Centuries ago our ancestors did not have surnames.  Communities often consisted of just a few people and surnames were not needed to identify individuals.  As villages and towns grew, surnames developed as a means to differentiate one "Heinrich" from another.  Early on, the easiest way to identify a person was for him to assume a second name which usually was associated with some aspect of his life.  This descriptive surname was most often derived from one of the following:

  his occupation 

  a physical characteristic (black hair, short, fat)

  topographical/geographical features (river, woods, meadow)

  the place or area in which he lived or worked (this could be a village, or as specific as a building such as a church or school)

One of the most commonly used categories was that of the place or area in which the person lived or worked.  Initially, topographical features were descriptive enough - a Heinrich who lived near the woods might take a surname of the German word for woods or forest, while a Heinrich who lived next to a river might use the word for river, or the actual name of a nearby river, as a surname.  Eventually, though, the need arose for even more specific descriptions of places, so some people began using the name of the region or the town or village in which they lived.