Commercial Real Property Analyst Dixie Phair began thinking about straight lines during her workout at the local gym. While practicing her balance skills, she realized that linearity in modeling could be ignoring the reality in her market.
Dixie knows that the concept of linearity states a mathematical relationship can be expressed as a straight line.
In models common to the assessment industry, this means if size increases, value per unit decreases commensurately. This is a modeling practice borne of rudimentary sales models built years ago that relied on insufficient data stratification. Now that Dixie is experienced, she knows this simply is not how the market works. Here are some of Dixie’s observations:
- Professional office properties under 20,000SF often show linearity but... once size suggests professional management is in place, rents and sales rise to reflect a more desirable (successful) location for prospective tenants.
- Most expect maintenance expenses to drop on a per-unit basis commensurate with quality and condition. This does happen but... only to a point where replacements are needed; thus maintenance allocations stabilize, only to drop again as a property reaches marginal rentability.
- Coastal & interstate warehouse markets show that size matters but... not inversely. New properties over 500,000SF commonly attract higher rents per SF (and greater sale prices per SF) compared to properties of 200,000SF to 500,000SF in size.
- Once lodging properties reach 60 or so units, cleaning costs per room become predictable and pretty stable even as property size grows but... size based efficiencies in some expense categories only go so far.
It is easier to visualize and ostensibly to justify strict linearity, but Dixie knows that ignoring what really happens based on property type, tenant design, and quality leads to inaccuracy in assessments.