Denver Colorado is the second fastest “gentrifying” area in the country just behind San Francisco.  Furthermore, Denver beat out Boston, Miami, New Orleans, Austin, and countless others due to the rapid gentrification of the downtown core.  What is Gentrification? How does it occur? Why is Denver gentrifying faster than other markets?  What does this mean for real estate and affordable housing?

 

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.

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, etc..

Who did the study?

The study was done by The National Community Reinvestment Coalition.  NCRC was formed in 1990 by national, regional and local organizations to increase the flow of private capital into traditionally underserved communities. NCRC has grown into an association of more than 600 community-based organizations that promote access to basic banking services, affordable housing, entrepreneurship, job creation and vibrant communities for America’s working families.

As with any study, the data only tells part of the story, it is important to think critically of any data, like this study, that was done with a political bent either liberal or conservative.

What is in the data?

San Francisco, California, took the title of most intensely gentrified city in America during 2013-2017, followed by Denver, Colorado, and Boston, Massachusetts. They had the largest share of their vulnerable neighborhoods that gentrified during that time period. Washington, D.C., ranked No. 1 in the 2019 report, dropped to No. 13. Gentrification and displacement continued there, but it surged elsewhere.  Below is a table of the top “gentrifying” cities across the country.

The study further pinned one of the primary causes of gentrification on Opportunity Zones whereas investors are able to purchase properties in high needs areas and defer tax gains.  Many of these areas are in challenging urban environment. Here is what the NCRC said: “because of the high degree of adjacency of OZs and urban neighborhoods experiencing gentrification, OZs may be especially prone to gentrification as they are impacted by the spill-over effects from neighborhoods next to them. The primary problem of the newly designated OZs is not so much how they were selected, but whether or not they will benefit their residents, and not just wealthy investors seeking to reduce their tax liability.”

 

 

How does gentrification happen in real life in cities like Denver?

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 can’t 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.

What is driving gentrification?

Unfortunately pinning the blame on opportunity zones is a bit of a stretch as it is assuming that opportunity zones are the drivers of change when the facts are radically different.  What is really driving gentrification? Lack of inventory!

  1. Lack of land/ restrictive land use policies: if you look at all the top cities in the study they are each larger cities with restrictive land use policies. For example if you look at the zoning of many properties, they are zoned for one single family home. There are thousands of examples where people try to build higher density (duplex, triplex, row homes), etc.. and cities will not allow them as they “change the character of the neighborhood”.  This is the number one driver of gentrification as there is little way to meaningfully increase supply.
  2. High build costs due to increased regulations: The top cities have strict building codes that get more complex every year.  Complexity always adds costs.  For example there are new energy requirement for how tightly a house must be sealed, the R value for windows and insulation, etc.. all these new requirements add substantial costs which makes building very expensive.
  3. High labor costs: Labor costs in all the top tier cities are very high.  For example NY, California, and others have a $15 dollar minimum wage.  The goal of the minimum wage was to help workers earn a “living wage”.  Unfortunately the byproduct is higher building costs. As the minimum wage rises, costs for building labor rises as well which has to be passed on to the new buyers via higher prices.

 

Summary

Gentrification is a byproduct of lack of inventory.  The market has responded as it always does with increased prices as demand outstrips supply.  The top tier cities like Denver continue to talk about the impact of gentrification but there has been little to no real progress made as the real culprit,lack of supply, has yet to be addressed. Will cities make radical changes to solve the economic riddle and reverse years of gentrification?  Unfortunately, the real estate market has already answered the question with a no as prices are continuing to rise in cities like Denver even during the economic malaise of the pandemic

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 MagazineThe 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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