The value of utility

Back in the early 90's, I once spent some time visiting in a small town in the Pacific Northwest of the United States. It was a pleasant little town, not too far down Interstate 5 from the coffee capital of the USA - Seattle. The town was perhaps the size of Pukekohe. It had the usual (for the USA ) mix of big box stores, a fancy mall, and an old fashioned main street which was either in a partial state of revival, or a partial state of dying - dependent on your viewpoint.

Across much of the USA, old fashioned "main street" is being revived with mixes of bars, restaurants, service providers, and funky little stores that provide an experience vastly different from the chainstores in the malls.

But what really fascinated me was a visit just a few blocks away from the fancy new mall, to the one it replaced. Actually, superseded would be more correct. When the new mall opened, the anchor tenants defected, and from there it was just a matter of time until all the supporting cast followed

So what became of the "old" mall? Actually it wasn't so old, but just not as shiny and new as the "new" mall. The town had not grown in years, and Main Street had already been abandoned by most retailers. So there was no demand for additional retail space, just for perceived better space.

The question has relevance here. And not just for the directly comparable retail industry.

We are seeing a parallel transformation with regard to industrial space. During the boom years we saw an explosion of new industrial space constructed - much of it with higher stud, better facilities and more parking than the space it replaced. The one thing the new could often not do better than the old was location. As much of the newly developed space is greenfield, it cannot replace the centrally located space in industrial suburbs such as Penrose and Mt Wellington.

The perplexing issue for some time has been that there was an unthinking expectation that the values of the "old" and the "new" were much the same.

Yet our industrial base , and demand for space, has not expanded at the same pace as our stock of industrial buildings.

And other factors did not seem to enter the equation. New buildings tend to have a greater volume than old buildings, or, to put it another way, the same number of square metres on the floor can hold substantially more pallets when the stud is 6 metres, than when it is 4 metres. New buildings tend to be more efficient in their use of space, and therefore running costs. This particularly applies with regard to the movement of goods, and access for truck and trailer units. How many older buildings do we still see with cart docks?

The explosion in the number of cars on our roads, or the paucity of public transport in industrial areas, means that older buildings with 70 plus % site coverage don't have anywhere near enough on-site parking for employees - and typically every employee has a car.

The configuration of older buildings, and typically the warehouse/office split, reflects an era when far more clerical and management staff were needed than is the case now.

Although to be fair, many contemporary developers are guilty of constructing buildings with far too much office/showroom space - if for different reasons.

When the comparison is made between the utility and usefulness of the old and the new, it is even more puzzling that the old formulas have survived so long.

Why do we still measure the value of warehouse / factory space in square metre terms? Why not in cubic metres? Why is site coverage (or lack of it ) not given greater weighting in values? Why do we value office space higher than warehouse space - even when it is superfluous?

Whilst we are at last seeing some reason come to the way value is viewed, our belief is that before too long we will see even more of a revolution. Instead of a value range of, say $60 to $100 for warehouse space, we should see a range of $10 to $200 - reflecting more accurately the real value and usefulness of the space.

To return to our opening question, what happens to the "old" mall?
And the answer: you can't give it away ! It either ends up derelict, or is given to community groups to avoid it becoming derelict.

Perhaps that also is the future for some of our older , badly located, industrial space. Far from being worth similar prices to new, as we were seeing just a couple of years ago, it is in reality worth less than land value - i.e. land value less clearance costs - as a prospect for re-development.

We believe that clear thinking on the value of utility cannot come soon enough.