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Estimating Commercial Land-Use Conversion: Case Study of Athens-Clarke County, Georgia Arthur C. Nelson, PhD, FAICP Presidential Professor and Director of Metropolitan Research University of Utah Grace Bjarnson University of Utah The authors gratefully acknowledge assistance in research leading to this paper provided by Nicole Sitko and Kelly A. Beavers of the Metropolitan Institute at Virginia Tech January 2010

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Introduction

Investment in urban areas rise and fall, then rise again as new buildings age, deteriorate, become

“ripe” for conversion, and make way for new development usually at a higher intensity. One of

the challenges facing planners is predicting when commercial properties may become “ripe” for

conversion to other uses. Despite the presence of theory on when properties conceptually ripen

for conversion (for a seminal work see Bourne 1967) and texts on how to evaluate the financial

feasibility of commercial properties under different scenarios (see Geltner, Miller, Clayton and

Eichholtz 2006), the planning literature is generally not helpful. This article for Practicing

Planner presents an approach planners may use to estimate when commercial structures may

become ripe for conversion within planning horizons. It uses a case study of Athens-Clarke

County, Georgia to illustrate the concept and its application. The article begins with a review of

growth trends facing Athens-Clarke County (a consolidated city-county), the analytic approach

used to estimate ripeness for conversion of commercial properties along commercial corridors,

application of the method to those corridors, and planning implications for the city-county.

Lessons can be generalized.

Athens- Clark County Growth Trends

Athens-Clark County just like most urban areas in the United States will see growth in their

population and job market. Projections for the area suggest that between 2007 and 2020 Athens-

Clark County’s jobs will increase by over 21,000, with almost 8,000 of these new jobs being

within the commercial sector. The main question addressed in the study was whether or not this

future growth in commercial jobs would require the city-county to increase its zoned supply of

commercial land during that same time period. The critical process of identifying those parcels

that may be “ripe” for redevelopment by 2020 is described below.

Method

Knowing when structural depreciation combined with sustained economic growth leads to

specific structures becoming replaceable is a key to planning especially for transportation and

utilities. As structures are replaced, new ones are built presumably achieving the highest and best

use of the site. Normally, this means new structures use land more intensively than the ones they

replace. How can we estimate when a structure becomes ripe for redevelopment?

Conceptually, every structure wears out and needs to be replaced. The aging process is called

"depreciation". It comes in three forms. Depreciation through economic obsolescence occurs

when the function for which a structure as built is no longer suitable for its initial intent, and the

structure is simply no longer functional. Steel manufacturing plants come to mind. Depreciation

through functional obsolescence occurs when the structure is no longer needed for its initial use

but could be rehabilitated for another use; converting warehouses into residential lofts comes to

mind. Mostly, however, we deal with physical depreciation, reflecting the wear and tear on

structures leading eventually to their replacement. (See (see Geltner, Miller, Claton and

Eichholtz 2006).

The study is limited to nonresidential structures for several reasons. First, they are replaced faster

than residential structures. Second, they tend to be on corridors that are more suitable for higher

intensity redevelopment than residential parcels. Third, nonresidential parcels are usually larger

and more easily combined with other nonresidential parcels for redevelopment than residential

ones. Fourth, it is probably easier, politically, to redevelopment nonresidential areas than

residential ones.

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Each nonresidential structure has its own rate of depreciation. The rate for each structure varies

by natural wear and tear, and by urban land inflation. Structure depreciation is estimated by

numerous sources; we use Marshall and Swift's Valuation Service (2007). Although hundreds of

depreciation schedules were provided, the county assessor culled the list to identify and make

use of those schedules that most accurately compared to properties in Athens-Clarke County

Knowing exactly when a structure is ripe for redevelopment is open to debate. For our purposes,

we used a simple model that assumed when the land value exceeded the depreciated structure

value placed on that land the parcel was ripe for redevelopment. Normally, as structures

depreciate land appreciates. Consider a structure with a 20-year useful life on a parcel of land

worth 20 percent of the total value, and that land appreciates by a constant (uncompounded) one

percent point annually. The structure becomes ripe for redevelopment in about 13 years. Even

without land appreciation, the structure becomes ripe for redevelopment in 16 years. (See figure

1.)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Structure Age

0

20

40

60

80

100

120

Uni

ts o

f V

alue Building Value

Constant Land Value

Inflated Land Value

Figure 1. Plot of ripeness for redevelopment of a 20-year structure with no land

appreciation and with constant (non-compounded) appreciation at one percent annually

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We estimated the year of ripeness for conversion for each parcel as follows:

1. We defined all structures as ripe for redevelopment when land value exceeds structure value.

2. We did not assume inflation or land value appreciation. This provided a conservative estimate

of potential commercial redevelopment within the specified time frame.

