implored us to listen. It was one of those moments I will never forget.

Before we get to actual useful information here in Housing Notes, where did the name Starbucks, the coffee chain, come from? Or Whole Foods?

Premium Grocery Stores Has Long Been A Driver Of New Housing, That Tends To Be More Expensive

My kids call Whole Foods “Whole Paycheck.” About 6 months ago, RCLCO updated their study on higher apartment rental prices caused by premium ground-floor grocery store anchors. This Globe St piece explains the retail premium, Multifamily Projects Realize Rent Premium With Ground Floor Grocery Stores. An upscale grocery story signifies that a neighborhood has “arrived” although with that comes higher rents.

‘”Apartment communities with a Whole Foods on the ground floor achieve, on average, a rental rate premium of 6%” compared to similar communities nearby, an analysis by RCLCO calculated. For a Trader Joe’s on the ground floor, the average premium was 5.6%. Other high-end grocers like Sprouts, Harris Teeter, Fairway and Safeway yielded premiums of 5.2% in 2023, up from 3.3% in 2020.’

RCLCO’s previous study was presented in 2020. Premium grocery tenants sound like a good way to jump-start a new development. They’ve been updating this report every four years, beginning in 2016 but I’ve been writing about this phenomenon since 2006.

Higher rent increases in buildings with a Whole Foods did typically follow the higher initial rents; less so in buildings with a Trader Joe’s. Absorption among buildings with any high-end grocer frequently exceeded that of comparable neighborhood buildings, but typically leveled off to the neighborhood norms within about 10 months, the report found.

This New York Times graphic is from 2020 but makes the same point as today.

Commercial real estate advisory firm Newmark published a premium retail study back in 2019 called “The Grocery Store Effect” with similar patterns.

Consumers Continue To Spend As Multi-Family Construction Stalls

While consumers continue to spend by taking out more home equity loans…

…new U.S. multi-family construction has stalled, down 21.3% year to date, helping keep rental prices elevated. The spike in interest rates since early 2022 and overbuilding in the Sun Belt likely are the causes for the sharp year over year drop.

‘Third Places’ Is Officially Added To My Vocabulary

According to a 2024 study: Third Places and Neighborhood Entrepreneurship: Evidence from Starbucks Cafés. Former NBA star Magic Johnson partnered with Starbucks to focus on underprivileged neighborhoods which resulted in an uptick in entrepreneurship in those locations.

When I was a freshman at Michigan State, Magic led us to the NCAA championship, and we won the Big Ten Football Championship, the Big Ten Baseball Championship, and the National Cheerleading Championship. My sophomore year Magic went pro and our Spartan teams were relegated to dead last or close to it, a humbling experience. Ha.

but I digress…

Magic clearly recognized the power of a third place as illustrated in the study.

From the Abstract: When compared to census tracts that were scheduled to receive a Starbucks but did not get one, tracts that received a Starbucks saw an increase in the number of startups of 9.1% to 18% (or 2.9 to 5.7 firms) per year, over the subsequent 7 years. A partnership between Starbucks and Magic Johnson focused on underprivileged neighborhoods produced larger effects. Several analyses suggest the effect occurs through a networks mechanism.

This was the most interesting part of the study for me – it’s not the brand Starbucks that creates entrepreneurism, but rather the introduction of a cafe to a neighborhood.

Starbucks does not increase neighborhood entrepreneurship among neighborhoods that already had coffee shops. The difference between the two columns is consistent with the benefit of Starbucks being dependent on the local incidence of institutions and locals’ ability to form and sustain social networks. By and large, the mode of entry for Starbucks is similar for the neighborhoods in either column, as are their demographic characteristics (see Table 2). However, the effect of Starbucks is different depending on whether local residents already have other locations that serve as substitute establishments to socialize. If the Starbucks effect were due to signaling, we would not expect the presence of other coffee shops to matter.

For me, it’s just a hop, skip, and a jump for the uptick in entrepreneurism to create more demand for residential housing as well as more supply for residential housing.

Final Thoughts

As we get closer to Thanksgiving, we can consider that more “third places” or social cafes create more housing demand and premium grocery chains influence rents to go somewhat higher. Both of these market forces incentivize the creation of more housing.

Since it’s nearly Thanksgiving, here’s confirmation from an old television sitcom that a Turkey can’t actually fly.

Monday Mailboxes, Etc. – Sharing reader feedback on Housing Notes.

November 22, 2024, The One Banana, Two Banana, Three Banana Housing Market Outlook

  • Bananas! I love. This week’s housing notes are pure entertainment. After this banana party, we should watch our steps. Rind warning!

November 18, 2024, $100 Million Home Sales Are The New $50 Million Home Sales

  • Great article. Rising state/county/local property taxes are not unexpected. Labor and material costs are not going to decline going forward. 
  • …one of those new 100 million plus homes [click image]

November 15, 2024, Higher Mortgage Rates Are Driving New York City Rents Higher & Other Rate-Related Housing Distortions

  • It is hard to argue with the concept that whoever hires someone should be the one paying for that person but what I don’t understand is how are landlords going to advertise their properties for rent? I guess it is more money in Zillow/StreetEasy’s pocket. They will be able to charge the LL to list and since they are a licensed broker they will probably collect that fee themselves and I can’t blame them for doing so. They don’t provide a free service after all. They charge brokers who want to be listed on their own listings based on a pricing algorithm that is a bidding process which if you ask me is totally disingenuous

Did you miss the previous Housing Notes?

November 22, 2024

The One Banana, Two Banana, Three Banana Housing Market Outlook

Image: Gemini

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