Why change-of-use feasiblity is not the same as commercial feasibility
Housing development feasibility is a confusing term that we use to mean two things, so let's create two terms with those exact two meanings
This is Part 1 of a four-part series coming to FET that I hope will become a reference point for understanding key concepts related to housing production.
Why a feasible change of use is different from commercial feasibility
How prices determine the construction cost of building new homes via choices of density and quality
Housing supply is not new housing production
Why landbanking is a normal market outcome of balancing present and future housing
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What do we mean by feasible new housing?
The word feasible gets used in two ways. We should have two words.
First, the word feasible gets used to mean that the development of new housing today would provide a larger residual income stream to a property owner than the current use. Let’s call that change-of-use feasibility.
Second, the word feasible gets used to mean that buying a site today at the market price and building new homes today can be done in a way that provides a return on costs that exceeds the risk taken. Let’s call that commercial feasibility.
In a recent FET article, I explained how commercial feasibility can never be found—the price of land will ensure that, at best, new development profits reflect the risk that developers in the market would be willing to take. Commercial feasibility gets bid all the way down to zero via rising land values, such that development returns only reflect risk.
And yet, this concept is widely thought to be very important for town planners and policymakers to try to measure and target via policy.
Let’s use the diagram below to illustrate the difference between these two feasibility concepts.
