Land Value: Zoning Matters

Part of the theory underlying the use of upzoning to improve housing affordability goes approximately like this: zoning restricts the number of housing units that can be constructed on a given piece of land. Since land is a part of the cost of housing, dividing a given piece of land among more housing units will reduce the land cost per unit of housing.

That is likely true, up to a point and in certain cases. But proponents often make it sound like going from an as-of-right entitlement of one dwelling unit per lot of a given size to, say, 4 units will cut the land cost per DU by 75%. Is such a dramatic savings in land cost realistic to expect? That is, does multiplying the number of units allowed per plot by X cut the land cost per unit by a factor of X? Evidence from some recent cases of upzoning tell a different story. One of the factors that drives the market price of land is precisely the building entitlement associated with that land. Increase the entitlement and you end up increasing the market value of the land. Upzoning can mean that a development option gets capitalized into the value of the land. That is, the price of land increases to reflect the increased value of the option to develop that land with more units or greater square footage. This is the lesson from papers analyzing the results of upzoning initiatives in Chicago and Minneapolis. Both cities undertook upzoning exercises. The papers show results of statistical analysis indicating increases in prices of vacant or re-developable parcels in response to the rezoning.

We do not have any such natural experiment available to us to evaluate the impact of upzoning in Charlottesville. We do, however, have some analogous data that can be suggestive of the degree to which additional building entitlements can drive land prices. The city makes available tax assessments of all parcels in the city, with value broken down into land and improvements. This is necessarily an approximation, but it is a good enough approximation that the city is willing to make people pay on the basis of it. And our earlier analysis shows that sale prices and assessments track relatively well (sales-to-asssessment ratio has average 1.07 over the past two decades and has not strayed too far from 1.00 at any time). We looked at the relative value of land on a few different metric for R-1, R-2, and R-3 zoning “families.” In addition, we have the instructive example of Planned Unit Developments (PUDs). PUDs are in themselves a sort of ad-hoc upzoning. Developers get special approval from the city to undertake projects that would not otherwise fit in existing zoning, by agreeing on a PUD overlay for the project. We adjusted the relative values for the differing neighborhood mix of each zoning category, and for each variable, indexed R-1 to a value of 1.0.

As you can see, PUD land values exceed those of other zoning categories when it comes to land value per acre. R-2 is only a whisker above R-1, but R-3 exceeds both. And these zoning categories do matter — you can see that the number of dwelling units per acre is much higher in R-3 and PUDs than in R-1. R-2 is slightly higher. Putting this together, we can look at the Land Value per dwelling unit in each category. There is an advantage to the higher zoning categories, but it is comparatively slight. R-2 does not associate with 50% of the land cost per unit of R-1. In fact, it has about a 30% discount. R-3 is only a 20% discount. And PUDs show only a 10% discount. Building entitlements are getting priced into the land value. It is not likely this effect will completely offset the savings from reduced land consumption per new unit, but the data above suggest it can offset it quite substantially.

One might question whether the differences in assessment are somehow a byproduct of systematic differences in what gets built on plots of different zoning categories, which then spill over into land assessment because of flaws in the assessment process. As a check we looked at assessments of vacant parcels. The pattern is similar. There is a substantial valuation-per-acre uplift for higher-zoned plots, and particularly for re-zoned plots, as proxied by PUD status.

Another useful check is to look at changes in land value for parcels that had construction approved. We looked at the change in assessed land value per acre for parcels from the assessment year five years before the certificate of occupancy was issued to the last assessment year before the assessment included the new building(s). We think most developers will not have bought land as far back as five years before completion, so we are capturing the full valuation uplift. We compared the valuation change in raw dollars per acre as well as the percentage change, looking at 1-2 unit developments vs larger developments and R-1-zoned developments vs PUD-zoned developments. Generally, the PUD will have been approved sometime later than five years before project completion, so, again, we capture the valuation uplift from rezoning. The results, detailed in the chart below, confirm what we saw above in absolute land values. There is a substantially higher valuation uplift for land that gets approved for higher-density development, whether that means more units per parcel or subdivision into smaller parcels.

Therefore, proponents of upzoning who hope to make housing affordable by lowering land cost should not oversell the magnitude of this effect. From Charlottesville’s own assessment data, it appears that most of the value of greater “land-efficiency” of higher-density zoning gets capitalized into land prices. This vitiates any potential reduction in housing production cost that we might have hoped for through the channel of reduced land cost per unit. What’s more, it can negatively impact owners of upzoned parcels who have no intention of developing their land. Owners could see the assessed value of their properties increase due to the development option provided by upzoning. That higher assessment translates into higher property taxes. And as we all know, higher property taxes can drive displacement. Therefore, any plan to upzone large swathes of our city should consider the full impact of rezoning on land prices. Market price response to upzoning will likely substantially reduce any affordability gains from reducing the required amount of land per new unit, and it may drive displacement through increased tax assessments on current homeowners.