11/02/2016 10:40 EDT | Updated 03/21/2019 15:52 EDT

Starbucks Effect: Spotting The Next 'It' Neighbourhood

When it comes to real estate, the "Starbucks Effect" has become a well-known phenomenon. The premise is that if the popular coffee shop opens its doors in a neighbourhood, it's a sure sign that the area has arrived.

By Sonia Bell

When it comes to real estate, the "Starbucks Effect" has become a well-known phenomenon. The premise is that if the popular coffee shop opens its doors in a neighbourhood, it's a sure sign that the area has arrived.

But does Starbucks really have this kind of effect on an area, or is it all the other influencing factors that come before it that attracted Starbucks in the first place? In other words, Starbucks isn't necessarily symptomatic of an area bound to go places, it's the final stamp of approval. And, if this is the case, the key to making a good real estate investment is to get in before Starbucks sets up shop.

Realtors often say that a good investor will abide by the real estate saying "follow the money." According to Shannon P. Murree, sales representative at ReMax Chay Realty Inc., Brokerage in Barrie, Ont., "It's always better to get in before the Starbucks because you want to be able to be ahead of the game, so to speak, before the numbers or the market catches up." If an investor buys into a market a few years prior to Starbucks, chances are, the money has started to come into the area, but hasn't yet peaked.

Most savvy real estate investors or developers would agree that the evolution of a neighbourhood is one that occurs over many years. It also involves a multitude of factors that include such things as population, employment and wage growth, infrastructure improvements and land and housing development.

One way to foresee an increase in such factors is the arrival of large retailers; these organizations think long and hard before opening a new store and select locations in a meticulous fashion based on data, research and demographic information. "(Retailers and builders) that are going to be developing in that neighbourhood have already done all the market research to make sure it's worth their while before making that kind of investment," says Murree.

Such retailers enter a neighbourhood because their research -- insight into city planning and economic development departments, for example -- indicates the economy and employment there are expanding. These retailers play an important role in providing additional jobs, servicing the growing community and affording the kind of amenities builders count on when they market new developments.

According to Murree, "When it comes to investors, one of the first things they need to determine is the tenant profile that they want to be able to attract. If you're looking for Millennials, what is it that attracts Millennials to an area? If you're going to be a strategic, savvy investor, of course the community, the Walk Score, the market reports, all of those things are going to influence your purchase decision."

For investors Eryn and Steve Lorriman-Morreau, co-founders of Effective Land Management Solutions (ELMS), retail helps determine the demographic the area will attract. "Retail in a neighbourhood, especially quality anchor stores, is a good indication that the area is stable... We'd rather see a Walmart or another large retailer in a community (over Starbucks), as these cater to a wider demographic and an indicator of an up and coming area."

The presence of major retailers is an important part of the selection process for builders and developers. "The absolute truth in land acquisitions is that there is an ordering to how we pick locations (neighbourhoods)," says Brian Johnston, chief operating officer at Mattamy Homes, Canada's largest home builder, with low- and highrise communities in Ontario and Alberta, as well as in the U.S. "Generally, the neighbourhood picks us, as opposed to the other way around.

"As an example, we may want to build townhouses in tony Forest Hill in Toronto. However, it is likely that the best we will find is a highrise site on the periphery of that neighbourhood. Sites get brought to our attention and we vet the opportunity. We assess things such as schools, parks, transit, roads and shopping to determine whether the opportunity is a viable one. There are vast differences in the availability of services and amenities when comparing greenfield communities on the urban fringe, compared to infill sites, but this is reflected in the selling price of the homes."

One way developers solidify their proximity to retail is by tapping into the "mixed-use" condominium trend, where retail is located within the building itself. Builders are foregoing homogeneous developments that are strictly residential, and instead building communities that entail parks and retail and other amenities.

Image of Ice District in downtown Edmonton. Photo by Ice District Properties

Take for example, E Condos at Yonge and Eglinton, Minto Westside at Front and Bathurst, or Ice District in downtown Edmonton. These developments are a few of many that will introduce retail into their projects. Once they are complete, the ripple effect will ensue. There will be a huge draw for people to live in these condos, wanting direct access to the amenities. It'll also bring foot traffic to the area from other nearby neighbourhoods, which will then spark more development from retailers who also wish to be near that increasing traffic.

Of course, these communities take time to develop. But once they're complete, investors who get in at the right time could be rewarded with price appreciation, as well as an attractive product for prospective renters.

Read more on YPNextHome

Follow HuffPost Canada Blogs on Facebook