Way back when everyone wanted to buy development land, my friend Jeremiah Shamess of Colliers used to always tell me that the only way to do this was to either (1) pay the most or (2) believe in something that others don’t. This — making non-consensus bets — is something I like to talk about a lot on this blog, but what did that mean back then? 

Well, when sites were seeing dozens of offers and the market was hyper-competitive, you really had to work to find any sort of overlooked value. Maybe it was an assembly. Maybe it was a density opportunity that others were missing. Or maybe it was a rail setback that the market felt would neuter the site, but that you had a solution for. Whatever the case, believing in something different was hard work.

Today, things are a lot different. The consensus bet would be to not buy development land in the first place, and the non-consensus bet would be to buy. But instead of having to believe in unique unlocks for a site, it’s obvious that the greater obstacle is believing that the market will be there to absorb your space. And if it is there, at what price? 

Nobody really knows, and that’s what makes it non-consensus. But as always, non-consensus bets are where the greatest opportunities exist. That was true when the market was booming, and it remains true today.

Cover photo by Alfan Ziyyadan on Unsplash

Let's say that you were comparing and thinking about buying two different pieces of development land. Both are about 25,000 square feet in size, but one is priced at $5 million and the other is priced at $50 million. If you were to calculate how much you were paying per square foot of actual dirt, you might conclude that the $5 million parcel is the cheaper one.

But as we have discussed many times before on the blog, the value of development land depends on what you can build on top of it. So what matters more is the price per buildable square foot. And to calculate this, you simply divide the purchase price by the allowable gross floor area (GFA) on the site (or, in many cases, the GFA that you believe is likely achievable on the site).

For example, if you could build 50,000 sf on the $5 million parcel and 500,000 sf on the $50 million parcel, both sites would have a price per buildable square foot of $100. This makes them, in theory, equal, assuming all other things are equal. That said, one could argue that 50,000 sf is maybe too small of a build, and so the $50 million lot is actually a better buy because you can hope to achieve some economies of scale.

Of course, if you could build even more than 500,000 sf on the one lot, then your price per buildable square foot would come down even further and that would make it the more attractive site (again, assuming all other things are equal).

There are a lot of other details to consider when evaluating a development site. Maybe the $5 million one actually has a bunch of environmental contamination that will cost you an additional $5 million to clean up ($10 million in total costs). In that case, your price per pound would actually be double the other lot, assuming the other parcel doesn't have any contamination or other factors that might impair value.

Permitted uses also greatly affect value, with residential often being the most valuable kind of urban density. And so this is ultimately why you need to create a full and detailed pro forma in order to properly evaluate a new development opportunity. But even before you get to that stage, you can tell a lot with just the price per buildable square foot. If you know the market, you'll usually know right away if it's too high or if it's an opportunity that may be worth exploring.

Way back when everyone wanted to buy development land, my friend Jeremiah Shamess of Colliers used to always tell me that the only way to do this was to either (1) pay the most or (2) believe in something that others don’t. This — making non-consensus bets — is something I like to talk about a lot on this blog, but what did that mean back then? 

Well, when sites were seeing dozens of offers and the market was hyper-competitive, you really had to work to find any sort of overlooked value. Maybe it was an assembly. Maybe it was a density opportunity that others were missing. Or maybe it was a rail setback that the market felt would neuter the site, but that you had a solution for. Whatever the case, believing in something different was hard work.

Today, things are a lot different. The consensus bet would be to not buy development land in the first place, and the non-consensus bet would be to buy. But instead of having to believe in unique unlocks for a site, it’s obvious that the greater obstacle is believing that the market will be there to absorb your space. And if it is there, at what price? 

Nobody really knows, and that’s what makes it non-consensus. But as always, non-consensus bets are where the greatest opportunities exist. That was true when the market was booming, and it remains true today.

Cover photo by Alfan Ziyyadan on Unsplash

Let's say that you were comparing and thinking about buying two different pieces of development land. Both are about 25,000 square feet in size, but one is priced at $5 million and the other is priced at $50 million. If you were to calculate how much you were paying per square foot of actual dirt, you might conclude that the $5 million parcel is the cheaper one.

But as we have discussed many times before on the blog, the value of development land depends on what you can build on top of it. So what matters more is the price per buildable square foot. And to calculate this, you simply divide the purchase price by the allowable gross floor area (GFA) on the site (or, in many cases, the GFA that you believe is likely achievable on the site).

For example, if you could build 50,000 sf on the $5 million parcel and 500,000 sf on the $50 million parcel, both sites would have a price per buildable square foot of $100. This makes them, in theory, equal, assuming all other things are equal. That said, one could argue that 50,000 sf is maybe too small of a build, and so the $50 million lot is actually a better buy because you can hope to achieve some economies of scale.

Of course, if you could build even more than 500,000 sf on the one lot, then your price per buildable square foot would come down even further and that would make it the more attractive site (again, assuming all other things are equal).

There are a lot of other details to consider when evaluating a development site. Maybe the $5 million one actually has a bunch of environmental contamination that will cost you an additional $5 million to clean up ($10 million in total costs). In that case, your price per pound would actually be double the other lot, assuming the other parcel doesn't have any contamination or other factors that might impair value.

Permitted uses also greatly affect value, with residential often being the most valuable kind of urban density. And so this is ultimately why you need to create a full and detailed pro forma in order to properly evaluate a new development opportunity. But even before you get to that stage, you can tell a lot with just the price per buildable square foot. If you know the market, you'll usually know right away if it's too high or if it's an opportunity that may be worth exploring.