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Suburban Parking Garages Can Be A Drag On Property Values

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Last fall I attended a seminar on the “Nuts and Bolts of a Tax Appeal” in Chicago.  A substantial portion of the seminar was devoted to a mock trial over the valuation of a large suburban office building that had a parking garage.  What seemed to be implied and accepted by both the plaintiff's &amp; defendants' appraisal experts, was that a parking garage is superior to surface parking, and the building should be valued higher because of this factor.  While parking garages are necessities in an urban environment, they are not always desirable in a suburban one.

If it is snowing or raining outside, I think many of us would prefer to park in a garage where we are out of the elements.  The fact that something would be nice, however, does not make it economical.Parking garages are very expensive to build and operate.  Unless tenants are willing to pay substantially higher rent to offset the cost, or they are boosting occupancy levels (which we don't generally see), buildings with this type of structure will have a lower net operating income.Suburban office properties rarely have the pricing power to recoup the costs of these parking facilities.

Writing in the Carl Walker 2016 edition of RS Means Building Construction Cost Data, Gary Cudney P.E. reported that the mean construction cost in 2015 for parking structures in Chicago is $22,425 per space, or $67.14 per square foot.  He reported that surface parking spaces typically cost $5,000 to $10,000 per space.  His report indicated that structured parking typically adds $10,000 to $20,000 per space but reduces land costs, and so typically becomes cost effective when land prices exceed about $1.5-2.5 million per acre or $34.44 to $57.39 per square foot.  In a suburban setting, we are often seeing land values of $5 to $20 per square foot which isn't even close to what would be required to be considered cost effective.

In an analysis by the Victoria Transport Policy Institute, a Canadian independent research organization, which utilized land values of $5.80 per square foot, they found that the typical cost for a surface lot would be $838 per space per year while a two-level parking structure would cost $2,382 per year.While the surface parking lot has higher land costs associated with it, this expense is more than offset by its lower operating expenses.

Parking structures may require elevators, fire control, mechanical ventilation and security.  Some people prefer surface parking lots because they do not feel safe in parking garages, particularly when it is dark or after normal hours. More than 1 in 10 property crimes occur in parking lots or parking garages.  Ingress and egress can also be more time consuming relative to a surface parking space.  Surface parking lots can also be used for local festivities, fundraisers or farmers' markets.  Finally, we rarely see much of a rental premium to offset the higher costs of these structures.

In a high land value urban setting, a parking garage may be a cost-effective amenity.  While some suburban offices may need garages to meet parking requirements, it is not necessarily something they should be happy about.

Gary T. Peterson, MAI, MBA

J. Chie, Esquire

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