Who in the 1960s, when we barely had electric typewriters, could have predicted what American business would be like today? Who could have known that millennials would shun the once-coveted private office for open space, more natural light, polished concrete floors and free Kombucha on tap?īuilding structures are static while market trends are dynamic. Buildings became obsolete as the market changed around them. That’s because they weren’t obsolete at the time they were constructed. You may be wondering why these buildings were built the way they were if they are considered obsolete. It just means they have limitations that will impact their value to investors and their desirability to tenants, both short and long term, and that needs to be taken into account when they are acquired, marketed and also when making capital improvements. That means higher turnover, more frequent changes to interior finish and a higher risk of rental income loss due to vacancy and/or tenant defaults.ĭoes this mean Class C buildings don’t make good investments? Absolutely not. Built with smaller tenants in mind, Class C product attracts local businesses looking for shorter lease terms and the lowest lease rates. With the possible exception of an elevator, it would be prohibitively expensive or structurally impossible to change these basic structural components. Built mostly in the 1960s and 1970s, these structures exhibit several elements of functional obsolescence including minimal window lines, shallow bay depths, low ceiling heights, lack of elevators and are generally of wood-frame construction. Orange County’s inventory of Class C office buildings is a good example. In most cases, elements of obsolescence in older office buildings are built into the original structure and are not economically or architecturally feasible to fix. But, before we get into that, let’s take a high altitude look at both conditions starting with the tougher of the two, functional obsolescence, to frame the topic. That challenge can also be converted to an opportunity, as those investors with the necessary skills, resources and capital are often able to acquire property at a discount and add value by addressing issues areas of obsolescence and deferred maintenance. It can result in depreciation of property value. The presence of either or both can substantially decrease property value in several ways, and with so many of Orange County’s office, retail and industrial buildings now being over 20 years old, these two important components of value determination pose more of a challenge every day.įunctional Obsolescence, a commonly used term in real estate, is the decrease in desirability and usability of a property due to physical deterioration such as outdated design or amenities. Two things every commercial property investor looks out for when evaluating a potential acquisition are elements of functional obsolescence and items of deferred maintenance.
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