This is just a quick back-of-the-envelope spurred by a presentation made by the Town’s Director of Finance at the 1/27/2020 Town Council meeting.
One statistic that caught my eye is that the residential share of total property assessments in town rose over the last decade, from 77.5% in 2011 to 81.0% in 2019 (Page 9 of this document (.pdf)). The Director of Finance suggested that this was one possible justification for hiring the new business development officer for the Town of Vienna. That is, to help bolster Vienna business and hence assessments. Conversely, Councilman Majdi suggested that the tear-down boom might account for it, with small houses being torn down to make way for much larger ones.
So, that’s the question here: Does the increase in residential share of total property assessments mean that commercial real estate in Vienna showed poor price appreciation, compared to residential? Or is that plausibly just a consequence of the tear-down boom, with small, lower-cost houses in Vienna being systematically replaced by larger, higher-cost houses?
Here, in the crudest way possible, I want to test that. Can the tear-down boom plausibly account for this change? In keeping with the idea of a round-numbers calculation, I’m going to do a crude cut at this. Basically, is the impact of the tear-down boom anywhere near large enough.
So: My recollection is that, of late, the Town has averaged about 100 tear-downs per year, based on building permit data. Further, based on a couple of observations, property value for a tear down typically increases by about a million dollars (in 2019 terms), from (say) $0.7M for a small house, to $1.7M for the typical mansion that replaces it.
So, 9 years x 100 houses per year x $1M/house = $900M in additional residential property values, in 2019 dollars, from the cumulative effect of the tear-down boom from 2011 to 2019. Roughly speaking then, if I net out the crude impact of the tear-downs, I get this table:
|Crude impact of tear-down boom on Vienna assessed real estate values|
|Less tear-down impact||900,000,000||900,000,000|
|2019 less tear-down||3,351,761,320||4,304,854,490||77.9%|
And the answer is that the (crude estimate of the) impact of the tear down boom is more-or-less the right size to explain the shift in assessment share in the Town of Vienna. The difference between the two red numbers, in the table above, is roughly as large as the difference between the two red numbers in the opening paragraph.
In other words, this shift in assessed values in the Town of Vienna doesn’t show any particular problem with our commercial real estate. Plausibly, it just shows the impact of the replacement of small, lower-cost houses with much larger ones.
This is consistent, I think, with repeated mentions of high rental rates for commercial property along Maple (e.g., in the new Town economic development officer’s “listening tour”). The complaint is that high rental rates are driving businesses out of Vienna. But if so, that’s just an indication that business is good along Maple. Nobody likes paying rent, but if property owners along Maple think they can get (e.g.) $60/square foot/year, that means they expect that business opportunities are such that some business can afford to locate on Maple and pay that kind of rent.