Posted on Apr 01, 2017
When an agent tells me “ You will really love this building” I politely tell him to go back to selling residential.
Actually, I don’t. But that is what I am thinking. Because industrial real estate is not about emotions. And certainly not about romantic emotions.
Having the smell of freshly baked bread wafting through a factory won’t help sell it. Presentation might, but the smell of brewed coffee doesn’t really help.
What does contribute to a sale is numbers. Because the numbers tell a story. And it is a story that is changing over time, and the way we interpret the numbers is also changing.
So, what are the numbers that count? And how are they changing ?
Floor area is probably the best place to start. Because that gives us an indication of the size of the building. But then, how that area is divided is important as well. Back in the 1980’s a ratio of 25% office was about the norm. But that number has shrunk over the years. For many buildings now, 10% office is much more appropriate. So that number of square metres indicating the building size is important. But the subsidiary numbers which give a clue to the utility of the building are the ratio of office/amenities to warehouse/factory, the stud height (which will enable a calculation of cubic capacity), the number of columns (which will indicate the usefulness of the interior space) and the ratio of building size to site size (or site coverage). The number of car parks in itself is not necessarily important (although it is vital when the property is a body corporate) but when combined with site coverage starts to indicate how the building may work for differing industries.
That’s a lot of numbers. But there are more! If the building is potentially (or actually) an investment, as opposed to being utilized by an owner-occupier, then there are more salient numbers that need to come into the equation. The most usually quoted number for investment properties is the yield, which is the annual rental divided by the cost of the property. It is well known that I will mock agents who quote a yield for a vacant property. Because of course when a property doesn’t have a rental return it doesn’t have a yield. Or more accurately the yield is zero. So in actual fact they are quoting a notional yield. Which is based on notional rentals. Which tells me that they don’t understand numbers. Which in turn leads me to doubt any other “facts” they may quote.
But a yield number in itself can be misleading if not also related back to the rental per square metre and the price on a per square metre basis. Because we are all aware of rentals being pumped up to unrepeatable levels, to in turn pump selling prices.
There is also a conversation which needs to be conducted over rental prices per square metre. Traditionally a different value has been applied to warehouse space, office space, amenity space, canopy area and excess yard area. That’s great if they all have differing “utilities” or usefulness. But why should the office component be valued at,say, 30% more than warehouse space, when in fact there is excess office, and much of it should actually be valued at zero? So what has evolved over recent years is the concept of valuing the overall space at the same per metre rate. But even then there can be a discussion when we see canopies that can make up as much as 30% of the overall space. Does a canopy deserve to be leased at the same rate as warehouse and office space?
But there are even more numbers. And there are numbers that need interpretation. There are sites which border streams. Which will mean a setback that effectively is of little use. Or sites which include a driveway. The driveway is included in the overall measure – but if the site was street frontage it wouldn’t need a driveway, so effectively the size of the driveway needs to be deducted from the measure for valuing purposes.
Obviously there is much more to valuation than just numbers – location, quality of building, whether street frontage or rear site, and much more come into it.
But it starts with numbers. And if you don’t have the numbers then no amount of freshly baked bread and brewed coffee will pass the test.
So don’t try to woo me with roses and wine and talk of love. Of buildings that is. What will arouse our passions are numbers – the right numbers and the interpretation thereof.