n my past few newsletters I discussed the enormous potential for land. These days, older property is being purchased for the underlying land value. The major impetus is the evolution from single story development to multi-story. Use of air rights increase the value of land in areas that have never experienced mid rise development. The proposition is obvious in dense urban areas like Pasadena, Downtown Los Angeles, Anaheim or West LA; however, mixed use is expanding throughout the entire region.

While there are entitlements to obtain, returns are substantially higher than common low cap rate investments. Plus there are often interim uses with existing buildings or outside storage to obtain reasonable current cash flow. Suburban tract development and big box industrial are not going away. However, in close-in and transitional neighborhoods, more creative developments are needed to fill urban demand. Partly this is a reaction to freeway congestion and more options for public transportation.

Also, new zoning ordinances are being adopted to create more housing units. Almost every municipality in Southern California, and there are 187, has a planning strategy that includes smart growth, especially in their older downtowns and traffic corridors. In these instances, land values can increase exponentially with creative developments

Another changing condition is the ratio of improvement costs to land value. As buildings age and become obsolete, the contribution of the improvement becomes less as the value of land increases. In other words, where land values may have doubled or tripled, construction costs rise on a fairly predictable linear manner (although much sharper recently). This helps explain the prevalence of teardowns.

In most urban infill locations that have a nearby residential or commercial component, land is valued with consideration of its development rights. If possible, industrial users are advised to fit their business in the pathway of growth. While many of these buildings suffer from various degrees of obsolescence, entrepreneurs have the ability to be more creative with their occupancy. By making accommodations, owner/users can capitalize on running their business in a potentially rewarding location.

Still, the average Buyer needs to beware because every purchase comes down to developing a viable project. While creative land use has greatly pushed values, buying too early, or in the wrong area, will lead to disappointment. Plus, there is now a backlash in many cities. The concern for losing industrially zoned land is becoming more vocal.