What Causes Commercial Real Estate to Increase in Value?

Increasing the value of a property is every investor's dream. Everyone who is involved with a property that can greatly increase its value is sure to reap rewards that are admired in commercial real estate.

Understanding what causes commercial real estate to increase in value is a necessity in this industry. It is important to recognize that value is not only determined by the land itself, but by the value of the building or business on the land, what surrounds the land, its highest and best use, and the value of the land in the minds of the buyer and seller. There are many factors that dictate the value of land, and they become most obvious when you see them at work.

When you see firsthand how property increases in value, it gets your blood pumping and mind racing in all the ways you can increase the value of your properties!

Just as with any concept of supply and demand, the more a property is in demand, the higher a price premium can be charged if the supply of a specific type of property is low. For example, the existence of a single one acre lot on the corner of two major intersecting highways for sale is more valuable than a landlocked three acre lot on the inner part of the corner.

Having a property in demand strengthens the seller's and investor's positions, and getting price premium for an in demand property is always profit motivating.

In evaluating and assessing the effect of supply and demand on a property, be sure to identify what was different about the property before this increase in value. For example, this one acre corner lot of property, has it always had frontage on both highways, or is one of the highways new, creating a corner lot and, therefore, increasing its value by increasing its demand?

Or perhaps there has been a sudden increase in population, and the closest gas station is just not enough for this new influx of residents. This corner lot would be in higher demand, as development would be a necessity to accommodate the increase in population.

There can be many factors that can increase a property's demand, and in order to evaluate its increase in demand, you must know exactly what caused the shift. Having control or access to influencing this shift that causes such an increase in value is one of the most valuable points in commercial real estate. Getting the most out of a single property is the key to walking with substantial profit.

Another factor that causes the increase in demand is other new development. Development such as new highways, two to four lane freeway additions, the building of a hot new retail center with brand name stores, the construction of an amusement park, the insertion of a traffic light on a newly busy intersection, a new park, and just about any other development or change to a city's infrastructure are all factors that will generally increase the value of a property.

A good rule of thumb is to research examples from the past and identify how these new developments and changes in infrastructure affected land values of surrounding properties. History can be expected to repeat itself. This can give clear guidelines as to how a property should be put to use, as well as give an idea as to how much it will be worth in the future.

For example, in Paulding County, Georgia, a new airport was designated to be built. The values of properties surrounding this newly designated site automatically increased from $44,000 an acre to about $250,000 an acre, simply by the fact that this airport was going to be built. You can count on a similar situation to occur in a county where a new airport will be built. Follow commercial real estate trends, as they generally will not let you down.

Another factor that increases a property's value is zoning. Zoning is usually decided and planned by the city long in advance in order to control development, population, taxes, and the overall balance of a community. However, as times change, so does the zoning. So much, in fact, that it is vastly important to be constantly in the know about the community you specifically work in, in order to understand how zoning can be the most critical factor of, not only the property itself, but surrounding properties as well.

Zoning can be an easy or difficult factor depending on the city planners and what their intentions are for the community. Perhaps the city planners are experiencing a demand for residences, so they change the intended use for properties from light industrial to R1, single family residences, or R5, five units to an acre.

Or perhaps a buyer wishes to develop a strip mall in an area zoned R1, but he or she cannot get it rezoned due to the fact the city planners feel there is already a saturation of commercial property. If this property were rezoned to commercial, then the value of the land would automatically increase to the market value of other comparable commercial lots in the area.

Zoning can be a very powerful designation that affects the value of a property. It literally dictates the market value of a piece of land in its specific city and location. If a property is rezoned to a more valuable zoning, such as high density residential or commercial, then you have automatically increased the value of the land! However, if a commercial property is designated residential by the city planners, then it automatically decreases in value.

Zoning can be detrimental or a goldmine to its owner and user. Always understand both the current and future zoning, and intended use of a property in order to evaluate how a property's value may change.

The motivation of a buyer or seller can greatly change the value of a property. For example, a seller who is very motivated to sell for whatever reason will usually accept a much lower price. When a seller shows urgency to sell, the values go down. However, the opposite comes into play with a very motivated buyer; it shows that the buyer is willing to pay a higher amount for a property. . Much of this shift in value is caused by the perceived value of the seller or buyer, and not necessarily what the current market value dictates.

Don't ever underestimate the power of thought and motivation in commercial real estate, as it can be a key factor in negotiating a good deal.

For example, a buyer looking for a beautiful, mountainous home with large oak and pine trees, creeks and a place to build a large, grandiose estate may pay a higher price for the perfect property which he or she is unable to find anywhere else. His or her perceived value could be much greater than what the market dictates. However, as you have learned, there are many reasons why a property's value will increase, independent of market value and location.

Though there are many more factors that can affect the value of a property, supply and demand, new development, zoning, and motivation of both the buyer and seller are the most indicative of land values. Many other specific factors such as bringing sewer and other utilities to a raw land site, as well as filling in wetlands can fall under these broader categories.

When you decide whether or not a factor is going to increase the value of a property, always acknowledge the status of the property prior to that factor's influence, and after the factor has directly or indirectly influenced the value of the property. When in doubt, consult history and other similar events to see how the value of a property will change.

Always be on the lookout for value increasing opportunities, as this is where commercial real estate becomes both creative and fun! Seeing your ideas go to work, and yield even greater profits than what you initially imagined, adds fuel to the fire in commercial real estate.

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