Beyond Location, Location, Location

We’re told real estate is all about location, location, location. But there’s a much better way of comparing properties: The three D’s of distance, division and density.

It’s all about location, location, location. You’ll have heard this mantra a thousand times before and it’s true but not very meaningful.

Why would I say that “location, location, location” isn’t meaningful? First, it’s not very specific and second, it isn’t measurable. Sure, you can put locations on a map but how does that tell us that 40°45'30.8"N 73°58'43.4"W is better than 47°34'41.3"N 52°43'16.5"W? The first location is certainly more expensive - Rockefeller Center, New York City compared to the second – an elementary school in St. John’s in Newfoundland and Labrador, Canada. However, location, location, location didn’t answer that per se, rather we had to add in knowledge of the property market in New York City, one of the world’s most expensive, compared to the more modest market of St. John’s.

So, what do I propose instead of location, location, location?

I call it the three D’s: Distance, Division and Density. The benefit of these is that they can be quantified and are therefore useful when choosing between properties.

Let’s look at each of them.

Distance

Distance is the most easily understood of the three D’s, but which distance? This will be different for different types of properties but generally the answer is distance to common destinations. If it’s your home, it’s the distance between there and work and services. If it’s your holiday home, it’s the distance to recreation, services and perhaps an airport. If it’s a commercial property, it’s the distance to customers and other businesses. It’s also important to know the distance to the central business district (CBD). Distance to the CBD explains the value of the Rockefeller Center very well since it’s located pretty much in the middle of the CBD.

Division

Division is also pretty easy to understand because it is exactly that: Any boundary and obstacle that divides properties. Cities are themselves often created around natural boundaries such as rivers or on the coast. You can even argue that cities are often solutions to boundary problems such as maintaining a river crossing or maintaining a viable harbor.

We also find divisions within cities and these are the ones that account for locational value. The saying “the wrong side of the tracks” meaning living on the less desirable side of train tracks understands this. Train tracks, rivers, highways and busy roads all isolate neighborhoods. This is why we can find extreme poverty right next to opulent wealth. Any boundary can have unforeseen consequences and removing it can create real value. City planners should pay much closer attention to divisions than they appear to be doing.

Consider boundaries both for neighborhoods but also for individual properties. Being located next to the boundary “lake” or “Central Park” is usually a benefit, but being next to the boundary “six lane highway” or “train track” is usually a drawback. The Rockefeller Center is located on the island of Manhattan, which is divided from the rest of New York by water and since it’s such a desirable location anything on the island will automatically be more expensive than off the island.

Density

Density might seem like the most difficult to understand but is in my opinion also the most powerful of the three. It’s what explains why the location of Rockefeller Center is more valuable than the location of the Elementary school in Newfoundland. New York is valuable because of the benefits reaped by scale.

For example, the more financial companies you find in a location, the more financial companies want to be there. By locating themselves together they can share services, a talent pool and ideas.

Some stipulated that the internet would kill the need for density when in reality it has only made the need stronger. When considering property value, density will behave differently for different property types.

Retail benefits from being next to other retail, especially of a similar type. If a street has ten jewelers, chances are that any shopper can find something they like, something that wouldn’t be true if there was only one jeweler on the street.

Homes benefit from density of services; can people live there without a car? Is it a culturally interesting location? Are there many restaurants?

So, when comparing two properties, think about the 3 D’s instead of the 3 L’s. How far are these properties from where I want to go? How far are they from services I want to use? What boundaries do they face? Do you need to cross a 6 lane highway to do shopping? Or are you located on a natural boundary, like a beautiful lake? And finally, what’s the density of the area like? How many people live there? And how many shops do you have?

Considering distance, division and density makes our understanding of desirable locations much fuller and quantifiable and therefore more meaningful.

Ingi Finnsson is passionate about data, economics and cities. He loves complex data but he loves complex data made simple more. He spends his days making real estate valuation models.