3. Using assessor depreciation schedules which were based on Marshall and Swift’s Valuation

Service, we estimated the year when every commercial-oriented structure within the county

would become ripe for redevelopment.

4. We combined parcels ripe for redevelopment cumulative from 2007 (the base year of the

study) to 2010 and 2020.

Analysis

The method was applied to the five principal commercial corridors in Athens-Clarke County (see

figure 2). Initial mapping of parcels ripe for conversion by 2010 and 2020 was “ground-truthed”

by staff of the Athens-Clarke County planning office. Figure 3 shows a close-up of how we

mapped the “Business” corridor commercial parcels “ripe” for redevelopment by 2010 and by

2020. Table 1 provides an overall summary of all five focus areas. Table 2 summarizes the

analysis for each focus area over the period 2007-2020 while Table 3 does the same for the

period 2010-2020.

We then compared the supply of those parcels ripe for redevelopment by 2010 and 2020 to the

demand for growth-related commercial development. For this, we first estimate the demand for

space-consuming jobs each year, using the technique developed by Nelson (2004a), reported in

Table 4.

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Figure 2. Index map of commercial corridor focus areas.

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Figure 3. Detail of Business Corridor focus area.

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Table 1

Overall Summary

Total 2007-2010 2011-2020 2007-2020

Acres 1,280 492 1,772

Square Feet of Improvements 14,202,050 4,528,694 18,730,744

Improvement Value ($) 236,379,170 133,668,324 370,047,494

Land Value ($) 277,835,827 98,974,006 376,809,833

Improvement to Land Value Ratio 0.85 1.35 0.98

FAR 0.25 0.21 0.24

*Parcels included for assessment in this study were those with commercial, employment, and industrial zoning classifications only.

Table 2

Projected to be feasible for redevelopment, 2007-2010

Focus Area Acres SF of

Improvement

Improvement

Value Land Value

No. of

Parcels

Improvement

to Land

Value Ratio

FAR

Business 486.2 10,615,834 134,001,079 115,008,959 405 1.17 0.50

Downtown 207.4 2,019,071 60437434 108,975,695 108 0.55 0.22

Northeast 188.3 164,825 5,269,191 10,067,554 34 0.52 0.02

Southeast 287.3 940,860 29,017,236 38,693,106 110 0.75 0.08

Employment 110.6 461,460 7,654,230 5,090,513 27 1.50 0.10

Total 1279.7 14,202,050 236,379,170 277,835,827 684 0.85 0.25

Table 3

Projected to be feasible for redevelopment, 2011-2020

Focus Area Acres SF of

Improvement

Improvement

Value Land Value

No. of

Parcels

Improvement

to Land

Value Ratio

FAR

Business 101.3 927,887 36,038,422 24,188,939 42 1.49 0.21

Downtown 79.8 2,399,659 59,891,196 41,568,938 91 1.44 0.69

Northeast 72.1 386,323 8,743,140 6,067,225 27 1.44 0.12

Southeast 80.2 591,570 24,040,134 17,766,114 41 1.35 0.17

Employment 158.4 223,255 4,955,432 9,382,790 40 0.53 0.03

Total 491.9 4,528,694 133,668,324 98,974,006 241 1.35 0.21

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Table 4

Space Consuming Jobs each Year

Year Jobs

2007 80,820

2008 82,203

2009 83,587

2010 84,970

2011 86,350

2012 87,730

2013 89,110

2014 90,490

2015 91,870

2016 93,246

2017 94,622

2018 95,998

2019 97,374

2020 98,750

Growth 17,930

Source: Estimated by authors.

Assessor records indicate that the 80,820 commercially-related jobs occupying space occupied

about 39,427,375 square feet of space, or about 488 square feet per job. This compares favorably

with Nelson’s (2004) analysis of space consumption nationally. For planning purposes, each

commercially-oriented job is assumed to consume about 500 square feet of space. Table 5 uses

this estimate to project commercial space needs.

Much of the existing commercial space will be replaced over time. Nelson (2004b) estimates that

commercial space is replaced about every 25 years with many retail spaces replaced in half that

time but more durable office space twice that. Table 5 estimates commercial space that may need

to be replaced over the period 2007 to 2020.

