In yesterday's post I spoke about the practice of buying land, rezoning it for a higher-and-better use, and then selling it for a margin. It may not make economic sense to do this in the current market, but it remains an important step in the delivery of new homes and other forms of real assets. Before you can build, you need entitled land.

But as I have mentioned before, there are people who look down upon this practice. They view it as a form of land speculation; one that just drives up land prices and doesn't ultimately create anything of tangible value. They might even go so far as to say that, if this is what you do, then you aren't actually a real estate developer!

Of course, this would be false and it shows a lack of understanding of how development works. It's also insulting to developers who work hard in this part of the business.

Let's consider Wikipedia's definition of development:

Real estate development, or property development, is a business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction or housebuilding, although many developers also manage the construction process or engage in housebuilding.

The two most important points for this discussion are bolded. One, development includes a range of activities that might include the sale of land or parcels to others. And two, real estate development is distinct from construction or housebuilding. So the more accurate way to describe a developer who sells land and doesn't build is to call them a developer who isn't also a builder. It's that simple.

But more important than nomenclature is the fact that there's nothing inherently wrong with securing development approvals and then passing off the land to a builder to complete the rest. Somebody has to do it.

Entitling a site often takes years — sometimes even decades. It’s a process that creates value and serves as a prerequisite to building new homes. Whether it’s done by one company or two shouldn’t matter.

Cover photo by Alexander Tsang on Unsplash

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.

This is an interesting chart from the Centre for Urban Research and Land Development at Toronto Metropolitan University (TMU).

It is based on recent population estimates from Statistics Canada, and what it is saying is that the Greater Toronto Area grew by 233,000 people during the 12 months ending July 1, 2023. If you include Hamilton, this number increases to 246,000. And if you include the entire Greater Golden Horseshoe, it increases to 340,000.

This is significantly more population growth compared to any of the six preceding years. And assuming this 2021 population estimate of about 9.8 million people is more or less correct, it represents an almost 3.5% growth rate. That's remarkable. It's also happening at a time when housing starts are declining.

In yesterday's post I spoke about the practice of buying land, rezoning it for a higher-and-better use, and then selling it for a margin. It may not make economic sense to do this in the current market, but it remains an important step in the delivery of new homes and other forms of real assets. Before you can build, you need entitled land.

But as I have mentioned before, there are people who look down upon this practice. They view it as a form of land speculation; one that just drives up land prices and doesn't ultimately create anything of tangible value. They might even go so far as to say that, if this is what you do, then you aren't actually a real estate developer!

Of course, this would be false and it shows a lack of understanding of how development works. It's also insulting to developers who work hard in this part of the business.

Let's consider Wikipedia's definition of development:

Real estate development, or property development, is a business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction or housebuilding, although many developers also manage the construction process or engage in housebuilding.

The two most important points for this discussion are bolded. One, development includes a range of activities that might include the sale of land or parcels to others. And two, real estate development is distinct from construction or housebuilding. So the more accurate way to describe a developer who sells land and doesn't build is to call them a developer who isn't also a builder. It's that simple.

But more important than nomenclature is the fact that there's nothing inherently wrong with securing development approvals and then passing off the land to a builder to complete the rest. Somebody has to do it.

Entitling a site often takes years — sometimes even decades. It’s a process that creates value and serves as a prerequisite to building new homes. Whether it’s done by one company or two shouldn’t matter.

Cover photo by Alexander Tsang on Unsplash

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.

This is an interesting chart from the Centre for Urban Research and Land Development at Toronto Metropolitan University (TMU).

It is based on recent population estimates from Statistics Canada, and what it is saying is that the Greater Toronto Area grew by 233,000 people during the 12 months ending July 1, 2023. If you include Hamilton, this number increases to 246,000. And if you include the entire Greater Golden Horseshoe, it increases to 340,000.

This is significantly more population growth compared to any of the six preceding years. And assuming this 2021 population estimate of about 9.8 million people is more or less correct, it represents an almost 3.5% growth rate. That's remarkable. It's also happening at a time when housing starts are declining.