When it comes to assessing commercial real estate's value, sometimes the treasure lies not within the constructed building, but beneath it – in the land itself.
The land-to-building ratio is a key metric that provides insights into the value of older properties under specific conditions. This concept is particularly relevant when appraising properties like auto dealerships, industrial yards, and standalone commercial establishments.
Early in my career, I discovered the correlation between the land-to-building ratio and the price per square foot of land. However, it took some time to fully integrate this insightful yet often overlooked perspective into my appraisal toolkit. While it may not always serve as a statistically robust method, it undoubtedly acts as a reliable sanity check in many cases.
Here's something to ponder: as buildings age, reaching the end of their physical and economic lifespan, their relative value diminishes. Consequently, the land-to-value ratio escalates. Initially, the value of a new building usually outstrips the land value, but over time, this dynamic reverses. In some instances, the building may ultimately hold no value at all, or even become a liability.
This is why I consistently factor in the price per square foot of land in my analyses. If the properties under evaluation possess similar location attributes, the price per square foot of land can prove to be a more dependable metric than the price per square foot of building area.
The relationship may not be linear, but my experience over the last decade has taught me that incorporating this analysis into appraisal reports is rarely, if ever, uninformative. If you're intrigued and would like to delve deeper into this concept, I'd be more than happy to chat further.
To give you a clearer picture, I'm sharing a typical graph from one of my appraisal reports below. I can also provide a redacted appraisal report illustrating this analysis upon request. By understanding and leveraging the land-to-building ratio, we can unlock hidden value and provide more nuanced and accurate property valuations.