How Marketing Could Boost Land Development

Prime Development Site.jpg

Zoning ordinances, land use maps and comprehensive plans used by cities to guide growth rarely provide the kind of insight required to make informed decisions about what will truly be best for the city and its residents in the long run. Unfortunately, by failing to incorporate market analysis and financial modeling in the beginning stages of the planning process, too many cities find themselves facing the results of misallocated resources and fiscal difficulties that could have been easily prevented.

For the past 22 years I have been involved in the market analysis of land development from the private developer’s perspective. The public sector could benefit greatly from utilizing the same sort of informed decision making tools currently used by much of the private land development industry.

Comments from urban planners and city officials seem to indicate that it is rare for city officials to actually consider market data in their decision making on issues such as transportation thoroughfares, land-use determination, building code changes, and comprehensive city planning.

As the owner’s representative, or as a market consultant in numerous design charrettes for master planned communities and urban infill projects, I've often observed an air of tension between those oriented toward design (urban planners and architects), and those who believed good design pays for itself through the value it creates for the end-user (the property owner and/or property developer).
In all of the situations where this tension was detected, no one considered including someone in the process to relay market information to the designers who were attempting to provide a product. Using readily available market data and a flexible, accurate financial model, input could have been given to the design consultants so that they could focus on land uses and products that would truly serve the local market, and to assure the success of the project.

It's difficult to design profitable private development projects in a vacuum. The same principle applies to cities. The proper planning of cities — plans that meet the needs of both present and future inhabitants in a fiscally responsible manner — cannot be done properly without considering the needs of the market, and the impact that serving those needs will have on the fiscal health of the city.

Typically, land uses are based upon residents' comments, the planning commission and/or council vision, and the planning consultant or staff leading the meetings. All of these suggestions stem more from emotion, or from the ease of finding a boiler-plate solution, than from an analysis of what the market wants or needs. Using market data, city leaders could be provided with reasonable projections concerning the near-term and long-term demand for different types of uses for property within their communities.

This projected data could then be compared to the existing supply and quality of these property types, and a reasonable projection for demand could be provided to the community. Community leaders could then decide how to proceed, based upon the values of the community. Once the initial decision was made, a framework could be put into place to evaluate future decisions on zoning, transportation, and infrastructure improvements.

However, this process would only address current and future levels of demand. The real issue is the likelihood of whether or not the projected demand will actually be met. This is where financial modeling techniques very similar to those created for large-scale development can be modified for use by the city.

In projecting future results, the trick is to not get caught up in trying to be exactly right. It’s not necessary, and any attempt to be exactly “right” leads to what I refer to as a deceptive level of precision, since you can’t possibly know exactly what is going to happen anyway. Using projected demand, market pricing and cost estimates, though, a model can be developed that can test the reasonableness of municipal policies and plans. Examples?

• A market study performed for a rapidly growing city reveals that affordable housing will be an even greater issue in the near future than it is currently, but the local school district needs additional funding. A per-lot impact fee to pay for new school construction seems like a reasonable idea, until the financial model proves that it will eliminate all hope of affordable housing being constructed.

• Street ordinances written long ago were originally intended to allow two fire trucks to pass each other while going in opposite directions. Even though the premise has now been proven to be absurd (how often are fire trucks assigned to different fires on the same street!), and, even though the rules produce large, ugly residential streets, the rules are not changed for years…until the long-term cost of maintaining those streets is accounted for in the city financial model. Once the high cost of the future maintenance and repair of the oversized streets is quantified and then compared to their “benefits,” the street ordinance is immediately amended.

• The opportunity to acquire water rights presents itself, with significant upfront costs involved. City leaders are understandably concerned, even though there will be long-term revenues from water sales. But the city market data and financial model indicates that the real benefit to the city is tax revenue generated as a result of having a stable, diverse source of potable water. After considering both the direct and indirect benefits of acquiring the water, the city decides to make the purchase. And the analysis of the economic benefits proved invaluable in selling the bond program to the voters in order to build the required infrastructure to utilize the water rights.

Consideration of market demand — and the intersection of that demand with public policy decisions — should be an integral part of the decision making process for the public sector. When used to provide input for financial projections, it can be an invaluable tool in land use planning for communities.

Skip Preble, MAI, CCIM is a real estate analyst and land development consultant specializing in market analysis, feasibility studies, project value optimization and market value opinions. He can be reached through his website at landanlytics.com

Flickr Photo by Toban Black: Prime Development Site, Oshawa, Ontario.



















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great post

Integrating Land Use with Land Economics

Incorporating market analysis and financial modeling into land use and infrastructure planning is an important advance. I hope that this improved process can account for a common situation that undermines most cities while also pointing toward a solution.

