Does Density Increase Land Value?
Many times throughout my career, I have come across the thinking that increasing the density – homes per acre – on a parcel equates to increasing the land value. Surely building 100 homes instead of 40 must have a significant increase on the property value. But early in my career, I witnessed adjacent parcels get sold in a large master planned community and both yielded the same per-acre land price. One parcel had a density of four homes per acre and the other had 18-per-acre townhomes. The one parcel had 4 times the density, yet did not increase the land value.
While the cost side has major impacts on the land value, the density question seems to have a major influence dependent very much on the location and submarket. And my thinking is that the submarket has much to do with discretionary and non-discretionary incomes of the home buyers in the submarket. Determining product and density has a lot to do with who has more nickels in their pockets and will a home buyer spend those extra nickels on a specific location.
First, an example where density may not increase the land value. I worked on a couple of master plans that were coastal and “A+” locations. What we found is that the buyers with discretionary income were willing to pay the premium to live in that location, so long as they had the house and lot size they desired. In one location, as the example, we were selling 4,000 square foot homes that sold for $2 million plus. In the same area, a townhome project that averaged $500,000 had a ceiling in price because the homes maxed out at 1,800 square feet. The townhome buyers were thought to be maxing out their purchasing power and did not have the extra nickels to pay more for the homes. It is a bit more of an economics discussion, but the larger detached homes had quite a price premium being in the A+ location.
Now, let’s take a look at a more “value” oriented location. In a very nicely done master plan, this same 4,000 square foot home would max out around $700,000, while the 1,800 square foot townhome would be priced around $300,000. The buyers of the larger home did not have enough discretionary income to push the prices higher, and now you have a submarket location where maybe the density might increase the value a bit. The extra premium for the larger home just didn’t exist as it did in the A+ location.
These admittedly are simplistic examples. A strong market analyst will understand the discretionary and non-discretionary incomes in a specific location, and the product answers are not always obvious.
Please feel free to share your comments or questions below.