Gentrification is a long-term process where a neighborhood undergoes urban development, involving an influx of higher-income residents to an otherwise abandoned or rundown area. Gentrification is a controversial political and social topic. A rise in new businesses opening and an increase in affluent residents leads to higher housing and living costs, which can force some original (lower-income) residents to relocate—also called displacement. However, there are benefits to the local economy and for real estate investors who embrace gentrification.
Reasons for Gentrification
Gentrification in the U.S. is happening in various cities, including Washington, D.C. and Atlanta, GA, which started gentrifying in the 1970s. While gentrification can happen for any number of reasons, part of it is younger generations looking to move closer to city centers but not being able to afford the high prices of living in the city.
Digging deeper, much gentrification is a result of an oversupply of rundown housing, coupled with an influx of available jobs in larger cities. This comes as there was an exodus from American cities in the 20th century.
San Francisco, CA, gentrification started in the 2000s thanks to the dot-com bubble, which led to an influx of predominantly white technology and Internet workers. What happens (and is happening) in areas like San Francisco is that homes that were selling for $50,000 years ago now sell for $250,000 or more.
Once gentrification starts happening, an area (and its associated properties) can see large and quick moves in real estate values. Real estate investors and developers are attracted to the area for investment and profiting purposes.
Younger generations looking for jobs near city centers tend to settle for urban neighborhoods that lie just outside major cities due to lower real estate prices and living costs. If an area already has some sort of city transport system in the area, it can help further drive gentrification. Early adopters tend to be individuals dubbed “hipsters,” artists, or musicians. Meanwhile, later on, upper-middle class individuals move to the area, followed by wealthier people.
Gentrification starts with a few properties (homes or apartments) being renovated or retail businesses opening up. Larger developers or investors will build bigger complexes and housing developments. Ultimately, the city takes notice and makes further investments in the community, such as infrastructure and more public transportation.
Gentrification vs. Revitalization
There’s a fine line between gentrification and revitalization. Revitalization is often seen as a positive aspect for an area, bringing more infrastructure and community resources, but gentrification is often frowned upon for displacing residents. The only real difference is that revitalization is gentrification without mass displacement.
Gentrification is often seen as profit-driven and racially charged, because investors and developers make money, while many residents must relocate due to rising prices. Thus, to limit gentrification governments will put in place various controls and laws. Cities looking to keep gentrification or its effects at bay may implement rent controls or zoning limits and use community land trusts.
Gentrification and Displacement
One of the impacts of gentrification is the large-scale displacement of families and cultures. The argument is that it makes housing less affordable for minorities and lower-income residents who are typically found in areas undergoing gentrification, ultimately making these residents move.
The original residents are then forced to leave the gentrified area and relocate to higher crime and potentially even lower-income areas than their original neighborhoods. Ultimately, a neighborhood can be completely changed, including any previous cultural roots and affordable housing. The effect of gentrification is a shift, not only in income levels, but ethical and racial composition.
A lot of it comes down to perception: Is gentrification revitalizing a neighborhood or is it effectively kicking out the “poor” and minorities? On the upside, an otherwise desolate or rundown area may now be rejuvenated thanks to gentrification, bringing jobs and economic activity to the area. Oftentimes, gentrification poses an ethical dilemma, but for real estate investors, identifying gentrifying neighborhoods can be a profitable strategy.
Investing in Gentrification
Identifying and targeting gentrifying city neighborhoods can be a profitable real estate investment strategy. Gentrification, despite the controversy, tends to lend to higher rental rates and home values.
The beauty (for investors) is that gentrification happens all over the U.S. Some of the fastest growing gentrifying neighborhoods today include Detroit, MI.; Miami, FL.; Charlotte and Raleigh, NC; Austin, TX; and Oakland, CA. Per RentCafe research, some of the most gentrified cities in the U.S. from 2000 to 2016 include Los Angeles, CA; Washington, D.C.; Houston, TX; Philadelphia, PA, and Manhattan, NY.
Investing in Gentrification
For real estate investors, investing in gentrifying neighborhoods can be profitable, as property values and rents tend to rise. Finding such neighborhoods, however, is key. A few things to look for include the opening of more restaurants and bars and a shift in the demographic to younger and more affluent residents. Identifying gentrifying neighborhoods can also be done with scuttlebutt research, using local business journals, studies, and planning meetings.
Broadly, look for these things when seeking out gentrifying neighborhoods:
- Improving neighborhood stats, such as crime rates
- Rising number of building permits, renovations
- Rising sales prices based on Multiple Listing Service (MLS) data
- Declining number of “for sale” or “for rent” signs, as well as less vacant and burned out buildings
Demographic wise—and beyond higher incomes—there’s a fall in the median age, rise in average educational level, and decrease in household size. The expansion of city transportation, such as additional bus routes and bike lanes, electric vehicle charging stations, and bike-sharing docks are all good signs of gentrification. Generally, if you see a Starbucks or Whole Foods pop up, it signals gentrification is in full swing.
In the early beginnings, neighborhoods can often be identified by a number of burned out and vacant properties that have also seen revamps in the area. Increased social media mentions and discussions of locations can help identify gentrification as well, based on a Cambridge University study.
Other signs that various real estate investors and experts have noticed are a shift away from dollar stores toward higher-end drug stores (such as Walgreen or CVS), opening of wine specialty stores, renovation of local stores, revamp in the types of goods sold by grocery stores, and mainstream banks opening locations.
Gentrification does have its advantages, bringing economic growth to an otherwise desolate area. But the rise of social issues, such as race and income inequality, has brought to light that gentrification can sometimes be a questionable version of urban growth. Still, that could mean less competition for investors who believe the advantages outweigh the disadvantages.