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Driving change: how the transportation revolution affects real estate.

If you've driven in Pittsburgh, Boston, Phoenix or San Francisco over the past year or so, you might have had some strange company on the road--autonomous vehicles that operate largely without a driver. Tech companies like Uber, Google and Waymo and even stalwart General Motors are running pilot programs around the country, and their self-driving fleets are getting a lot of attention.

However, these autonomous vehicles are just one aspect of a rapidly advancing automotive revolution that also encompasses electric cars, sustainability initiatives and changing attitudes about how vehicles fit into our everyday lives. And no one can say for sure how the revolution will play out.

"I think we're going to be surprised by how these new vehicles are adopted by people, and the impact they will have on nearly everything--including real estate and real estate markets," says Steven Norris, MAI, principal at Norris Realty Advisors in Pasadena, California.

Appraisers need to understand the direction that transportation is headed and its significance on the valuation profession.

Looking toward mobility on demand

A number of factors are altering the public's relationship with cars. Electric vehicles are becoming more practical and slightly more affordable. People are moving into urban areas where congestion and the availability of mass transit make vehicle ownership unnecessary and less appealing. And ride-hailing services, such as Uber and Lyft, are providing a practical, inexpensive alternative to owning a car.

Numerous cities already are feeling the impact of these trends. In 2013, Paar Development in Seattle built a 48-unit apartment building that had no associated parking. Many observers were worried that tenants would take up nearby street parking. "That was not the case," says Joe Paar, owner and lead developer. "Our tenants actually didn't have cars--a lot of them didn't even have bikes." The building was a success, and Paar has since developed more Seattle apartment buildings with little or no parking. For many people, cars are not a critical part of the equation when sizing up a place to live.

These trends are leading to the emergence of "mobility on demand," where people access transportation--buses, trains, cars and even bicycles--on an as-needed basis. Electric autonomous vehicles bring some appealing qualities to that scenario. For example, proponents see them as a contributor to sustainability because they can operate efficiently and could help reduce C[O.sub.2] emissions in cities. Self-driving cars also have the potential to be safer because they eliminate human error. And they could make good economic sense for transportation providers that adopt ride-hailing models. "The cost reductions can be significant," says Bill James, MAI, president of James Real Estate Services in Denver. For public transportation, "one of the most expensive operational components of the overall cost per passenger-mile is the operator," he says.

The average car owner also could benefit financially. Consumers spend a lot of money on car ownership--from the purchase price (the average new car costs $34,968, according to Kelley Blue Book), to the operating and maintenance costs. However, experts calculate that the typical personal vehicle is parked 95 percent of the time, which means that it largely is a wasted asset. Relying instead on self-driving cars from a service presents a relatively cheap alternative.

In the future, says James, "a lot of individual vehicle ownership will go away. People will still own some cars, of course, but much of transportation will be provided by vehicles that are owned by some single entity." He adds that future transportation likely will evolve from a private ride-sharing service to a public agency or a regional transit agency that operates fleets of autonomous vehicles as part of the overall public transportation network. That evolution is similar to what happened with streetcar systems more than a century ago: They originally were private systems built to bring buyers to land developments that in those days were outside city limits.

The impact on real estate

The anticipated result of the changing usage patterns is fewer cars on the road--a paradigm shift with the potential to significantly alter the way people use and value real estate.

"There are whole industries that are going to be disrupted--vehicle manufacturing, sales, maintenance, disposal and insurance," says James. "Vehicular access to properties will change as well. The demand for real estate will be significantly altered." For example, suburban properties that are near commuter lines have recently become more attractive to buyers and tenants. With widespread usage of autonomous cars by ride-hailing services, that proximity may be less a factor because cost-effective mass transit could be available to nearly every home and workplace. Or, if electric vehicles dominate, gas stations might need to be repurposed. Even highway real estate may need to be reconsidered, because self-driving cars will be able to use roadways much more efficiently.

Meanwhile, large garages may become less important to the single-family home market because families may no longer want multiple cars--or any car at all. "This could increase the value of some homes that only have a one-car garage, because that's all you need," says Mark Levine, Ph.D., MAI, a University of Denver professor who focuses on real estate. "If a home has a two-, three- or four-car garage, you might say that's now really just extra storage space. So, it changes the way we're going to view the use of those things." Similarly, some urban condominium owners have separately sold their parking spaces because they consider them unnecessary. "Already, people have been buying condos in the core city area [of Chicago] who don't even have a car," says Michael Hobbs, MAI, SRA, president of PahRoo Appraisal and Consultancy in Chicago.

In Los Angeles, the Planning Department is considering reduced parking requirements across a variety of development types, including residential, says Norris. "I don't think the parking requirements of 10 years ago are really going to be applicable going forward. There's going to be reduced demand for residential parking, and that's going to result in increased density of residential units that can be put on a given parcel of land."

Gary Papke, MAI, senior vice president of Clarion Associates in Chicago, suggests that ride-hailing services and self-driving cars will change the way people interact with some commercial properties. "Hotels, office buildings and other commercial buildings will have to become more oriented toward being drop-off points rather than locations with parking," he says. "Buildings will need to accommodate people who arrive in autonomous vehicles." Such vehicles also fit nicely with the shift toward mixed-use development because the projects can include ground-floor retail without having to provide additional parking for shoppers.

Levine estimates that about one-third of the real estate in downtown Denver is devoted to parking. "There is a lot of land that is now parking that could be developed with something else," he says. "There might be an extra piece of land next to an apartment or an office building that can be valued separately because it's no longer needed for parking." He says that he's talked to at least one developer that has started to build condos on extra shopping center parking space, a move that is creating a new income stream and increased property value for the shopping center owner.

