No matter what the location and what type of property, every buyer wants to feel they’re getting a great deal and aren’t paying the highest price, said Raifie Bass, an Aspen-based broker for Douglas Elliman.
And purchasing a property in a transitioning neighborhood is one way a buyer can optimize potential appreciation and growth. But timing the purchase depends in large part on whether the buyer is looking for a solid long-term investment or a new place to occupy as a primary or secondary residence.
Knowing when to pull the trigger on an investment in a changing neighborhood often comes down to how much risk the buyer wants to take on, said Paul Habibi, a professor of real estate at the UCLA Ziman Center for Real Estate.
"If you purchase a property in an area right as it starts transitioning, a lot of people will tell you that you’re taking a big risk, and I would agree," he said. "But the problem is that once an investment is proven, the risk may go away, but so do the returns."
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From the investment perspective
For luxury purchasers who want a solid investment with growth potential that they likely won’t live in—at least at the present—Mr. Habibi said that timing comes down to satisfying three criteria.
First, he said, you’re looking for policy changes that impact land-use rules or increase subsidies, both of which make it easier for developers or investors to come into a neighborhood and make changes. Next, he said, you’re looking for an investment in infrastructure, or big public/private partnerships that spur retail or housing development.
"When you see a local government or municipality that’s pro-growth, and a big investment being made, that’s a real sign of change," Mr. Habibi said. "This should give investors the first glimpse that something is about to happen, and let them know that gentrification is right around the corner."
Finally, with these two criteria satisfied, buyers should look for signs of private sector development and investment, he said. This could mean grocery stores, banks and other support services sprouting up where they weren’t before, or other types of businesses entering the scene.
A recent example of this phenomenon is downtown Los Angeles. In 1999, the city approved a policy called the Adaptive Reuse Ordinance, which made it easier and less expensive for developers to convert commercial buildings into condos, apartments, retail centers and hotels.
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Then, major capital investment was made in the area, with the 1999 opening of the multi-purpose Staples Center, a popular event venue that’s also home to Los Angeles’s NBA, NHL and WNBA teams, and the adjacent L.A. Live event venue in 2007.
In 2006, the private sector opened the first major downtown grocery store, Mr. Habibi said, which was followed by an influx of restaurants, bars and retail establishments.
Today, Inglewood, a city of 110,000 in southwestern Los Angeles County, is on that same trajectory. After Inglewood’s mayor showed that he welcomed development after his 2010 election, the city’s indoor sports arena, The Forum, was renovated in 2012 by Madison Square Garden Group and re-launched in 2014.
In November, construction began on a $2.6 billion, 80,000-seat stadium, which will be home to the Los Angeles Rams and Los Angeles Chargers NFL teams when it’s completed in 2020. The stadium is the centerpiece of a larger 298-acre mixed-use development called the City of Champions Revitalization Project.
In addition to this cataclysmic investment, the city, which is located near Los Angeles International Airport, is undergoing infrastructure investment, as the Crenshaw-LAX rail line, which will connect to lines that reach downtown Los Angeles, is under construction. Today, these things are sure to change the face of the neighborhood, Mr. Habibi said.
Even though the Inglewood transition is still relatively new, Mr. Habibi said, prices in the area have already started increasing. In downtown L.A. and other places like Venice Beach, where gentrification has already occurred, those changes have been more pronounced.
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"While the investment might still be lucrative in these place, and they’re still growing, if you’d invested in Inglewood at the first signs of change five years ago or in downtown L.A. or Venice Beach 10 years ago, you would have tripled your money by now," Mr. Habibi said.
Similar story in Brooklyn
Like Inglewood, an area of Brooklyn located southeast of Prospect Park along Flatbush Avenue also satisfies these criteria. While it was once home to the first major battle of the Revolutionary War in 1776, and was a place where affluent Irish and Jewish families settled in the 1930s, in recent years, the neighborhood has fallen off the radar of real estate investors. Slowly, that’s started to change, said broker Joshua Garay of Garay Real Estate.
Two years ago, the historic Kings Theatre reopened after a massive $95 million restoration. Upcoming events include concerts by The Shins and St. Vincent, and the family-friendly "Paw Patrol Live!" Across Flatbush Avenue, a seven-story hotel is being raised, as boutiques are replacing outdated retail businesses, and three Starbucks have opened on the strip, Mr. Garay said.
