As we have talked about many times before, the best answer to this question is that it's worth whatever money is left in your pro forma once you've accounted for everything else. This is what is called the "residual claimant" in a development model. And it means you start with your revenue, you deduct all project costs, including whatever profit you and your investors need to make in order to take on the risk of the development, and then whatever is left can go to pay for the land.

This is the most prudent way to value development land; but of course, in practice, it doesn't always work this way. In a bull market, the correct answer to my question might be, "whatever most market participants are willing to pay." And sometimes/oftentimes, this number will be greater than what your model is telling you, meaning you'll need to be more aggressive on your assumptions if you too want to participate. (Not development advice.)

Given that determining the value of land starts with revenue, one way to do a very crude gut check is to look at the relationship between land cost and revenue. This is sometimes called a land-to-revenue ratio. And historically, for new condominiums in Toronto, you wanted a ratio that was no greater than 10%. Meaning, if the most you could sell condominiums for was $1,000 psf, then the most you could afford to pay for land was $100 per buildable square foot.

However, this is, again, a very crude rule of thumb. I would say that it's only really interesting to look at this after the fact. Because in reality, things never work this cleanly. For one thing, there is always a cost floor. Don't, for example, think you can buy land in Toronto for $80 pbsf and sell condominiums for $800 psf, because this will not be enough to cover all of your costs. You will lose money.

Secondly, there are countless variables that have a huge impact on the value of development land. Things like a high required parking ratio, development charges and other city fees, inclusionary zoning, and so on. All of these items are real costs in a development model, and so they will need to be paid for somehow.

Typically this happens by way of higher revenues (in a rising market), a lower land cost (in a sinking market), or some combination of the two. But in all of these cases, it means your land-to-revenue ratio must come down to maintain project feasibility. This is why suburban development sites typically have a lower ratio -- too much loss-leading parking, among other things.

Of course, there are also instances where the correct answer could be a land-to-revenue ratio approaching zero, or even a negative number. In this latter case, it means your projected revenues aren't enough to cover all of your other costs, excluding land. For anyone to build, they will require some form of subsidy. And this is basically the case with every affordable housing project. They don't pencil on their own. (For a concrete example of this, look to the US and their Low-Income Housing Tax Credits.)

So once again, the moral of this story is that the best way to think about the value of development land is to think of it as "whatever money is left in the pro forma once you've accounted for everything else." Because sometimes there will be money there, and sometimes there won't be.

Photo by Jannes Glas on Unsplash

The first phase of Montreal's new Réseau express métropolitain (or REM) just opened it up. It is a 17 km light-rail line that includes five stations running from Brossard in the south (A1 above) to Gare Centrale in downtown Montreal. Eventually this network -- which is distinct from but connected to the city's existing metro network operated by STM -- will span 67 kilometers and have a total of 26 stations. To put this into perspective, Montreal's current metro totals 69.2 kms. So this is a near doubling.

As with most big city building projects, Montreal's REM is being and will continue to be criticized. Back in 2016, the project had an estimated total project cost of $5.9 billion. By 2021, this number had increased to $6.9 billion. Today, who knows what the number will be. But it will be more. The reality is that everything went up, by a lot, over the last five years. During the pandemic, we were seeing 30-40% cost increases on some of our construction line items.

What's perhaps most noteworthy about this project is its delivery model. It is being delivered through a partnership with the the Caisse de dépôt et placement du Québec (CDPQ):

Under the pact, the Caisse’s infrastructure arm is assuming $3.5-billion of the project’s $6.9-billion construction cost while Quebec is committing $1.28-billion and the Canada Infrastructure Bank is providing a $1.28-billion loan. The balance consists of a $295-million payment from Hydro-Québec for the line’s electrification, while the Autorité régionale de transport métropolitain, the transit authority for the Montreal region, is pledging $512-million.

Provincial and local governments will provide continuing operating subsidies for the REM to make sure the Caisse earns its required return on the project, currently pegged at 8 to 9 per cent. The pension fund manager will get 72 cents for each passenger-kilometre travelled on the light rail system. Without such a subsidy, fares would climb to a level few passengers could afford.

It'll be interesting to see how this approach stands the test of time. As I understand it, CDPQ wants to continue building and operating transit in other cities around the world. I don't know any of the specifics other than what I have read online. But from the outside, things seem to be working. The first phase of the REM broke ground in April 2018, and the opening ceremony was held this month (July 2023). That's basically warp speed in transit timelines.

Map: Montreal REM

This morning I took the mid-level escalators down to Hong Kong station so that I could catch the express train to the airport. At over 800m, it is supposedly the longest outdoor covered escalator system in the world.

If you’ve ever walked the streets of Hong Kong you’ll know that the ground plane can be inhospitable at times. There’s limited space, but no shortage of steep pitches. I can’t imagine having a physical disability and trying to navigate this city.

So this system must have been a real innovation when it was constructed in the early 90′s. In total it moves up and down about 135m in elevation. That’s about the equivalent of a 45 storey tower. And I got down from the mid-levels and was on a train to the airport within 15 minutes.

But because the streets here are so narrow it’s a unidirectional system with one line of escalators. They bring people down to the CBD during the morning rush, but then the direction flips and they bring people up the hill for the remainder of the day — until midnight I believe. Living near these escalators is considered a win.

Hong Kong Island surely isn’t the easiest of environments in which to build and operate one of the world’s most important global cities. There’s relatively little developable flatland. But they more than made it work by being creative and by building up. Hong Kong is not just a tall city, but a truly vertical city.

Too bad my efficient morning commute was followed by a cancelled United flight. Tomorrow is not going to be a fun day travel.