Commercial vs residential values in the valley
For a number of years I had worked a mixed practice back in suburban Boston. By mixed I mean that I did both residential and commercial real estate sales/leasing. About 40% of my business was commercial based.
Over the course of those years I had just a few occassions to work with people that were looking to sell a residential property in order to buy a commercial property. Each time this happened it presented a new set of challenges in educating the client about the numerous differences between the 2 markets.
Of course, the first problem is that they are both lumped under the heading of "real estate". Which is kind of like defining Football and Polo as "sports". They both have different thrills and virtues, rules and etiquitte but could be no more different in thier audience and practice.
Sure, both markets are "real estate". So if one hears that the real estate market is slow, the assumptiuon is that this means all real estate. Now replace the word "market" with "audience" and the first thing that may come to mind is "which audience?" When you think of a market as an audience of potential consumers it just makes sense to think that commercial and residential audiences are 2 completely different animals. Seriously, it is pretty clear that a 3 bedroom cape has a much different prospective buyer than does a peice of land next to Staples or Home Depot. Even if it just comes down to the land alone it becomes strikingly clear that there are really no similarities. A buildable 2 acre lot on a cul de sac with mountain views may sell for $100,000, while a buildable 2 acre lot next to Staples, in the same town, even within 1 mile of eachother, would probably sell for $1,000,000.
The factor to keep in mind is "use". A home lot has 1 or 2 or so purposes: you can buy to build, hold as an investment or simply use it for storage/buffer/recreation. On the other hand, the commercial lot has only 1 real valuable use: To build a business that makes a profit. Of the many things that drive price, the potential for profit is one of the greatest. A lot next to Staples and Home Depot will be much more attractive to another retailer than a peice of raw land in Albany on Rt. 16.
The other major factor that drives any market is scarcity: How much land is there that can be used this way? In most towns, zoning is the method used to limit commercial use to specific areas of town, creating scarcity in itself. The other way that scarcity comes into play may be considered natural zoning. This is an easy concept to grasp here in the valley: Rt. 16 and Rt. 302 are the natural traffic paths for consumers. For most retailers any other commercial space in town would not work. If people can't see you they won't come to you. So the exposure of the 2 major routes through town was a type of zoning that was in place long before "zoning" got voted into place.
One of the elements that seems to confuse people is the mixed use type of space: A property that could be residential or commercial. The term that is used in the business to define the way that price is determined for this type of property is called "highest and best use." Simply defined this refers to what would be the most likely and most valuable use of a property. Put yourself in the shoes of a property owner that is thinking of selling: You can sell your property on Rt. 16 for $300,000 max as a residence or you could sell it for $500,000 because of it's commercial aspect. Even if the buyer wants that property for a residence, there is no way the seller wants to lose the $200,000 difference. Also keep in mind that an owner of commercial real estate is typically not hinging the course of their life on the sale of the property. Right? They already live somewhere and don't need to sell for anything other than business purposes. So ask yourself this: Would it be worth $200,000 to wait 2 years to sell the property to the right buyer?
Of course, this is just an overview of the differences but it important stuff to consider if you feel like you must be a real estate expert because you have lived in real estate your whole life. The house you live in is involved in an entirely different universe than the commercial property you want to buy.
Over the course of those years I had just a few occassions to work with people that were looking to sell a residential property in order to buy a commercial property. Each time this happened it presented a new set of challenges in educating the client about the numerous differences between the 2 markets.
Of course, the first problem is that they are both lumped under the heading of "real estate". Which is kind of like defining Football and Polo as "sports". They both have different thrills and virtues, rules and etiquitte but could be no more different in thier audience and practice.
Sure, both markets are "real estate". So if one hears that the real estate market is slow, the assumptiuon is that this means all real estate. Now replace the word "market" with "audience" and the first thing that may come to mind is "which audience?" When you think of a market as an audience of potential consumers it just makes sense to think that commercial and residential audiences are 2 completely different animals. Seriously, it is pretty clear that a 3 bedroom cape has a much different prospective buyer than does a peice of land next to Staples or Home Depot. Even if it just comes down to the land alone it becomes strikingly clear that there are really no similarities. A buildable 2 acre lot on a cul de sac with mountain views may sell for $100,000, while a buildable 2 acre lot next to Staples, in the same town, even within 1 mile of eachother, would probably sell for $1,000,000.
The factor to keep in mind is "use". A home lot has 1 or 2 or so purposes: you can buy to build, hold as an investment or simply use it for storage/buffer/recreation. On the other hand, the commercial lot has only 1 real valuable use: To build a business that makes a profit. Of the many things that drive price, the potential for profit is one of the greatest. A lot next to Staples and Home Depot will be much more attractive to another retailer than a peice of raw land in Albany on Rt. 16.
The other major factor that drives any market is scarcity: How much land is there that can be used this way? In most towns, zoning is the method used to limit commercial use to specific areas of town, creating scarcity in itself. The other way that scarcity comes into play may be considered natural zoning. This is an easy concept to grasp here in the valley: Rt. 16 and Rt. 302 are the natural traffic paths for consumers. For most retailers any other commercial space in town would not work. If people can't see you they won't come to you. So the exposure of the 2 major routes through town was a type of zoning that was in place long before "zoning" got voted into place.
One of the elements that seems to confuse people is the mixed use type of space: A property that could be residential or commercial. The term that is used in the business to define the way that price is determined for this type of property is called "highest and best use." Simply defined this refers to what would be the most likely and most valuable use of a property. Put yourself in the shoes of a property owner that is thinking of selling: You can sell your property on Rt. 16 for $300,000 max as a residence or you could sell it for $500,000 because of it's commercial aspect. Even if the buyer wants that property for a residence, there is no way the seller wants to lose the $200,000 difference. Also keep in mind that an owner of commercial real estate is typically not hinging the course of their life on the sale of the property. Right? They already live somewhere and don't need to sell for anything other than business purposes. So ask yourself this: Would it be worth $200,000 to wait 2 years to sell the property to the right buyer?
Of course, this is just an overview of the differences but it important stuff to consider if you feel like you must be a real estate expert because you have lived in real estate your whole life. The house you live in is involved in an entirely different universe than the commercial property you want to buy.
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