Water Property Values
By Charlie Elliott, Jr., MAI, SRA

There has probably not been any subject more on the minds of property owners, lenders and appraisers than that of property values on and around the beaches, lakes and sounds throughout the United States. As most of us have observed, property values, at least for now, continue to be going through the roof. Those of you who regularly read my columns know that recent appreciation in these areas have reached as high as 25 to 40 percent.  Not only are the square-foot values increasing on the typical home, the size of the homes are also increasing at a rate not seen in the past. 

What is it about us that make us want to be on and around the water? Those scholars of evolution will be quick to point out that we came from the water so why not revisit it?

If one looks at a map of the country where the larger property value increases are taking place, it is easy to see that, in a large part it is occurring around the rim of the continental United States. Beginning in Maine and moving around in a clockwise direction through Boston, New York, the Carolinas, Florida, the Gulf Coast, and around to California and all the way up to the Seattle area, we are seeing this significant increase in property values. While there are other areas on the water, such as lakes and rivers, experiencing property-value increases, the granddaddy of them all seems to be oceanfront and other near-ocean properties.

Why is this? These properties have been here all along without such a strong rush to purchase in the past. Yes, these properties have usually been more in demand than inland properties, however, there seems to be a great surge in values, especially for some of these properties in the new millennium. While each location and situation is somewhat different and there is no one-size-fits-all explanation, listed below are a few of the reasons I attribute to this phenomenon. This is not just based upon my observations and the opinions, but also that of many of my professional colleagues, such as bankers and economists.

1. First, and this is more of a personal opinion than a professional one, people like to think that they are hobnobbing with the rich and famous, so where do they go? They go to the beaches and surrounding areas where such activity occurs. This increases the demand for such property. Such a theory may seem somewhat artificial, however, it can be very real, especially when the market is on an upward trend.
    

2. Next, we are in a very affluent society. We are not just talking about the top 1 percent here, as in many lesser affluent areas, but a much larger percentage of our populace has discretionary moneys to invest. Due to recent experiences, many of our investors have negative feelings toward typical investment vehicles, such as stocks, bonds and mutual funds. Therefore, to avoid putting all of their eggs in one basket they seek other investment vehicles, such as real estate, as a hedge. So what is a better way to invest than to own real estate and enjoy the opportunity to use it in a beautiful location?
    

3. We have talked much about demand, but those of us with at least a modest education in economics know that supply is also an important part of the equation. Here, many economists believe, lies a large part of the answer as to why water properties are increasing in value at such a rapid rate. Yes, there are fewer acres along the coast to develop than inland. By looking at a map of our country, it would be easy to conclude that property at or near the water represents a small portion of all property. Perhaps as little as 1 percent of all property would be in this category, depending upon how it is accounted for. But this is not the only supply driven issue. See the next paragraph for another one.     
     

4. A significant issue relative to the supply of real estate is whether or not it is available in real time. We all know that the amount of land is more or less fixed, that it already exists and that it cannot change.  The amount of marketable real property, on the other hand, consists of property that has been developed or has been approved for development quickly. That would mean that such properties have met all environmental requirements as well as all federal, state and local development ordinances.  Where water properties are of a concern, perhaps we have uncovered a substantial clue as to the real time supply. We all know that politics and physical infrastructure, as well as environmental concerns, delay the development of land on and near our beaches. Therefore, development of water properties is more expensive and time consuming than that of inland properties. This places pressure on the market price because of the increased cost of development as well as the short supply, due to the delay in availability. In some highly populated areas, development approvals may require five to 10 years. This places upward pressure on existing housing stock prices, causing substantial increases in value.  
             

5. Finally, one of the reasons is simply that investors see values increasing in and around the water, so they jump in, no pun intended, and compound the already volatile situation by adding fuel to the fire. This works to a point, but, as we have seen in the stock market recently, once the market is oversold, prudent investors, realizing the risk, will pull back.