In all, Table 5 shows that Athens-Clarke County may need to build about 31.6 million square

feet of commercial space between 2007 and 2020. Of this space, 9.0 million is estimated to be

needed to support job growth while 22.7 million square feet will be replaced. Assuming a

conservative cost of $90 per square foot of space, the value of this construction is estimated at

about $2.8 billion (in 2007 dollars).

Converting square feet of space needed to acres of land needed to be zoned for commercial

development entails two steps. First, the current floor area ratio needs to be estimated to gauge

current conditions. Second, reasoned estimates of FARs for the future need to be determined.

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In 2007, assessor data from Athens-Clarke County indicate about 39.4 million square feet

occupies about 3,771 acres of land. This converts to a floor area ratio (FAR) of:

39,427,375 square feet ÷ (3,771 acres @ 43,560 square feet per acre) = 0.24.

Table 5

Estimated Commercial Space Construction Needs, 2007-2020

Year Total Space

Growth-

Related

Square Feet

Replaced

Square Feet

Total Square

Feet

Constructed

2007 39,427,375

2008 40,119,042 691,667 1,577,095 2,268,762

2009 40,810,708 691,667 1,604,762 2,296,428

2010 41,502,375 691,667 1,632,428 2,324,095

2011 42,192,375 690,000 1,660,095 2,350,095

2012 42,882,375 690,000 1,687,695 2,377,695

2013 43,572,375 690,000 1,715,295 2,405,295

2014 44,262,375 690,000 1,742,895 2,432,895

2015 44,952,375 690,000 1,770,495 2,460,495

2016 45,640,375 688,000 1,798,095 2,486,095

2017 46,328,375 688,000 1,825,615 2,513,615

2018 47,016,375 688,000 1,853,135 2,541,135

2019 47,704,375 688,000 1,880,655 2,568,655

2020 48,392,375 688,000 1,908,175 2,596,175

Total 8,965,000 22,656,435 31,621,435

Source: Athens-Clarke County Assessor for space in 2007, authors for other estimates.

Table 6 estimates the land area needed to meet projected space needs if FAR policies continue at

the current average or are modified to 0.25, 0.30, 0.35, and 0.40. Suggested FAR figures are

estimated at or below 0.40 to ensure that parking schemes do not require decked parking

structures.

Table 5 shows that a city-county wide FAR of 0.30 or higher would be sufficient to meet

projected commercial land use needs. This assumes all existing commercial development is

redeveloped to at least that FAR, which is unlikely.

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Table 6

Commercial Land Area needed based on Different FAR Targets

Year

Total

Projected

Space Needs

Acres Needed at

Current FAR

Average Target FAR Policy of

0.24 0.25 0.30 0.35 0.40

2007 39,427,375 3,771

2008 40,119,042 3,837 3,684 3,070 2,631 2,303

2009 40,810,708 3,903 3,748 3,123 2,677 2,342

2010 41,502,375 3,969 3,811 3,176 2,722 2,382

2011 42,192,375 4,035 3,874 3,229 2,767 2,422

2012 42,882,375 4,101 3,938 3,281 2,813 2,461

2013 43,572,375 4,167 4,001 3,334 2,858 2,501

2014 44,262,375 4,233 4,064 3,387 2,903 2,540

2015 44,952,375 4,299 4,128 3,440 2,948 2,580

2016 45,640,375 4,365 4,191 3,493 2,994 2,619

2017 46,328,375 4,431 4,254 3,545 3,039 2,659

2018 47,016,375 4,497 4,317 3,598 3,084 2,698

2019 47,704,375 4,563 4,381 3,650 3,129 2,738

2020 48,392,375 4,628 4,444 3,703 3,174 2,777

Source: Space and land area in acres for 2007 from Athens-Clarke County Assessor, calculations by

authors.

We then assess the redevelopment potential of five focus areas. It shows that roughly 1,770 acres

are likely to be redeveloped over the period 2007 through 2020. If the FAR of the redeveloped

sites is increased from its current average of 0.24 by 50% to 0.36, the net change in FAR may be

more than sufficient to meet future commercial development needs, estimated at 9.0 million

square feet. This is illustrated below:

(0.12 FAR change) x (1,770 acres @ 43,560 square feet/acre)

= 9.3 million square feet

This finding suggests that Athens-Clarke County need not consider expanding the supply of

commercial land at least until the next plan update process.

