Location, Location

The key component in real estate, of course, is location. And value in real estate is all about the fit between a location and its best use. 

What makes one location superior to another? The answer varies from market to market, and it varies over time. What is a good location at any one time for residential development is likely to be different than one for retail, offices, and industrial uses. This is more than just the governmental restrictions placed on various locations by zoning. It pretty much breaks down to good old supply and demand. 

In the 1800s, industrial property in New England was often located in a central area like a downtown. The same was true of retail property, which in the 1800s was often multi-story. There was a demand in the industrial market for this type of location because it was close to where the potential work force lived and where access to the highest speed, lowest cost (railroad) transportation was. Because of the high demand for downtown industrial space, factories were often four and five stories tall. As the 20th century rolled around, new forms of transportation were developed, and the need for a downtown location was less compelling. The owners of factories and retail buildings moved to lower cost areas, and the new buildings tended toward a one-story style. 

When demand dropped for downtown multi-story industrial and retail buildings, these became vacant and run down. At best, they became occupied by tenants willing to pay only low rents. As time moved on and private transportation became more popular, the demand for downtown property stayed low. 

During the mid 20th Century there was a movement toward urban renewal, which at that time meant tearing down the old buildings and putting "more suitable" uses in their place. Often the more suitable uses were not developed and land remained vacant. 

In recent years, with a more environmentally conscious public, downtowns have become popular places to live. Cities that resisted the urban renewal movement and kept many of their old industrial and retail buildings have seen renewed interest and have started to take advantage. Buildings that often sold for $1.00 to $5.00 per square foot as industrial buildings sell at higher rates ($10.00 to $30.00 per square foot) for conversion to residential space. Downtown living tends to be inexpensive, at least for the pioneers. The spaces tend to be interesting and have appeal to artists and professionals. If an area becomes popular, the lower rent retail tenants tend to be forced out by shops that cater to the new residents. Areas that had pawn shops, low-end shoe and clothing stores, fortune tellers, chiropractors, and thrift stores now have boutiques, trendy restaurants, coffee shops, and organic grocery stores. 

A wave of retail vacancy in shops that used to have low end tenants does not necessarily mean that a particular market is in decline. Appraisers need to observe what is happening in a whole neighborhood. In one city there can be a trend toward rejuvenation of a downtown area, while the downtown of a similar city ten miles away could still be in the throes of economic decline. It is part of an appraiser's job to see when trends in the market are changing. Commercial real estate appraisers often work over a wide geographic area, so knowing when change in a certain market is happening may be difficult. Appraisers are often called on to value properties in changing markets and need to be competent to see the changes as they occur. 

William Whiting



The Reenstierna Associates Report is published as a service to the clients of Eric Reenstierna Associates and other real estate professionals. The views expressed are those of the articles' authors and do not necessarily reflect those of other members of the organization. Copyright 2006. All rights reserved.

Eric Reenstierna Associates
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