The only truth in the expression “land will always appreciate in value because they’re not making any more of it” is found in the last 7 words! The finite supply of land does not come even close to guaranteeing that its value will increase over time. Supply is only one factor to be considered in estimating how much any real estate parcel is worth, and it’s not nearly as important as other issues when it comes to determining the value of land for development.
The land development valuation process begins with several questions. These questions focus on the most profitable use of the parcel, taking into account the current zoning and other legal restrictions and any physical limitations of the site. Value is tied to the “highest and best use” of a land parcel which is the most profitable use that’s legal, physically possible and economically feasible. The usefulness (utility) of a land parcel is the key.
Suppose there’s just one vacant land parcel, consisting of 20 acres, that’s available in an area. It has a great location and public utility lines are in the street. The seller is asking $2mil for it. How much is it really worth? You can’t answer that question until you know some additional facts, such as what uses and development densities are permitted under the zoning, how much of the land area can be developed, and if utility permits are available. In other words, you need to know how the parcel can be used and the intensity of the use that’s possible.
Lower Future $$$
Time can either work for or against land development values. It can bring changes that limit how a parcel can be used or impact its economic or physical feasibility for development. Local, county and state governments can enact laws that prohibit or suspend development for a specified period of time to allow a condition to be corrected or a change to be put into effect. These “moratoria” can last weeks, months or even years.
Suppose that 20-acre parcel is in an area that has been exploding with development. Builders have bought up virtually all of the available sewer permits. The local government imposes a moratorium and stops issuing any more sewer and building permits until the existing sewage treatment plant is expanded or a new plant is designed, built and put on line. Development could be suspended for years because only the properties that have sewer permits can be built out. The seller would have a hard time finding buyers once the moratorium went into effect because builders wouldn’t be interested in tying up resources on a property they couldn’t use for the foreseeable future.
The fact that this parcel is the only undeveloped property left in the entire area doesn’t mean that it’s worth big bucks now or even 10 years from now. If it’s zoned agricultural, for instance, the property is probably not going to appreciate measurably over time without a change to permit a profitable development use. Alternatively, the parcel might contain significant areas of natural resources that either couldn’t be disturbed or would increase cost to the point that any development wouldn’t be economically feasible. Time isn’t going to make these limitations disappear magically. Value won’t substantially increase with the passage of time.
Higher Future $$$
The 20-acre property could be worth big bucks if it’s in an area that’s been targeted for growth. A cross-county expressway might be in the works as the result of years of planning at the state and county levels, and the value of this property would spike if it is in the corridor of the proposed highway. The parcel could be worth a lot five years from now when the local government updated its master plan and decided that properties in this area should be zoned to permit more intensive development than agricultural. This change would promote plans for housing developments and major retail and commercial facilities (a regional mall, shopping centers, theme parks and office campuses), and public utilities would be extended or expanded to handle the growth that’s expected to occur in this area. Substantial appreciation would occur, not because of the passage of time, but because the highest and best use of the parcel had changed dramatically.