The study found that by raising the FAR of new development and redevelopment to between

0.35 and 0.40 – thereby raising the existing FAR modestly from 0.24 to about 0.30, the current

zoned supply of commercial land in Athens-Clarke County may be sufficient to meet current and

projected commercial development needs to 2020. This excludes currently vacant industrial land

that may be converted to commercial uses, or more rapid redevelopment of commercial sites

than the study estimates. Further, no more land should be considered for a change to its future

land use designation to allow for commercial. The assessment is based on the foregoing analysis

plus these additional considerations:

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More than 4,000 acres of other land zoned for nonresidential and nonagricultural land

uses provides additional supply for unforeseeable, large-scale development.

The 0.35 FAR threshold applied to redevelopment prospects presented in this assessment

is lower than the 0.40 FAR Athens-Clarke County already applies to targeted

commercial/mixed-use areas.

The analysis excludes consideration of the use of decked, tuck-under, or other forms of

parking that can raise FAR levels.

The analysis does not consider the extent to which pending Federal law and/or market

forces will lead to small automobile sizes and thus small parking stall footprints than can

also raise FAR thresholds.

Any study which assesses future redevelopment should also suggest that future proposals to

expand the supply of commercial or other development to meet specific, unforeseen needs

should be considered. These studies are only intended to provide greater clarity on future land

use needs by taking into account redevelopment within the area. The Athens-Clark County

study encourages periodic review of redevelopment characteristics to guide future decisions

about the supply of projected commercial or other land use needs for the community.

Planning Implications

Broader implications for planning generally are suggested. As a rule of thumb, the analysis found

that when the value of land approaches or exceeds the value of physical improvements

approaches, a commercial property becomes ripe for conversion (see also Knaap 2001.)

Second, that conversion is usually the removal and reconstruction of the physical improvements.

Unless they have historical significance or are unusually durable constructed, it is unlikely that

many commercial structures would be rehabilitated to serve any use, commercial or otherwise.

The reason is that commercial structures are usually built to serve a specific function during a

short-term (10- to 20-year) investment horizon (see Geltner and Miller 2000) so, by design, they

are not built durably.

Third, as commercial areas ripen for conversion they will likely become areas of disinvestment,

rising vacancy rates, and lower rents. If an area is growing and/or if new investment is steered

into existing commercial areas (through planning, redevelopment policy, natural barriers, or a

combination) the older commercial structures will give way to newer ones. The cost of

demolition and rebuilding combined with the probable economics of more expensive land along

existing commercial corridors requires that new structures boost their economic productivity

levels. This implies that less intensive disinvested commercial areas will be replaced by more

intensive land use areas with higher FARs.

Finally, as land use intensities rise there may also be opportunities to mix land uses, especially

adding residential development. This kind of transition from a commercial use to a multi-use

area may be aided through the investment of alternative public transportation modes along

current commercial corridors. Given its small population base, Athens-Clarke County is

anticipating adding bus service along the corridors, and improving pedestrian and bicycle

options. In larger urban areas, bus rapid transit, trolleys, and light rail may be additional options.

It seems that the future economic vitality of America’s metropolitan areas is tied to the

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redevelopment of existing commercial corridors. Facilitating these transitions may be up to

planners. Being able to anticipate today when corridors may become ripe for conversion is the

first critical step in this process. As planners use the redevelopment principles described above

they will be able to work together with policy makers to create mechanisms to encourage wise

conversion when the opportunities arise, rather than impede them by simply not knowing when

the time has come to reshape them.

References

Bourne, Larry S. 1967. Private Redevelopment of the Central City: Spatial Processes of

Structural Change in the City of Toronto. The University of Toronto, Department of Geography

(Toronto).

Geltner, David M. Norman G. Miller, Jim Clayton and Piet Eichholtz 2006. Commercial Real

Estate Analysis and Investment, second edition. Southwestern Publishing (Oklahoma City OK).

Knaap, Gerrit J, Ed. 2001. Land Market Monitoring for Smart Urban Growth. Lincoln Institute

of Land Policy (Cambridge MA)

Marshall and Swift. 2007. Valuation Service. (Los Angeles CA)

Nelson, Arthur C. 2004a. Planners’ Estimating Guide. American Planning Association (Chicago

IL).

Nelson, Arthur C. 2004b. Toward a New Metropolis: The Opportunity to Rebuild America.

Brookings Institute Metropolitan Policy Program, Discussion Paper.