This newsletter is mostly focused on the mechanics of construction - how the parts of a building go together. But construction is just one part of the overall real estate development process, and the way real estate development proceeds has a large impact on construction. So I thought it would be useful to try to understand the mechanics of real estate, particularly with regards to what’s involved in putting up a building on a piece of land.
Wow something I actually know about as someone not in construction who still finds your writing fascinating.
One of the biggest problems that leads to the complexity and the cost of planning to developers is the lack of uniform zoning/planning law. In my state zoning/planning is a local government responsibility and so every council has different zoning regulations. In my state that’s 79 different regulations. My local regulations are just under 1200 pages with 50 pages of amendments. As councils are elected often new councillors want to leave their lasting stamp on the area and write new zoning rules. This adds a ridiculous legal cost for developers because of local knowledge/expertise.
Lastly something to stress is the time cost as well. The average time to process the median planning proposal is 96 days where I live (most of which are small residential renovations: ie kitchens / added garage /new driveway etc). Skyscrapers are obviously far far longer. The bureaucracy of the planning commissions are infuriating. They only started accepting electronic planning applications LAST YEAR in some places due to Covid which is absurd since it’s been commonplace in the courts for at least 10+ years in most things. On appeal to the administrative tribunal 50% of appealed planning decisions get overturned (basically a coin flip!)
For all your articles about how construction is resistant to change, the Legal industry might give it a run for its money!
One thing that was not addressed is the perverse incentive that residents have not only to limit development, but to strongly skew it towards unaffordable, luxury units because it improves the future value of their own lots. Social or affordable housing is the very cancer they are trying to avoid, because it will bring the less well to do outsiders in the area, depressing "property values", and killing "community character", also know as "whiteness".
So even if highly efficient fabrication methods are developed, they will be up against communities that hoard land and deliberately restrict themselves to compete on the upper-middle class market. Any construction savings, even substantial ones, say 50k for a single family home, will be eaten away by some extra bathroom or some 2 acre minimum plot ordinance, designed to make sure that no house are made available in the area for less than 500k.
Thanks for writing this! A brilliant deconstruction. I wonder if the dynamics of financing real estate development play a role in this - that aspect is absent from this post, and I would love to hear your take on it if you care to tackle the topic.
This is excellent, and a useful review of zoning and its effects. One note from footnote [2]. While your point is true -- the landowner cannot do anything to affect the value of the land, the owner can do things to affect the value of the property -- the land plus the improvements. And those actions also affect the nearby owners, by slightly raising or lowering the value of their properties. It also affects the broader community tax base, by lowering or raising the amount of tax collected. Last I checked, I get a property tax bill every year, not a land tax bill.
Wow something I actually know about as someone not in construction who still finds your writing fascinating.
One of the biggest problems that leads to the complexity and the cost of planning to developers is the lack of uniform zoning/planning law. In my state zoning/planning is a local government responsibility and so every council has different zoning regulations. In my state that’s 79 different regulations. My local regulations are just under 1200 pages with 50 pages of amendments. As councils are elected often new councillors want to leave their lasting stamp on the area and write new zoning rules. This adds a ridiculous legal cost for developers because of local knowledge/expertise.
Lastly something to stress is the time cost as well. The average time to process the median planning proposal is 96 days where I live (most of which are small residential renovations: ie kitchens / added garage /new driveway etc). Skyscrapers are obviously far far longer. The bureaucracy of the planning commissions are infuriating. They only started accepting electronic planning applications LAST YEAR in some places due to Covid which is absurd since it’s been commonplace in the courts for at least 10+ years in most things. On appeal to the administrative tribunal 50% of appealed planning decisions get overturned (basically a coin flip!)
For all your articles about how construction is resistant to change, the Legal industry might give it a run for its money!
Thanks for the great work!
One thing that was not addressed is the perverse incentive that residents have not only to limit development, but to strongly skew it towards unaffordable, luxury units because it improves the future value of their own lots. Social or affordable housing is the very cancer they are trying to avoid, because it will bring the less well to do outsiders in the area, depressing "property values", and killing "community character", also know as "whiteness".
So even if highly efficient fabrication methods are developed, they will be up against communities that hoard land and deliberately restrict themselves to compete on the upper-middle class market. Any construction savings, even substantial ones, say 50k for a single family home, will be eaten away by some extra bathroom or some 2 acre minimum plot ordinance, designed to make sure that no house are made available in the area for less than 500k.
One item to keep in mind - the greater the density, the greater the number of job opportunities within a commutable distance.
Thanks for writing this! A brilliant deconstruction. I wonder if the dynamics of financing real estate development play a role in this - that aspect is absent from this post, and I would love to hear your take on it if you care to tackle the topic.
This is excellent, and a useful review of zoning and its effects. One note from footnote [2]. While your point is true -- the landowner cannot do anything to affect the value of the land, the owner can do things to affect the value of the property -- the land plus the improvements. And those actions also affect the nearby owners, by slightly raising or lowering the value of their properties. It also affects the broader community tax base, by lowering or raising the amount of tax collected. Last I checked, I get a property tax bill every year, not a land tax bill.