Whether we are helping someone find the right location for their company, or listing a property for sale or lease, the concept of “highest and best use” is ever present in our minds.
The Appraisal Institute defines highest and best use as:
“The reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value.”
Zoning and other regulations establish legal uses in a fairly straightforward fashion. Physical possibility will certainly narrow the options as to how a piece of land or existing structure could be used. But when it comes to financial feasibility and maximum productivity, we find that trends have a major impact on what the highest and best use for a property might be at any given time. As trends evolve and change, the potential use may also shift.
Let’s consider, for example, how abandoned warehouses have been used over the past decade. Three trends come to mind, with the first being the explosive growth of multifamily following the 2008 recession. Previously, seniors facilities and recreational conversions were the trend. The transformation of warehouses into lofts was not only hip and cool, but also a highly productive use of space when demand by Millennials for apartments was at a peak. Today, many primary markets have become saturated with apartments, making it less financially feasible in those markets to consider a multifamily project. Instead, consider another trend that has been gaining continuing momentum over the past few years, eCommerce. It is estimated that online shopping has grown in the US to 8% of retail sales in 2017, and is expected to almost double by 2020, making this more paradigm shift than trend. Retailers are downsizing traditional storefronts and moving inventory into distribution facilities or store pickup in an effort to keep pace with shoppers who want the convenience of shopping online and the convenience of fast delivery. “Last mile” delivery to hasten the online experience has become the norm and has driven demographically centered warehousing costs through the roof! So warehouses that might have been gobbled up by the multifamily developer only a few years ago are being targeted now for use as distribution centers. The third trend is the self-storage industry. Demographics drive this market and the densification of the urban core has sent this need skyrocketing.
And on the horizon? Think about the implications of self-driving vehicles and how that will change our need for and use of parking lots. Land use planning will be turned upside down to react to autonomous cars and trucks. Talk about a moving target!