Tuesday we took a look at the fundamental components of property values, at a macro level. In short, properties fall in two categories: resource-productive, and people-productive. Generally, if a property isn’t a farm or some kind of mine (or well) then it’s value is derived from it’s ability to attract human use. When humans use land they often build structures on it, which are called “improvements” in the terminology of property valuation. The ability of these improvements to attract people determines the property’s economic value. The reason for this is basic economics: the more people who are competing for something with their dollars, the more expensive it will be to buy.
So today we’re going to look at another aspect of property value. Again this is my theoretical way of looking at things based on my research, experience and professional practice. As far as I know this is an original approach to the subject, though it’s inspired by lots of great existing work. Remember, in this article I’m only going to look only at urban, people-productive property.
The broader environment is a significant factor in property valuation; the attractiveness of a property often has as much to do with the condition of the properties surrounding it as it does with the condition of the property itself.
All improved properties have two main components: structures and interfaces.
The structure is obvious, it’s the house or the office building or the workshop. Most properties have a single primary structure. Many properties also have auxiliary structures (like free-standing garages) or secondary structures. Some properties are multi-structured (like campuses or large complexes).
The interface is not as obvious. An interface is a connection to the outside world. A property’s interface is any and all space outside of the private confines of a property between the building and the public realm. Houses offer the simplest example; the neighborhood street and the front yard is the interface for a house.
A good neighborhood street is equivalent to a public interface, it is a space which anyone can pass through on their way someplace else. A highway is not an interface, nor is a train track or anything else which cannot be used by human beings at large. Any form of mechanized transportation or infrastructure is a conduit. Roads like Westheimer straddle the line between conduit and interface, the sidewalks could be an interface but the main lanes are definitely conduits.
On Tuesday we talked about property values on a macro level – the general attractiveness of a place to people will more or less set the base for property values. Certain things, like good weather and beautiful scenery, are always attractive. The most important thing, however, is people. People attract other people. This is why, at a regional level, the biggest cities will always tend to command the highest prices. Large populations equate to great opportunity for specialization, which means great opportunity for the creation of wealth.
We all can observe, however, that property values are not evenly distributed across a region. Urban areas, people-productive properties, vary in value at a micro-level, sometimes significantly. The most obvious factor in this difference is the quality of the structure. All properties vary in their use, and each end user will have different desires. Specific users will value the details of a building, the specific features of a structure, and those features will weigh heavily in which property a person will buy.
However, interfaces and conduits also play a huge role in determining property values at a micro level, and this is something that’s not very widely understood. Interfaces and conduits have everything to do with neighborhood trends. Interfaces and conduits are both important to all users, but different types of users place different priorities on them. Residential users value interface more than conduit, commercial property tends to value both, and industrial property values conduits more than interfaces.
Single-family houses always make a great example because they’re so ubiquitous. A house may be great, but if it doesn’t have a nice front yard it won’t be worth as much as the house next door that does. Likewise, homes in an area with lots of big trees tend to be valued higher than places without them. The interface is better. Conduits matter less. People want to be able to quickly get where they need to go, but generally don’t want to see or hear lots of traffic going by. So, residential users prefer a street that is all about interface: it’s nice looking, easy to park on, doesn’t flood, feels safe.
Industrial users are the opposite. They don’t care as much about how a street feels, except if it’s considered so unsafe that people don’t want to come to work. Rather, they want to be at the biggest conduit they can afford so they can ship goods in and out as easily as possible. However, it’s not enough to have a major freight rail line go by your factory, you need a siding so you can access it. Interface still matters, but conduit is much more important.
Commercial is the nexus between these two. Commercial users want lots of accessibility (to be located within the travel threshold of the greatest possible number of potential clients), and they want to be visible, so they want to be near good conduits. They also want people to come and shop (in the case of retail) or to like coming to work, or to be impressed when they drive by; so they want good interface.
Engineers ‘get’ conduits. They love building big pipes. The problem is, too often they are unaware of the importance of interface. Huge, high quality conduits (like mega-freeways) can drive down property values if they carry tons of traffic and noise directly beside a residential area. Commercial an industrial properties can be hurt by conduits that are too close and cut off access.
Most of the engineers and architects that I’ve met don’t instinctively ‘get’ interface. They weren’t taught about it in school, and in fact a lot of the things they were taught in school go against good interface design. Overly wide streets, high-mast lighting spaced far apart… these things work for a conduit, but not for an interface. Architects can be the worst, because they tend to think their building stands alone as an island, and that it will be judged as a sculpture.
Take the Bank of America center downtown, it’s a great example. In the image above you see it from a distance. In the image below you see it up close.
In high school we would have said this is “HFFA,” or Hot From Far Away. In other words, it’s ugly up close. It has a horrible interface. America today has a lot of good conduits, but good interface is hard to find.
But if a building is nice inside, what difference does the outside make?
Conduit and Interface are both RADIANT. Good interface not only improves the value of the property, it spreads a residual boost in values to the surrounding properties. This is true for conduits as well, good ones spread value. This is true in the reverse as well, bad interface and bad conduits lower the property values around them. Therefore, in addition to being ATTRACTANT, conduits and interface can also be REPELLENT.
With conduits, there’s also a degree to which high-performing conduits can still be noxious. A very noisy highway is repellent if it’s too close; the interface must include adequate buffering of the noise and odor in order to avoid a negative impact.
Traffic congestion is repellent. When the attractiveness of a good conduit (like a freeway) achieves a certain quantity of traffic (repellent) it reaches equilibrium and traffic peaks because people look for alternate routes.
Well-designed train stations often create big boosts for the property values in the surrounding areas: they provide both a good conduit that allows more people to get to a place, and they’re far less likely to be noxious than a freeway. They also take up less space, meaning more land is available around them for development. Lastly, because most of the people who arrive will be on-foot, people are inclined to build good interfaces around a train station, which creates positive radiant value.
- – - – -
Once more, I think we’ve hit about the limit of what’s useful to write in a single post. I hope you’re still following, we’ve got one more post to follow in this series. As always, I’d love to hear what you think. Let me know by leaving a comment!