Finding the Next Hot Neighborhood

Wouldn’t it be great as an RE professional if you knew when a neighborhood was ready to take off from a pricing perspective? Here are a few signs experts say is a good indicator that an urban neighborhood might be ready to be the next hot neighborhood!

The Neighborhood Next Door
One is called the halo effect. It’s a term Stan Humphries, chief economist at online real-estate marketplace Zillow Inc., Z -1.16% uses to describe the way value tends to diffuse from a thriving urban neighborhood into the areas that surround it, like a halo. Mr. Humphries says there is a “much higher probability” that a neighborhood will improve in a lasting way if it’s in the halo of an already prosperous one.

A word of warning, though: Proximity to a popular neighborhood is no turnaround guarantee. Sandwiched between City Hall and the Union Square shopping district, San Francisco’s Tenderloin neighborhood has yet to flourish. And revitalization efforts have been characterized by “fits and starts” in downtown Los Angeles, which Bruce Bartlett, managing partner at Sequoia Real Estate Partners, a private-equity firm in Los Angeles, attributes to the difficulty of gentrifying such a sprawling neighborhood.

Shop the Shopping
One of the best ways to preview how gentrification might play out in a neighborhood is to check out the local retailers, Mr. Bartlett says.
“What type of wine are they selling? Does it all come in gallon jugs, or is there something more there? If they’re moving higher-priced material, that should tell you something,” he says.

Retail is one of the more visible reflections of other, less apparent signs of gentrification, such as an increase in median household income, says Jed Kolko, chief economist at online real-estate marketplace Trulia Inc. TRLA -0.55%

History and Vitality
Looks matter a lot, too. Experts say an older, attractive housing stock is crucial for a neighborhood’s long-term growth potential once gentrification has started. “You need a neighborhood that has good bones,” says Jonathan Butler, who founded Brownstoner, a website dedicated to the real-estate market in Brooklyn, N.Y.
Property owners in poorer neighborhoods with architecturally interesting features may not have been able to afford great maintenance or renovation. But Mr. Butler says this can be a good thing for prospective buyers: It means people “didn’t have the money to do bad renovations, either.”

By the Numbers
Realtors and locals, of course, have a vested interest in turning into a neighborhood’s most ardent gentrification evangelists. It can be easy to point to one trendy coffee shop, a new mass-transit stop and a few old buildings as bellwethers that a neighborhood will be the next big thing.

Some basic economic data can help cut through the spin. “First and foremost, buyers should be looking at employment,” says Mr. Rutherford, the developer from Dallas. “If you’ve got an urban area that’s anchored by jobs, it can weather any storm.”

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