So, a 200,000 square foot, 24’ clear-height distribution building in the Inland Empire is functionally obsolete because the overwhelming majority of users looking in the area are bulk distribution users. Companies like Amazon combine ceiling heights of more than 30’ with sophisticated racking systems to maximize their space utilization, while machining operations making precision parts for Boeing or Lockheed Martin, can probably function efficiently with 15’ foot ceilings. The combination of physical characteristics within the existing building inventory varies widely, and each property’s mix of size, age, shape, location, stand-alone or common wall configuration, creates its own degree of functional obsolescence depending who uses it.Ĭeiling height is a good example, as it is critical to distributors, but not to most manufacturing or assembly operations. When applying this definition to the obsolescence of industrial buildings, we generally refer to things like ceiling height, parking ratio, column spacing, turning radius, loading doors, lot size, yard area, type of construction and other physical componentry. According to Investopedia, functional obsolescence is a reduction in the usefulness or desirability of an object (in our case, an industrial building) because of an outdated design feature, usually one that cannot be easily changed. In this post we take a critical look at this important aspect of ownership.īefore we do that, let’s define it in the simplest of terms. Industrial buildings with elements of functional obsolescence can create a variety of difficulties for their owners. Here’s what we had to say: The Perils of Functional Obsolescence That fact reminded us that we wrote on the topic a couple of years ago in a post that we believe is even more on target today than it was then.
With that possibility in mind, we are particularly concerned for those of our clients who own older properties with elements of functional obsolescence, as their properties are likely to see steeper value declines if a correction did occur. We think the double whammy of high prices and more expensive mortgage money may be enough to send the market in another direction soon. The SBA 504 rate, the most popular mortgage option for owner/user acquisitions, has more than doubled in 18 months and just moved above 5% last week.
#FUNCTIONAL OBSOLESCENCE DRIVERS#
Property values have risen to more than double the previous peak of 2007 and one of the primary drivers of that price run-up, low mortgage rates, has shifted dramatically in recent months. Last week on the blog we spoke plainly about the possibility of an industrial market correction in Southern California. So, why should that be such a source of concern to industrial property owners? It really comes down to the degree to which use becomes limited.
It could be said that most industrial buildings, unavoidably, have some degree of functional obsolescence.
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