One problem with this line of thinking is that if we’re talking about land on a street where greater densities such as mid-rise are also permissible, the land is going to get valued based on mid-rise and not high low-rise.

So when a prudent landowner thinks about developing their land, they may also consider the opportunity cost of simply selling their land based on its highest and best use.

That thought process might go something like this. I own a piece of land. If I were to sell this land today and take on no development risk, I could make $X. If I were to instead develop this land, I could make $Y.

If $Y is less than $X, then I’m obviously not going to develop. But if the spread between $Y and $X isn’t enough to compensate me for the risk of developing (and there’s lots of risk in developing), then I’m also not going to do it. (Developers run a similar test by marking the land cost in their pro forma to market.)

And if $X is based on greater densities than $Y ($X is based on mid-rise densities and $Y is based on high low-rise densities) and if $Y is also being challenged by further diseconomies of scale, then I’m sure you can start to see how the math may not pencil.

I say all of this not to shit on Reid’s article. It’s a good article. You should go read it. And we should all continue to think about ways to increase the supply of housing in this city and in others.

One problem with this line of thinking is that if we’re talking about land on a street where greater densities such as mid-rise are also permissible, the land is going to get valued based on mid-rise and not high low-rise.

So when a prudent landowner thinks about developing their land, they may also consider the opportunity cost of simply selling their land based on its highest and best use.

That thought process might go something like this. I own a piece of land. If I were to sell this land today and take on no development risk, I could make $X. If I were to instead develop this land, I could make $Y.

If $Y is less than $X, then I’m obviously not going to develop. But if the spread between $Y and $X isn’t enough to compensate me for the risk of developing (and there’s lots of risk in developing), then I’m also not going to do it. (Developers run a similar test by marking the land cost in their pro forma to market.)

And if $X is based on greater densities than $Y ($X is based on mid-rise densities and $Y is based on high low-rise densities) and if $Y is also being challenged by further diseconomies of scale, then I’m sure you can start to see how the math may not pencil.

I say all of this not to shit on Reid’s article. It’s a good article. You should go read it. And we should all continue to think about ways to increase the supply of housing in this city and in others.

Share Dialog

Share Dialog