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By William Travers, Senior Quantitative Strategist, Ten-X Research

The “Starbucks Effect” may sound like a medical term related to caffeinated beverage addiction, but you won’t find the term in the American Medical Journal. Rather, several articles have taken this parlance to describe the phenomena of how a Starbucks store opening increases home and property values.

It’s important not to confuse correlation with causation though. If Starbucks really caused a surge in property values, mass openings of Starbucks cafés in markets with high foreclosure rates would be a powerful economic stimulus tool. This is a case of correlation, and the credit for this illusion should be given to the Starbucks site selection/real estate department, who have done an excellent job pinpointing neighborhoods undergoing strong income and population growth. Starbucks offers an amenity that up-and-coming neighborhoods want – and it may even help define these neighborhoods – but it is not the cause of a neighborhood becoming the “hot” place to live.

Starbucks is seemingly ubiquitous – located in every mid-to-major US market. Its operation is classified in the quick service restaurant (QSR) segment, which is considered very competitive retailing space. In order for Starbucks to maintain its competitive advantage and franchise value, it is imperative that it continually finds the next optimal store location and position itself as “first mover” in order to capture and maximize local market share before its QSR competitors can get on the ground.

With over 23,000 retail stores located throughout 70 countries, Starbucks has fine-turned their uncanny ability get ahead of the neighborhood curve by successfully identifying the demographic, income, and economic metrics and trends that drive residents towards copious sales of elevated-priced coffee.

The Starbucks Effect is not real, and the notion of “build it and they shall come” remains a fallacy, but the opening of a Starbucks store does confirm the area has been economically vetted to the point where the firm is comfortable investing in the market. So if you see a new Starbucks, or similar high-priced QSR store pop up in your neighborhood, rest assured it’s a positive symptom of improving home values, just not the cause.