Rethinking the parking structure

Some observers see possibilities in repurposing parking structures, including as self-storage facilities. However, using parking structures for any nonautomotive use isn't easy because they typically have low ceilings and sloped floors, although some architects are now designing parking structures with future uses in mind. "They are expanding parking ceiling heights, so the structures can be converted later to offices or apartments," says James. Entry/exit ramps also are being rethought so the structures can better accommodate future changes. "Instead of building ramps on the inside, they're attaching them outside the structure so they can be more easily removed if the building is converted decades down the road," he says.

It's appropriate that plans are long-range because parking structures won't disappear overnight. "Office rents have escalated, and with rent representing the second-highest cost for corporate America [behind labor], we are seeing significant office densification," says Ted Anglyn, MAI, president of Parking Property Advisors in Naples, Florida. "Companies are trying to save on rent by having more employees per 1,000 square feet. So, over the next three to 10 years, we're probably going to see more demand for parking, due to this office densification trend."

And even cars without drivers must park themselves somewhere. Ride-hailing services are unlikely to want their vehicles simply driving around empty during off-peak hours. In addition, urban congestion and the need to pay for roads through something other than a gas tax have prompted some observers to suggest road-use pricing--essentially, usage-based fees that would further incentivize the parking of cars. "Individuals and companies would be very sensitive to how many miles their cars are putting on the road, and not consider it a free resource," says Anglyn. With that in mind, parking operators could refit structures with electric-vehicle charging equipment and narrower spaces, because self-driving cars can fit in smaller spaces since their doors don't need to be opened once parked.

"The valuation profession needs to rethink what parking needs are for all uses in the future," says Anglyn. "If you think a property has an economic life of more than 10 years or 15 years, you definitely need to think about the long-term demand for the parking component in commercial real estate."

What can appraisers do?

There still are a lot of questions about how people actually will use these evolving transportation options. For example, self-driving cars might encourage increased urbanization (they're convenient and can reduce road congestion), or conversely, they might increase interest in the suburbs (they're convenient and can make commuting more efficient).

There's also the question of ownership. "How many of these self-driving vehicles will be part of car-sharing or transit system fleets versus how many will be individually owned? Nobody's sure," says Papke. If fleet-owned cars drop off people at their office, the cars can simply drive off to pick up other people. But a car that is personally owned would need to be parked nearby.

In short, as transportation and technology continue to merge, appraisers will face a lot of unknowns. "If I'm appraising a shopping center, do I now say that some of the parking is excess ground? And if so, will it enhance future value? Or will it not really be worth much?" posits Levine.

As the transition to mobility on demand progresses, appraisers will have to keep an eye on several evolving variables. "We're going to be spending a lot more time looking at zoning and other regulations, which will become more complex in order to respond to these changes in transportation, along with other market shifts like sustainable development initiatives," says Papke. "And the nuances in each market will complicate the sales comparison approach. If you're looking at sales in one community versus another, the variations in the local regulations are going to be more significant than they currently are." With so much changing, he adds, "appraisers need to be flexible and look ahead more. We're going to have to watch the markets and try to help clients anticipate changes going forward."

That may make things more complicated for valuation professionals, but it also presents significant opportunity. "They can do more than turn out the work product report, and instead help clients think through some of these issues and plan for the future," says Norris. "It goes back to relationships and working with clients and helping them out. That's where our profession can really add value."

"The more appraisers can broaden their perspective, the better," adds Hobbs. "You can both answer the question about how much an asset is worth, and take a step back and have discussions around highest and best use to help clients assess options and evaluate possibilities." The appraisal report is a part of that, but in a changing world, "people need you to help them solve problems."

Peter Haapaniemi is a freelance writer based in metro Detroit.

All in good time

The autonomous vehicle promises to change the face of transportation--but the biggest question is, when?

Projections vary widely. "Some say that there will be mass adoption by 2020, but that seems overly optimistic," says Alan Anglyn, vice president of Parking Property Advisors in Naples, Florida. Instead, he cites a report from analytics firm IHS Markit that predicts global sales of new autonomous cars will reach 600,000 a year by 2025, and U.S. sales will reach 4.5 million a year by 2035. Those are significant numbers, but it's worth noting that the auto industry currently sells about 17 million new vehicles a year in the U.S., and there are about 260 million vehicles on the road. Thus, says Anglyn, "it will take some time before we see widespread use."

The fact is, truly autonomous vehicles still face some technical hurdles. Even the more successful ones require occasional human engagement. Anglyn also points to the need to handle complicated exceptions to normal driving--if a stoplight is out or if police officers or other emergency responders are directing traffic, for example. How will a car recognize those situations? And security is critical to connected, computerized vehicles so hackers can't hijack the cars and trucks.

There also are legal and regulatory issues to be sorted out. "Municipalities, the states and the federal government--all of them have to line up so that vehicle manufacturers can integrate all these transportation components in compliance with the law," says Anglyn.

Caption: In a future where autonomous vehicles are the norm, even the valuation of highway real estate could change, because self-driving cars would use roadways more efficiently.

Caption: A Seattle developer took a risk building a 48-unit apartment building with no on-site parking --and won, because tenants were comfortable with alternative transportation options.

Caption: When is a garage not a garage? With less demand for one or more personal vehicles, homes and other properties with garages might be better marketed as having extra storage space.

Caption: Low ceilings are one challenge to reconfiguring parking structures for other uses.
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Title Annotation:Trend Watch
Author:Haapaniemi, Peter
Publication:Valuation Magazine
Geographic Code:1U9CA
Date:Jun 22, 2017
Words:2353
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