Volatility in Land Development
A look at volatility in real estate:
Outside influences in real estate are externalities that have affected real property since it was first owned and improved, dating all the way back to feudal times. As externalities assert themselves, they can produce positive or negative impacts. When they become extreme enough, we have volatile conditions.
Economists have formal definitions for externalities and the resulting volatility, but I am not an economist so I’ll leave the formal defining to them. At the same time I have been continually affected by volatile externalities as a land developer, so have many others who have owned real property. As affected parties, it is a important to be aware of the causes and effects of these external forces.
Let’s start with an immediate volatile condition:
Social and economic externality - COVID-19:
We live in a world where viral pathogens from an open market in Wuhan, China can cause a worldwide pandemic. You start out with a few people that routinely buy freshly slaughtered bats and pangolins from a bunch of less-than-hygienic street vendors and you wind up with a world economy in freefall a few short weeks later. Every life lost to Coronavirus is a tragedy in it’s own right and it has also been accompanied by economic chaos on a worldwide scale.
It’s a little disquieting to think that we are so intertwined as a world order that this kind of thing can happen, but it has been going on for centuries. Wars, economic upheaval, social disorder and sickness have continually taken place. Consider the bubonic plaque that started in Asia and from 1347-1351 killed one-third of the population of Europe in only four years.
Real estate is not as immediately affected in all ways by COVID-19, but it will be in some ways. Government control over money and credit could be a key factor in softening any downside from the virus. At the same time, if health and safety codes are strengthened down the road, property owners could face more costly compliance adjustments. Few things in real estate development stand as singular factors, usually it’s a multitude of factors creating a cascading effect toward an uncertain outcome. A lot like everyday life.
External factors in real estate:
The externalities we face in real estate are physical externalities of the land, economic externalities, social externalities, and political externalities. Actions by outside forces from any of these areas can have a positive or negative effect on a property. As illustrated above, these forces usually work in combination.
What are they?
Political externalities:.
* Money supply and credit
* Government guaranteed loans
* Water rights
* Health codes
* Zoning ordinances
* Housing availability
* Quality of schools
* Taxes
Physical Externalities:
* Climate
* Topography
* Proximity
* Soil conditions
* Geotechnical
* Wetlands
Economic externalities:
* Wages & Salaries
* Credit availability
* The strength of the economic base
* Key businesses and industries
Social externalities:
* Population trends
* Growth or decline of a sector
* Birth rates
* Death rates
* Divorce rates
* Lifestyle factors
* Disease
Review:
Real estate development revolves around taking advantage of favorable externalities, working through limiting factors and anticipating them accurately. Unlike COVID-19 which is sure to end at some point, land development externalities are more permanent and enduring. Understanding the external forces and their effect on a land development project is a key skill that any successful developer needs to refine and perfect. Good luck!
