In an earlier blog post: “Have Saskatchewan commercial real estate values peaked?” I discussed the future of commercial real estate values in this province. Here we look more specifically at what I will refer to as the functionally obsolescent asset class.
What is the actual economic life of commercial property?
That is a question that accredited appraisers will most often address within the appraisal process. We see the reality that it can vary significantly according to the original design and the flexibility that exists within that design to repurpose the property.
Obviously the structural integrity or lack of structural integrity of a building can override that design question. Can a building or multi-tenant property be partially demolished to provide a better building to site ratio and in turn more parking or loading capability? These are just some of the questions may be required to be answered.
How does the term “functionally obsolescent” apply to office, industrial & retail real estate?
Let me provide you some examples. The term as it relates to office could mean too many structural columns which restricts office design options or possibly the lack of wheel chair accessibility.
Low ceiling clearance and lack of surplus land are the most common objections we receive for industrial property.
Many retail merchants today are looking for high ceilings, lots of glazing, abundant parking and proper site access/egress. There are many building examples where these were not design priorities 30+ years ago.
Intersection in time where important different factors have come into play
We find ourselves at a time in history where I believe property owners with functionally obsolescent commercial real estate should consider selling and reinvesting in assets that are more in demand by tenants.
We have historically low mortgage interest rates, a very limited supply of commercial real estate for sale and a high demand from owner occupants looking to purchase.
All of these factors come at a time when rental rates have recently increased which causes tenants to desire owning their own building. We find that potential owner occupants are often prepared to make a few compromises in functionality and make a significant investment in updating if it means they get to own rather than lease.
My discussion here would be more applicable to what would be considered small to medium sized real estate that appeals to that owner occupant. Generally speaking the solutions available for larger functionally obsolescent property are somewhat different….a topic for another discussion.
I welcome you to share any thoughts you may have on this issue.
Posted by Barry Stuart