The highest and best-use concept in the CRE industry is one of the key economic/investment principles in the sector. It posits the idea of maximum productivity and profit for a given parcel of land. In the CRE appraisal process, the appraiser first determines the highest and best use of the land and building. The appraiser then determines how the highest value for a property is arrived at and how it produces the greatest value, regardless of its actual current use. 

A piece of land and related property may be considered to be its highest and best use when it provides the maximum return to its owner or user. The return may be measured in monetary terms, or intangible and social ways, or a combination of such values. However, the value of a piece of land is not static and can change over time. The highest and best use of a property at any point in time is derived from four qualities as follows:

• Legally allowable under local laws and regulations
• Physically possible use of the subject land and building
• Financially feasible for the use of the subject land and building
• Maximum utility/profitability for use of the land and building

In today's struggling CRE market, the highest and best-use concept has been put to the test, with hundreds of office properties around the country ripe for changing from their former use. During the last ten years, there have been two large changes in use for many CRE properties. The first is the conversion of former commercial sites such as gas stations, older urban office buildings and suburban strip retail centers into high-rise and garden apartment projects. The other and more dramatic, highest, and best-use change is older suburban mall properties that are being converted into industrial, office, hotel, medical office, food courts, fitness centers and bowling alleys. Today, there is a new highest and best-use conversion, office buildings in urban cities to apartments or in some cases hotels. 

The major reasons for the highest and best-use conversions in the office sector are the tremendous loss of value of many older and physically obsolete buildings, a change in tenant demand for these properties and potentially higher rents for the conversion of these office buildings into multifamily rentals. Since most of these properties are located in dense urban cities, the change in demand is primarily for apartments and to a lesser extent, hotels. However, the physical process of a conversion to apartments is fraught with risk, can be very expensive and physically challenging and maybe only 10% of office buildings may qualify for this highest and best use change.