Generally speaking, the value of a piece of land depends on what you can do with it. If the highest-and-best use is agriculture, then it might be worth $X. But if the highest-and-best use is a supertall skyscraper, then it's going to be worth a lot more than $X.

This is why the land component is typically thought of as the residual claimant in a development pro forma. Start with what you can build, forecast your revenues and expenses, and then see what is left over and can be attributed to the land. This is, at least in theory, how the mechanics should work.

An interesting thought exercise, though, is to consider how different developers might value the exact same piece of land.

One obvious scenario is that a developer could just get their forecasts wrong. For instance, maybe they understate their costs, which then leads them to believe that they can pay more for the land. In this case, an error makes them the highest bidder.

In a rising market, there will also be developers who believe that they can almost certainly collect higher revenues in the future. In this case, the most bullish developer often becomes the highest bidder for land. And as long as the market continues to rise, they might not be wrong.

But things change in a slower or flat market.

Now the market isn't there to save you if you happen to overpay for land. It's a less forgiving environment. But it's also a market where you really benefit from conservative underwriting and solid execution. Now it's these groups who are the high bidders.

Generally speaking, the value of a piece of land depends on what you can do with it. If the highest-and-best use is agriculture, then it might be worth $X. But if the highest-and-best use is a supertall skyscraper, then it's going to be worth a lot more than $X.

This is why the land component is typically thought of as the residual claimant in a development pro forma. Start with what you can build, forecast your revenues and expenses, and then see what is left over and can be attributed to the land. This is, at least in theory, how the mechanics should work.

An interesting thought exercise, though, is to consider how different developers might value the exact same piece of land.

One obvious scenario is that a developer could just get their forecasts wrong. For instance, maybe they understate their costs, which then leads them to believe that they can pay more for the land. In this case, an error makes them the highest bidder.

In a rising market, there will also be developers who believe that they can almost certainly collect higher revenues in the future. In this case, the most bullish developer often becomes the highest bidder for land. And as long as the market continues to rise, they might not be wrong.

But things change in a slower or flat market.

Now the market isn't there to save you if you happen to overpay for land. It's a less forgiving environment. But it's also a market where you really benefit from conservative underwriting and solid execution. Now it's these groups who are the high bidders.