At the end of last year, I wrote this post arguing that development value has shifted from land to the build. And in it, I argued that it's no longer viable to be a high-density land developer in Toronto. The practice of buying land, rezoning it for a higher-and-better use, and then selling it for a margin, is over — at least for the time being.

It's also not easy to find value in the execution of new builds, but it's a better place to be looking. Because today, as we underwrite new development sites, we are seeing land prices (on a per buildable square foot) that are similar to what they were back in 2017 when we were assembling the land for Junction House. Meaning that, in some cases, land prices have been nearly flat over this 8 year period. This is despite a total inflation rate of approximately 25% and an average annual decline in the value of money of 2.86%.

This is not all that surprising, though. Land should, in theory, be the residual claimant in a development pro forma; so it should be one of the first things to reset during a market downturn. However, in the past, I have referred to land prices as being sticky in the face of changing cost structures, such as development charge increases and/or new inclusionary zoning policies. So which is it, Brandon?

Well, one way I think about this is that land prices tend to be sticky in the short term. Nobody wants to immediately take a loss. And as long as prices/rents continue to exhibit strong growth, there's a chance that these new costs will get absorbed into somebody's pro forma and that land prices won't need to adjust downward. But turn off demand and reverse price/rent growth, and now there's no other option but for land prices to come down.

This is what we've been seeing in Toronto since 2022.

Cover photo by