Urban Real Estate: Violent crime skyrockets; gentrification reverses.

The statistics are staggering. Violent crime in Atlanta is up over 30% from 2019. Unfortunately, this is not unique to large cities. According to Crime data from Denver Police there have been 44 homicides this year so far, that is up from 31 at the same time last year. A more than 40% increase. Is gentrification reversing in many urban cores? What does this mean for real estate?

What is in the data about violent crime?

It is not anecdotal that crime in cities is rising rapidly. A sharp rise in homicides this year is hitting large U.S. cities across the country, signaling a new public-safety risk unleashed during the coronavirus pandemic, and amid recession and a national backlash against police tactics.

A Wall Street Journal analysis of crime statistics among the nation’s 50 largest cities found that reported homicides were up 24% so far this year, to 3,612. Shootings and gun violence also rose. It is hard to tell if the long-run trends that transformed many U.S. cities for the better are now reversing, or if instead this will be a spike. A great deal hangs on that question, experts say.

“If the city descends into the level of danger that we saw in the 1970s, that will be a challenge for all of America,” said Edward Glaeser, an urban economist at Harvard University.

What is gentrification?

Gentrification is a general term for the arrival of wealthier people in an existing urban district, a related increase in rents and property values, and changes in the district’s character and culture. Many aspects of the gentrification process are desirable with reduced crime, new investment in buildings and infrastructure, and increased economic activity in their neighborhoods.

Gentrification is occurring in cities throughout the United States as urban areas are becoming desirable. It is ironic in the 80 and 90s, the goal of many cities was to invigorate “challenging” in town areas. Tax breaks and other incentives were given to help “clean up these areas”. The changing of inner cities to desirable and coveted areas to live worked very well as the tax base rapidly increased, violence decreased, and new stores and restaurants opened.

Now the pendulum has swung the other way with gentrification of challenging areas now looked at negatively, as wealthier owners figuratively “push out” less advantaged with higher property costs, rents, new stores, etc..

How does gentrification happen in real life?

Regardless of what the fancy studies say, gentrification is a very simple economic event. People want to live in an area, the area they want is too expensive, so they buy a house near the area they desire that isn’t as nice and then spend money fixing it up. Depending on the price point, buyers go further and further into less desirable areas to afford a property. For example, in a nice neighborhood around Denver the median home price might be 500k, which many buyers cannot afford. Fortunately, if you go a few miles another direction, the house prices are now 300k. The 300k is looking really good to buyers as at least they can own a house. This same cost benefit analysis snowballs on itself as more people go into the less desirable areas, they then become desirable, aka gentrified.

Is/will the opposite of gentrification occur?

Just as gentrification can occur in cities and urban areas throughout the country, the opposite can also occur. I’ll term this “ungentrification”, this is a new word I developed to describe the undoing of gentrification. Essentially this occurs when an area that had previously improved with less crime, more stores and restaurants, and a more vibrant housing market swings the other way. Many areas in urban cores are at a tipping point, will they remain desirable areas or will they slip back to the 80s. Here is a good description of what this means:

On the north edge of Denver’s downtown, gunshots are becoming a regular song of the night. Even the daytime. Residents say violence and drug dealing are taking over encampments in an area where people experiencing homelessness have been seeking refuge for decades.

“Things have changed demonstrably in the last four months,” says Noah Geisel, who lives on Curtis St. near Park Avenue West. “A half dozen shootings in the past two weeks, brutal beat downs, multiple overdoses, and that’s just the serious stuff.” (CBS Denver)

I’m assuming the above description is unlikely to be used in marketing materials to sell a property in the area!

How does ungrentrification occur?

Just like gentrification, ungentrification is an economic phenomenon. As an area appears to turn for the worse, residents will look to leave the area. One sale could cause a snowball effect. For example, in the area mentioned in the quote above let’s assume a homeowner decides to sell. When prospective buyers come and see the area, they are not likely to pay top dollar for the property. One can reasonably assume that the property will sell for less than when they neighborhood was perceived as a better or an up and coming area. This sale will set the bar lower than previous prices and will be used as comparables for other properties in the area creating the snowball of declining prices. Unfortunately, when prices decline, there is less desire to be in the area until prices reach some stabilization point. This process could be swift in a matter of a year or less or a drawn-out painful process of subsequent years. Declining prices are terrible for an area’s residents as gentrification is rapidly reversed and residents relocate to more desirable areas, stores/restaurants close, and the area becomes less desirable. The circle is further perpetuated as falling values and loss of stores/businesses leads to less revenue for the city to take steps to combat the “ungentrification”.

Summary

Before Covid, most urban areas were safe bets for real estate investing with the majority rising over the last 5-10 years. The desire to live in cities will return as the pandemic is brought under control and many of the areas within cities will become increasingly desirable again, but real estate will not be as easy as before the pandemic where almost everything just went up in value.

Unfortunately, the tide has now turned within cities as certain areas are at a tipping point and investors need to be careful. Will some of these areas become “ungentrified” with a flight out of the area or will they maintain their desirability? This is the million-dollar question for real estate owners/buyers as up and coming areas can be the best investments, but these same areas could be the new ones that fall out of favor causing huge losses. Not all urban areas will be the success of the past and real estate owners will be holding the bag … what is in the bag is the question.

Additional reading/resources

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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