Why Floor Area Ratios Matter in Industrial Real Estate
The floor area ratio, or FAR, is the figure representing how a building’s size relates to its land.
What Is a Floor Area Ratio in Industrial Real Estate?
The floor area ratio, or FAR, is the figure representing how a building’s size relates to its land. Many municipal governments set an effective floor area ratio maximum as part of zoning codes or ordinances, and FAR requirements generally vary depending on asset type.
In a nutshell, a higher FAR allowance permits a denser property. With industrial properties, floor area ratios are typically far lower than for office or multifamily buildings — primarily because industrial structures are generally single story, while apartment communities or office towers can span many stories on relatively small plots of land.
Calculating Your Floor Area Ratio
Although the formula is simple, it is critical to understand the two variables.
First, you must determine your building’s floor area. This is not just the footprint of an asset, but all floor space, excluding areas that cannot be occupied: think stairways, elevator shafts, and even basements.
Second, you must determine your land size in square feet, not in acres. Multiply your parcel’s acreage by 43,560 square feet to calculate this figure.
The Formula
FAR = Building Floor Area ÷ Parcel Size
Examples
Let’s illustrate with an example. You are planning to develop a 200,000-square-foot industrial property on a 30-acre land. To calculate your FAR, first figure out the parcel size in square feet (30 acres x 43,560 square feet = 1,306,800 square feet). Then, divide the building size by the parcel size, and you find your result: 0.15.
Now, let’s complicate things. Say your local zoning commission has determined that all industrial assets on your parcel must have a floor area ratio of, at most, 0.10. If you want to calculate how much land you need to build that 200,000-square-foot property, it’s simple: Just divide the building size by the required floor area ratio, and you’ll see that you need a 2 million-square-foot (or 46-acre) parcel. Alternately, you can also calculate the maximum building size your parcel can support by multiplying the land size by the FAR requirement, which would result in 130,680 square feet.
Related Questions
What are the drawbacks of a higher FAR in industrial real estate?
The drawbacks of a higher FAR in industrial real estate include potential obstruction of views from the property due to high-density construction projects nearby, which can lead to a reduction in property value. Additionally, FAR is often limited by zoning laws, so it's important for investors and developers to check out local FAR limits early on in the planning process. Commercial zoning and commercial construction loans are important considerations when building a new project.
What are the zoning regulations for FAR in industrial real estate?
The zoning regulations for FAR in industrial real estate vary between municipalities, but generally require a minimum ratio for different types of buildings. According to commercialrealestate.loans, industrial facilities may only need a parking ratio of 2 to comply.
How can investors use FAR to their advantage when investing in industrial real estate?
Investors can use FAR to their advantage when investing in industrial real estate by understanding the local zoning laws and the FAR limits that apply to the property. This will help them to determine the maximum density of the project they can build, and the potential return on investment. Additionally, investors should consider the impact of high FARs on the property value, as high-density construction projects nearby can obstruct views from the property and lead to a reduction in value.
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