Monopoly Properties
This is an excerpt from the book Real Estate Investing for Double-Digit Returns by Petros S. Sivitanides.
Monopoly properties represent a category of properties that have significant value increase potential. In many cases, an extreme result of growth controls and regulations is the creation of properties with monopoly status, that is, properties that because of unique locational or other attributes are not replaceable or substitutable. This means that properties that are bought before they revert to monopoly status and sold after they gain monopoly status should allow for big profits, since monopoly implies extreme scarcity, which in turn can lead to significant price increases.
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Berry 1 (1984) suggests that the number of monopoly properties has grown rapidly, due to widespread downzoning and outright prohibition of land uses. He cites numerous examples of monopoly properties such as existing residences, motels, apartments, and mobile home parks on unique ocean frontages, where such uses have been restricted; existing high-rise apartments in districts where height restrictions have been imposed; and industrial plants in areas where newly adopted environmental regulations restrict the further development of such uses. Berry indicates that the level of price increases that may take place after a property acquires monopoly status will depend on how long the property is likely to maintain such a status, the nature of events that may cause its termination, and the magnitude of demand for such a property.
Berry’s example of high-rise apartment buildings in districts where height restrictions have been imposed entails a notion of localized scarcity, but in my view, it may not approach the level of scarcity implied by the term “monopoly” if other high-rise apartments can be found in other districts within the urban area. Continuing improvements in communications and transportation have expanded significantly the geographic extent of property markets, and therefore, concepts such as monopoly and scarcity should be examined within the scope of the entire urban area, as opposed to a small geographic scale. Within this context, real estate investors need to think very carefully before attributing monopoly status to any given property.
Given significant locational substitutability within an urban area, and the fact that any type of property can be reproduced (except historical monuments, districts, and buildings perhaps), true scarcity and monopoly status may lie at the location level and not the property level. In other words, what may be truly monopolistic within an urban area are unique and scarce locational characteristics that can not be easily replicated. Think, for example, of a large coastal city, which has a few beaches of unique physical beauty, which are also suitable for swimming. I would argue that these few beaches qualify as monopoly locations, and the properties at these locations must qualify as monopoly properties by virtue of the monopoly status of those locations. To understand this, consider that while there are many hotels in a large urban area, there will be few located on uniquely attractive beaches.
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