A city can be well-positioned to succeed economically. It can employ the best planning and infrastructure development. And yet such a city can still fall far short of its potential because development decisions are made according to the whims of individual landowners – some of whom may not feel compelled to develop their land accordingly. It is often easy to find surface parking lots, boarded-up buildings, and other under-performing land even within prosperous downtowns.

In cities, land value reflects a site’s potential to be a good place to live or run a business. This “potential” is largely determined by a site’s access to public goods and services (transportation, good schools, police and fire protection, etc.) and by the development regulations (zoning, historic preservation, building codes, etc) that apply. Yet each of these factors is independent of any productive work or investment by a landowner.

Thus, a city with a vibrant economy can create a successful transportation system and place a highway intersection and a transit station next to my land. The city can change the zoning of my land to accommodate the increased demand for residents or businesses to locate on my property. Yet, in spite of the fact that economic demand and public actions have made my land much more valuable, I might decide not to develop. Perhaps I’m thinking, “Why should I develop my land at what it’s worth today when it might be worth even more tomorrow?”

My neighboring landowner does decide to develop. But he seeks such a high price for his land that no developer can construct a building that will be affordable to middle-class residents (never mind the poor) or to modest businesses. Thus, the infrastructure intended to facilitate development has helped inflate land prices that now chase development to cheaper, but more remote sites. This is part of the impetus for sprawl that wastes infrastructure, creates traffic congestion, saps vitality from downtowns, and prematurely develops rural areas that would be better suited for agriculture, conservation or recreation.

Some jurisdictions have overcome this conundrum by using value capture to transform their property tax into a public service access user fee. This is accomplished by reducing the tax rate on building values and increasing the tax rate on land values. The lower tax on building values makes it cheaper to construct, improve and maintain buildings. (This is good for residents and businesses alike.) Surprisingly, the higher tax on land values helps keep land prices more affordable. It also creates an impetus to develop high-value sites – which tend to be infill sites near urban infrastructure amenities – the very places where infrastructure and zoning would indicate that development should take place. Thus, this tax reform actually helps make zoning more robust by directing development to high-value locations.

I hope that the improved modeling capabilities described in this article can demonstrate the benefit of this important policy tool for creating jobs, enhancing affordability and making economic development more sustainable. For more information, see “Using Value Capture to Finance Infrastructure and Encourage Compact Development.” It can be found at https://www.mwcog.org/uploads/committee-documents/k15fVl1f20080424150651...

Rick Rybeck

Excellent topic

We used a market study to inform our comp plan in 2010. Very valuable information that has led into rethinking the past pattern of development and a yes attitude toward most development that was occurring before I arrived as director. The best part was the ammunition the study gave to our council to question new commercial development proposals when faced with vacancies in other existing developments. I now want to formalize market analysis for larger projects and make it part of the approval criteria.

Comment and Question

Thanks for your contribution. I have a question for you - how did the council account for obsolescence and locational factors influencing vacant space in existing developments? A lot of vacant space will stay vacant at any price (even free!) due to these problems.

Did the market study get down to the level of evaluating specific space and nominal vs effective vacancy?

Private-style market analysis for cities

I've been an architect working for private real estate developers for many years, and I've never read a market report based on much more than comps, comps, comps. Absorption rates and demographic spectra aside, this sort of market oriented "planning" has generated mostly more of the same, adjusted primarily in the direction of bigger homes which are more "feature" attuned. Zoning practices have only fairly recently begun to change in favor of specific plans and more comprehensive urban design. Following the private model will be guaranteed to produce marketable suburban banality into the future, a banality uninformed by the increasing need for restricted and manageable infrastructure, better resource management, greater densities, and superior environmental practices. The exigencies of environmental degradation and delimited resources for a growing population are increasingly taking planning out of the hands of private developers and trusting it to the care and nurturing of professional urbanists and environmental experts. Private developers have in the main tended to perpetuate the status quo, individually and as an organized group, precisely because of its predictability, and have only rarely been agents of real paradigm change.

RE: Private-style market analysis for cities

Thank you for taking time to read my article, and for providing such a thoughtful response. I believe the reports that you are referring to are appraisals, which are done to determine the market value of a specific project. If your clients are getting market research based upon primarily on comparable sales, then they need to engage competent consultants.

The kind of market research I am referring to is based upon empirical analysis of population trends and existing and proposed product in the competitive marketplace. This sort of "broad-brush" analysis can provide insights into the types and amount of housing and related support commercial desired by the market and which can be profitably sold into the marketplace.

I have been involved in a number of design charrettes as an advisor, and though there was resistance initially from many of the design professionals involved ("What's a numbers guy doing here?"), the response to guidance on unit mix, pricing and phasing provided a structure that enhanced creativity, not diminished it. And across the board, the professionals involved appreciated the project input being available before the project was designed and presented to the client, instead of several weeks afterwards. There are few things more discouraging than putting a tremendous amount of effort and creativity into a project, only to have it judged by criteria that were not provided before the project was finished.