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Dark Store Theory in Commercial Real Estate

Despite its controversial name, the Dark Store Theory in commercial real estate is an important concept. It is used to value commercial properties for taxation purposes. While some people may be wary of the theory because of its dark connotations, it is as old as real estate itself. Here’s what you need to know about it. This theory is used in determining the value of commercial properties in some cities and states.

The dark store theory has a complicated meaning and is a source of controversy. State-mandated stay-at-home orders, for instance, are fueling a daily wave of closures, compounding ongoing changes in consumer preferences. While it may be true that the COVID-19 pandemic will allow grocery chains to recover faster than the stores that sell nonessential items, it is clear that the accelerating trend towards ecommerce will significantly alter the demand for bricks-and-stick commercial properties.

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The Dark Store Theory advocates that the value of commercial properties be based on the highest and best use of the property at the time of appraisal. While this may seem like an ideal way to value property, it has many implications. The first is that the valuation of vacant properties is not the same as the value of fully occupied store space. That is, while a vacant property may be a higher-valued asset, a dark store will be less profitable for the owner.

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The second major flaw in the dark store theory is the argument that big box retailers will not allow smaller businesses to move into their space. The big box stores will block any business that wants to move in as their competition. Essentially, this results in lower property value and increased property taxes. This theory is particularly prone to skewed value evaluations. So if you’re in this situation, you need to be aware of the potential pitfalls.

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