Land Value

Land underlies everything in real estate. The same is true of land value. Land is part of the worth of all real estate. And sometimes it is the bigger part. We like to think that the buildings we put up are where the value is. But sometimes the value of the land overwhelms the value of its building. When land is vacant or is occupied by a decrepit building, it is obvious that the value is no longer in the building at all. At other times, the value of the land creeps up on what seems like a perfectly good, modern building, like an office building in a market where office rents are low but multi-family land values are high. We only see what has happened when we see the wrecking ball. At that point, we see that the value is in the land and the land alone. The office has lost its value. The office was doing nothing for the value of the property as a whole.

Some people have radar for car accidents. They stay tuned in to a police scanner so that they can be first on the scene with an offer to help. Some people have radar for dinged bumpers and fenders and will approach you with an offer to pull out the dings. Appraisers have radar for tear downs. Where we see a tear down, we know we have probably found a land sale. Someone is tearing down the building to put up something new. The price that someone is paying for the land could be crucial to the valuation of anything else the appraiser is valuing in the neighborhood. Demolition is the clue to a land sale, which is appraiser gold. Especially in an economy where one thing is hot and other things are not, the valuation of the land alone can become an important part of the appraisal of any parcel of commercial real estate.

If a property is not encumbered by a long-term lease and its owner is in a position to market it for its land value, it is important that the appraiser take at least a quick look at the land value. Otherwise, the appraisal is not complete. A good appraiser will look at the land value in any valuation of property where demolition is a possibility. It is important for the appraiser to have a working knowledge of land value anywhere a building is not under the protection of long-term leases, landmark status, or other such hurdles that would prevent demolition.

The chart that follows is derived from land sales (including sales of properties where a building was taken down) at various locations around Greater Boston. All the information shown here is available from public sources.

Greater Boston Land Values

Downtown Boston, as expected, tops the list.

Kendall Square in Cambridge supports the highest rents in the region, for its office/lab market. But its lower allowed density results in lower land values than at downtown Boston.

Dorchester Avenue and other south of downtown neighborhoods have experienced a surge of acquisitions for multi-family development. The highest prices are supported near the intersection of Old Colony Avenue on the north side of the district. From there, access is good to downtown Boston.

Farther from downtown, developers have begun acquisitions on Dorchester Avenue above Fields Corner running north to Savin Hill, but at a level of value less than half that in the neighborhood at Old Colony Avenue to the north because of the more distant access to downtown.

Massachusetts Avenue at Newmarket has seen a cluster of acquisitions at $100 to $150 per foot. Access to Boston is good from this neighborhood, but it may be adversely affected by its proximity to the "Mass and Cass" intersection, with its concentration of drug users. The lowest level of value in Dorchester is in the residential neighborhoods, where opposition to dense developments prevents the kind of higher-density developments available in more commercial neighborhoods.

Mystic Avenue in Medford is an outlier in the map of land prices. It is developed with a mix of car dealerships and older commercial/industrial buildings on large lots. These make ideal sites for large-scale multi-family buildings. The neighborhood has excellent proximity to Boston and excellent highway access. Medford has encouraged multi-family development at other locations. But at Mystic Avenue, it has resisted the trend to multi-family that is common at its neighboring communities, and, without zoning, multi-family (and the resulting higher land value) is blocked.

Downtown Natick has seen a cluster of acquisitions for multi-story multi-family development with ground floor retail. Natick's downtown is attractive, with a well tended common, well maintained civic buildings and churches, restaurants on the ground floor, and existing one-story buildings suited for demolition and new development.

Similar levels of value are supported in Newton and Waltham's older industrial districts for multi-family development.

The Route 495 suburbs' primary demand is for sites for restaurants, retail strips, assisted living facilities, medical buildings, and hotels. Towns like Ashland have established zones to encourage mid-rise multi-family development, but development of this kind has not taken root as strongly as it has in suburbs inside Route 95/128. Brockton, though not far south of Route 93/128, experiences demand primarily for one-story retail uses.

The high values for land result in large part from the demand for multi-family space. The City of Boston set a target for a high volume of new apartment and condominium units several years ago, but in spite of the extensive new development taking place, the target can no longer meet the demand, as a result of population growth. Population growth is fueled in large part by the expansion of bio science companies, which need not only space to house their workers but also lab space, which spreads from Kendall Square. Greater Boston is notoriously poor in speeding the time line for new development. As a result, we are constantly under-served with housing, and rents and prices are always high. Greater Boston may want to think about whether it wants so much new space for expansion, given that expansion leads to serious traffic congestion, gives us a never-ending housing crunch, displaces low-income households from their traditional communities, and prices people out of the places where they grew up.

The primary factors that lead to high land prices are location, allowed density, and development approval.

Location is easily observed. It is mainly a matter of a property's distance from downtown Boston.

Allowed density tells a developer how much building can be put on a property. If twice as much building is allowed on one site versus another, the value of the one with more allowed density is more. Especially in Boston, the zoning may specify a maximum density, but the city's planning authority may allow substantial overrides. For the appraiser, it may be difficult to project the eventual density that a developer may gain for a building site. The safest way to proceed with an appraisal in that case is to make use of prices per square foot rather than prices per "FAR foot" for comparisons. (The price per FAR foot is the price per square foot of building that is allowed.) No appraiser or anyone else can know the density that will eventually be approved for a site where the developer, the city, and the neighborhood all have input and the density is still undecided.

Approvals matter, too. When making an appraisal, it is important to know the status of a site with respect to approvals that have already been issued by a city or town. If the property being appraised has no development approvals and the comparable sale an appraiser may want to use as a comparison had approvals for development and was ready to go, the comparison is not apples to apples. Getting approvals takes time. Time is money. Having to wait five years for approvals means a lower land value. To make use of the sale requires a substantial adjustment for the approvals. Approvals can boost the value of a site considerably. Examples are a 2020 sale of a development site on Stuart Street downtown and a hotel site in Chelsea on Second Avenue, both of which sold at prices nearly double the value of similar nearby sites because of pre-existing approvals.

Two sites may seem identical, but if one has approvals and the other does not, they are an apple and an orange. A client needs an appraiser who has gone to the trouble to sort out the apples from the oranges before reaching a conclusion about what a development site is worth.

Eric T. Reenstienrna, MAI