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.