All this led him to recommend that his developer client, Blank Property Group, purchase a mixed use, four-story building built in 1930 at 1001 Flatbush Ave., which they picked up for $2 million in cash earlier this month.
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"While in Manhattan, there’s not as much opportunity to purchase value-added properties, in Brooklyn, you can still find emerging areas where there’s a lot of opportunity for strong appreciation," Mr. Garay said.
Both he and Mr. Habibi said that investors looking to capitalize on gentrification without living in the property themselves should consider purchasing a small, two- to four-unit multi-family building. "This sort of project has less risk than buying retail or office space," Mr. Habibi said. "Most folks just understand the dynamics of a residential building better, and can make investments of this size with relative ease."
In terms of where buyers should look before they know if criteria like policy changes and infrastructure investment have been satisfied, Mr. Habibi said the easiest thing to do is follow the current path of development, and pick the next community or the next frontier.
You can also follow artists and progressives to see where they’re settling, as Mr. Habibi said that, "a high influx of those folks into a community is like adding kindling to the fire."
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Investing in a place to live, with growth potential
For luxury buyer-occupiers, purchasing in a transitioning neighborhood often comes down to getting more for their money and expecting solid, if not slow, appreciation over the years. Unlike purchasing a multi-family development as an investment, these buyers typically buy in a transitioning market farther down the line, when the risks are minimal.
Manhattan’s Lower East Side is an example of a neighborhood where luxury buyers can now purchase in a new development and get all the amenities they might expect in an area like Tribeca or SoHo for a fraction of the cost.
Prices in developments like 150 Rivington and 196 Orchard, where there’s an onsite Equinox gym, start around $1,750 per square foot and go up to $2,500 per square foot, said Howard Margolis and Jeff Adler of the Margolis, Espinal, Adler team at Douglas Elliman. "But that’s competitive in the new development space," Mr. Margolis said, "because anywhere else in the city these buildings would be asking $3,000 per square foot or more."
Unlike Flatbush or Inglewood, many buyers of Lower East Side luxury condos are creative people in the arts, who moved into the area when they were younger, but now, in their 30s to 50s, want to stay put but upgrade to something a little bit nicer than the neighborhood could traditionally offer. "These buildings are being built with the environment in mind to appeal to people that have always loved the Lower East Side," Mr. Adler said.
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Even though these are the highest prices ever seen in the Lower East Side, they’re primed to keep going up, Mr. Adler and Mr. Margolis said. In terms of whether the timing is right to purchase in the area, it’s impossible to be sure, they said. "But if you need a place to live and you can afford to buy one of these apartments, no matter where we are in the market cycle, if you’re going to be there for five to seven years, you’re going to do just fine financially," Mr. Margolis said.
Burgeoning new developments around the world
In Knight Frank’s 2017 Luxury Report, the Centro neighborhood in Madrid, Quartier des Pâquis area in Geneva, and Santo Spirito and Porta Romana neighborhoods in Florence were also singled out as emerging locations where development is rippling out from more popular tourist and residential sectors.
The final neighborhood on the Knight Frank gentrification list is West Aspen, an area about a mile and a half from the much more expensive and in demand Aspen downtown core. Like the Lower East Side, where the price per square foot of condos can be about half that of similar units in more established neighborhoods, the same rules apply in West Aspen, where buyers can get much more house—and more land—for less money.
In recent years, pricing for condos and townhouses in Aspen’s core has pushed north of $3,000 or $4,000 per square foot, said Mr. Bass, who has worked in the area for two-plus decades. "With that much pressure on the core, a lot of buyers are looking for more space and a better value proposition," he said.
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By just crossing the bridge into West Aspen, lots jump in size from a range of 3,000 to 9,000 square feet on the west end of Aspen up to 15,000 square feet in West Aspen, as prices drop down to about $1,200 per square foot.
This isn’t necessarily about neighborhood revitalization, because West Aspen has always had the free bus service into town and an excellent school system, Mr. Bass said. It’s about taking older homes in a more established neighborhood, and building properties that are nicer and more contemporary.
"You could spend $7 or $8 million in the core, or go across the bridge into West Aspen and get twice as much space with other amenities for a couple million less," Mr. Bass said. "Either way, the demand is still there."