This blog post is Part 2 of a series; this post focuses on exchange value.
You can read Part 1 here.
Exchange Value
Buildings have a price tag – when built, occupied, and sold.
Buildings are usually purpose-built.
One could build them as a church, schools, apartment buildings, office buildings, restaurants, factories, hospitals, etc.
And no matter what one is building for, three critical considerations in the early stages will significantly impact the future usability and success of the building:
- financing,
- the location,
- and the building’s design.
Each is an important consideration that, taken together, will have a considerable impact on the overall success of the building. It is challenging to have a good result if any of these criteria are wrong.
Financing the building
There are many options available to finance construction (both new and renovation projects) depending on:
- the purpose of the building,
- the scope of the project,
- and whether it is intended to be owner-occupied or tenant-occupied.
Since we are not experts in real estate financing, it is best to discuss financing options with real estate financial experts.
Location
Proximity to customers, transportation access, convenience, and cultural and social venues are some of the crucial considerations, depending on the purpose of the building.
Neighborhoods are also important.
Because a building does not exist separately from its community, it is necessary to plan as best as possible to be in a location that will be most suitable for the space in the long term.
Considering environmental and local zoning codes is essential.
For example, if you are considering building on a Greenfield site (not previously developed), investigate the costs of developing the property if not already equipped with utilities and other infrastructure.
The property may need an environmental inspection before buying brownfield construction (land previously built on).
The inspection is to determine any hazardous waste from previous use of the property that one would have to remediate before construction.
If it is a renovation of an existing building, inspect for existing structural issues.
The law may require one to remove or sequester asbestos, lead-based paint, mold, and other contaminants before construction.
In addition to the first cost of the land, improvements can add up quickly, and one should realistically budget for them.
Improvements could include:
- driveways,
- drainage and retention ponds,
- environmental requirements,
- parking,
- landscaping,
- and others.
Architectural and interior design
The design of the building plays a considerable role in its cost to build or renovate, the way it integrates into the local neighborhood, the cost to operate, and the future value when sold.
Buildings in the US consume about 45% of the electricity produced, prodigious amounts of natural gas and water, plus construction materials and interior fixtures and furnishings.
As a result, many building owners are committed to building to more stringent energy codes and using sustainable (green) materials and furnishings.
These materials reduce overall energy costs while improving indoor air quality and occupant comfort.
There is some debate in the construction industry about the additional costs of adding these energy efficiencies and sustainable products.
But, it is generally much more cost-effective to build energy efficiencies into the building from the beginning and future-proof the building from excessive increases in energy costs.
If you are about to engage in construction, keep in mind that many communities’ current commercial building codes require a bare minimum of energy efficiency and other environmentally responsible building materials and techniques.
There is also a growing body of evidence suggesting that energy-efficient buildings retain more exchange value than comparable but less energy-efficient buildings.
How a building feels is an essential aspect of the appeal.
Buildings that are lit with natural light, incorporate social gathering areas, have reasonable control of indoor temperatures and have pleasant lighting that is task appropriate are generally more productive and occupant-friendly.
In addition, walking into a building should give you a positive vibe about the place.
Buildings become a part of the fabric of the community.
They have personalities that can be reflective of the companies and occupants inside.
For example, a structure may welcome passersby to stop and chat, sitting under shade trees on comfortable benches.
Or, a building may surround itself with concrete parking, minimal landscaping, and other less than welcoming signals.
Tenant-occupied buildings
Buildings built by owners for leasing are known as tenant-occupied buildings.
These buildings serve specific requirements, from mixed-use (apartments and retail mix) retail, commercial, distribution, multi-family apartments, and other similar purposes.
They pay close attention to location and build to meet a specific price-per-square-foot lease range.
Owners are responsible for managing their properties to a certain standard.
The owner will assess a portion of the cost to maintain the property on a percentage basis to all tenants based on their square footage.
The desire to attract tenants within the lease range appropriately for the property will incentivize tenant-occupied building owners to keep their property attractive and well managed.
Owner-occupied buildings
Those who choose to build and occupy a building may take a different view of the exchange value of a building.
Because they will have it built to meet their needs, they may pay more attention to:
- specifics in the architectural design,
- the quality (or green attributes) of materials and contents,
- and other performance choices (e.g., enhanced installation, geothermal or other alternative energy sources)…
…instead of focusing solely on the cost to construct, especially if they plan to occupy the building for many years.
Owner-occupants may build to achieve lower energy bills and reduce future maintenance and repair costs.
However, suppose the requirements mean the building is built to rigid specifications to meet the owner-occupant’s needs.
In that case, it may make the property more difficult to sell or renovate.
Whether the building is tenant-occupied or owner-occupied, the owner usually understands that a mix of many factors determines the exchange value of the building:
- the location,
- architectural design,
- quality of tenant,
- facility management and maintenance,
- energy efficiency,
- occupant comfort,
- and the anticipated return on investment.
Next in the series we will examine the utility of a building; that is, how a building interacts with occupants, and the local neighborhood in which it exists, in:
Use Exchange Value. Buildings enhance or inhibit what happens in and around them.
Thank you for spending time with Darwin.
Cheers!
Tom Miller