Anchorage is a comparatively young city that has experienced a lot of new construction over the past 10 years. It has been interesting for me to see how this development has improved the city and demonstrated the concept of "Highest and Best Use."
Highest and Best Use is the use of real estate that results in its highest return to the owner. This is generally the value that an appraiser will determine. This does not necessarily mean current use. Over time and as property is developed, or for improved/redeveloped property, the use will move toward its highest and best use.
For example, a large trailer park once stood southwest of the corner of C Street and 36th Avenue. Today there are four class A office buildings there: ASRC, Centerpoint Building, JL Tower and Centerpoint West. The new Target store on C Street in South Anchorage was an industrial lot. The new developments clearly provide a higher return than the previous uses.
Highest and Best Use is qualified by including only those uses that are legally permissible, physically possible, financially feasible and provide the highest return. Legally permissible means allowed by zoning and complying with any other restrictions on use such as code or deed restrictions.
For example, say a vacant lot would be worth $150,000 if used for a warehouse, $200,000 if used for a retail building and $250,000 if used for heavy-metal fabrication. But because code restrictions on noise prohibit development for heavy metal fabrication, the Highest and Best use is as a retail building.
Physically possible is just that: uses that can be physically constructed on the site.
Financially feasible means uses that will provide a positive return higher than as vacant. This takes into consideration all the items to determine the financial feasibility of development, from construction cost to market lease rate to market demand.
For example, a vacant industrial property could not be considered for use as speculative construction of a warehouse in Anchorage because the market lease rate will not support the cost of new construction, so there would not be a positive return.
Highest return is the use that, out of all the possible uses, will provide the maximum return. For example, the C Street and 36th Avenue site could have continued to be used for a trailer park or developed for retail, but such uses would not generate as high a return as class A office buildings.
Improved properties' Highest and Best Use might be as vacant instead of their current uses. For example, if an improved property's current use had a value of $500,000, but the site had a value of $600,000 if vacant and the cost to demolish the existing building was $50,000, then the vacant value would be the $550,000 ($600,000 minus $50,000). That would be the Highest and Best Use.
But if the vacant value after demolition were less than the value of the current use, then the highest and best use would be its current use. We have so many older buildings in use in Anchorage that have not been redeveloped for this reason. Essentially the land value is not high enough relative to the value as currently improved to justify redevelopment.
There are several locations in Anchorage where, unfortunately, there is an unsightly use that I wish someone would tear down and put up something better. But the land value is going to have to rise high enough to exceed the value as currently used before that will happen.
Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His opinion column appears monthly in the Anchorage Daily News.
CHRIS STEPHENS
REAL ESTATE