Industrializing Gentrification

by Reihan Salam

Large-scale real estate investors are increasingly devoting resources to sprucing up entire neighborhoods to increase the value of the properties they’ve acquired, according to Robbie Whelan of the Wall Street Journal:

Real-estate firms say they need to spiff up neighborhoods to make their investments pay off. The MACK Cos., is a rental landlord that operates in the Chicago market and owns about 400 homes and manages about 1,400 homes owned by larger investment firms. Six months ago, it paid $165,000 for a house in Midlothian, Ill., near a country club, which sat on a street filled with potholes.

After local officials failed to repair the road, MACK decided to spend $20,000 to repave the block in front of the home, which is expected to rent for about $3,300 to $3,500 per month. Jim McClelland, MACK’s chief executive, said the company buys most of its homes, which are all bank-owned foreclosures, for around $50,000. It then spends an average of $43,000 on interior renovations for each house, and an average of $9,700 on exterior improvements, including grooming driveways and planting trees in medians on the street.

“If your play is for long-term appreciation, versus just flipping the houses, wouldn’t you want to improve the properties and make the area more desirable?” Mr. McClelland asked. “It creates a look of curb appeal. It’s good for business.”

Neighborhood change always engenders resentment and resistance, and the extremely rapid neighborhood change Whelan describes certainly does as well. But as long as the supply of housing also increases, something we should absolutely not take for granted, I see this as an enormously positive development. If the supply of housing does not increase, and one assumes limiting supply would redound to the benefit of some of these investors, the result of upgrading will likely be displacement, with low-income, less-skilled workers pushed to the margins of metropolitan areas, where they will have a much harder time accessing employment opportunities. So supply is crucial.