How do economies of scale and barriers to entry relate to real estate value?
One of the most salient features of real estate is the tendency for the price per square foot of land or building space to decrease as the net square footage in a transaction increases. Conversely, the price per square foot tends to rise as the property size decreases. This is due to factors related to economies of scale and barrier to entry. A small land investment will have a lower overall barrier to entry (lower purchase price). In other words, the investment will be within reach of more investors. For this reason, the seller will be able to command a higher price per square foot. Conversely, an investor who buys a larger piece of land (or a larger building) will demand an economies-of-scale discount, which will lower the price per square foot. In this case, the overall barrier to entry will be higher (a higher overall purchase price), which will lock out more prospective buyers from the bidding. The forces apply to most sectors of real estate, from units in an apartment complex to
