Before 2022, being a land developer was a perfectly reasonable business to be in. In fact, it was a lucrative business to be in. What this business entailed was buying development land, getting it rezoned for some higher-and-better use (which here in Toronto usually takes a few years), and then selling it to another developer who would then build the thing that you got approved (or something close to it).
This kind of business practice is sometimes looked down upon by the general public, presumably because it feels like a speculative endeavor that doesn't actually result in anything physical. But another way to look at it is that it's just dividing up the same required work across multiple firms. Projects can take a long time and sometimes investors want their money back.
It is also good practice to look at this option even if you aren't a land developer, per se. One way you do this is by plugging in the market value of your land in your pro forma (not book cost). This way you can tell if your development margin is coming from your land uplift or from the build out. If most of your margin is coming from the former, then it may not be worth taking on the risk of construction.
In any event, the problem with this business is that it no longer works. (At least not in Toronto.) Land prices are moving in the opposite direction. Without a clear understanding of potential revenues (such as condo sales), it's very difficult to value development land. And if you can't accurately value land, then it's pretty challenging to run a business predicated on selling it.
What this means is that the development margin, if any, has shifted away from land toward the full build out (or whatever else your strategy may be). It's not enough to just entitle land. There's lots of entitled land out there right now. That is not the constraint. The constraint is figuring out how to actually make sites feasible. And to do that, you have to roll up your sleeves and really work each project and each asset.
Those who know how to do that will be the ones who come out ahead in the next cycle.
I spent three years living in Philadelphia for grad school and one of the things that I appreciated the most was its walkability. I walked and took transit everywhere. Much of this has to do with the grid system that was laid out for the city in the 17th century. But there are also lots of more recent developments that help to reinforce this fabric.
CityLab, for example, just published this article on Penn's Landing Square, which is a housing complex in Philadelphia's Society Hill neighborhood. Built in 1970 and designed by Canadian-American architect Louis Sauer, the modernist complex occupies an entire 2.37-acre block and contains an assortment of 118 low-rise homes, many of which are connected through small interior laneways.
In addition to its handsome architecture, what is noteworthy about Penn's Landing Square is that its site plan makes it quite a dense low-rise development. At 118 homes, this translates into just under 50 units per acre. CityLab estimates that this means the development holds about 174 people per acre (~412 people total), which would make it more dense than Stuyvesant Town in New York (~158 persons per acre).
However, this is based on the assumption that there are almost 3.5 people living in each of these homes. While generally large, I don't know if this is the case. It would be higher than the average US household size. But regardless, from a unit per acre standpoint, it remains a great example of dense, family-oriented, and grade-related housing.
For fun, let's compare this to a more intense form of infill development. Our Junction House project, for instance, contains 151 homes and sits on a 0.48-acre piece of land. This translates into about 315 units per acre. I don't know off hand the average number of occupants per household, but I reckon that, given our larger average suite size, we should be on the higher end compared to most mid-rise condominiums. So I would say that we are probably 400+ people per acre.
It's unfair to compare a single development to an entire neighborhood, such as Stuyvesant Town. Circulation and other open spaces will necessarily pull down your average density. But these individual development examples do speak for themselves. There are many parts of North America where you might find 1 home or a handful of homes per acre of land. At Penn's Landing Square, this number is 50 units per acre. And at Junction House, it's 315 units per acre.
At a high level there are two components to the value of a house. There's the value of the land and there's the value of all the improvements. That is, the bricks, wood, and other stuff that form the actual house. When a media outlet runs a sensational headline about some shack in Toronto selling for, oh I don't know, a million dollars, what it actually means is that the land in this particular area was just valued by somebody at this number. In fact, if the property is very clearly a "knock down" the improvements sitting on the land become a liability/cost rather than anything of value. Because whoever buys the land will almost certainly need to remove the improvements before they can build whatever it is they want to build.
This distinction between land and improvements is a valuable one for many reasons. Here's one example. In cases where the improvements aren't some shack, you may be faced with a scenario where a property can be valued in two different ways. You can value it based on the development potential of the underlying land or you can value it based on the income (either in-place or potential) that the improvements are generating, or could be generating with some hard work on your part. If the development value is greater than the value of the improvements, then there will be pressure to redevelop. Conversely, if the opposite is true, it is likely that not much will happen other than maybe capital expenditures applied to the existing building(s).
Of course, you could also run into a scenario where there's little development potential and there's zero ability to invest in the existing improvements, either because the market rents are too low in the area or because they're capped and/or controlled in some way. In this scenario, it's likely that not much will happen other than the normal and expected depreciation of the improvements. Maybe one day the development/investment math will work. But in the interim, you probably won't be seeing any of those sensational media headlines.
Photo by Andre Gaulin on Unsplash