Density: Good or Evil?

Patrick Phillips, CEO of ULI-The Urban Land Institute, in an article published on GlobeSt.com, addressed the future of real estate development:

“What we learned from this phenomenon (migration back to urban centers) is that there is a market for compact, mixed-use design, smaller housing space, and transit-oriented development that minimizes the need to drive. But perhaps the bigger lesson--one we are still learning how to apply--is that there is a demand for at least some aspects of this type of development that stretches beyond downtown cores and into outlying suburbs” (emphasis supplied).

In addressing the use of land to achieve this development, he added: “Going forward, our decisions on what and where to develop will be guided not by a plentiful supply of land throughout urban regions, but rather how best to use the land that is left.”

The article has been reprinted in Urban Land magazine.

I commented on the original article when it appeared on FaceBook, as follows:

“I agree with Patrick that, going forward, new development and redevelopment will occur in greenfields areas as well as urban ones. The issue I see is that public sector planners, appointed planning commission members, and elected officials frequently don’t get it. Even when they do, they are aware that the electorate largely doesn’t get it. And the public sector necessarily is very sensitive and responsive to the wishes of the electorate regardless whether it is well informed. That is the real challenge for those of us in the land use and development industry.”

The point here, of course, isn’t that public sector officials and members of their staffs, as well as members of the electorate, are dull-witted. It’s that they often don’t easily connect the dots between more efficient use of land with less issues relating to sprawl and the resulting need for higher density.

You can build smaller, more compact residences on a given parcel of land, but only if you can put more of those smaller residences on it than the larger ones contemplated in the original planning and zoning. It’s simply a matter of number$ (if you get my meaning).

Suppose you can build X units on Blackacre (after all, I am an attorney) at a land cost of Y dollars for Blackacre, and sell those finished larger units at a per unit market price that includes an acceptable risk-adjusted rate of return on total investment. Suppose, however, that the market demand changes to smaller, less expensive residences. Now, in order to earn a return on investment, you must be able to build X+ units, assuming the price for Blackacre remains Y dollars.

Otherwise, the residual land value per unit (the percentage of the total cost represented by the land cost) will be too high to produce an acceptable profit, and Blackacre won’t be sold and developed, which means that needed, affordable residential structures (remember those days?) won’t be built. That, in turn causes demand to drive up the price of existing housing, which gives rise to other social, political, and economic issues. Bottom line: density is a positive thing.

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