This article was written and submitted by Mark Goodman, Ian Brackett, and Megan Johal, brokers at Goodman Commercial and authors of the Goodman Report.
The outrage machine is noisy these days with denunciations of supposedly nefarious “middlemen” who assemble properties and take them through rezoning — not because they plan to build something, but rather in hopes of flipping the land for an immediate payday.
This criticism — often ill-informed and slanderous in tone — is rooted, loosely, in truth. There are players in our industry who specialize in getting land ready for development, even if they don’t plan to execute the next step. But instead of condemning these supposed bad actors, we should step back and consider if any harm is actually being done.
To understand the accusation — and to recognize its error — it’s important to know a little about how development works, and where value is added along the way.
In today’s complicated policy environment, you can’t just buy a piece of land and build what you want. There are innumerable layers of rules and regulations, zoning restrictions, and demands to pay for everything from sewers and water mains to parks, daycares, and public art installations. It can take years to get a building permit, even when a property is already appropriately zoned. And depending on the size of a project, it can cost millions or tens of millions of dollars in fees to lawyers, engineers, and architects, as well as up-front payments to the municipality — and that’s not counting the carrying cost of the land itself. If a project is large and prominent, the entitlement process can take a decade and cost much more — before the first shovel breaks ground, and long before a developer begins to recoup any of their investment.
In this complicated regulatory environment, there are plenty of builders who don’t have the experience, or the patience, to put an assembly together and take it through a lengthy and uncertain entitlement process. It makes perfect sense that they would want to buy land that is ready to go, leaving the approvals to those who are experts at dealing with planners, politicians, and neighbours to win support for new proposals, but who lack the financial resources and technical knowledge to see projects through construction.
The critics decry this division of labour as “speculative,” and denounce any incremental profit-taking as somehow sinister — an attitude on display in the City of Vancouver recently, when Council sent a Broadway Plan rezoning back to staff and speculated about the proponent’s intent to deliver a finished product.
If the point is to see new homes built, and someone can get a site through permitting and into the hands of a builder who can deliver the work, it should be seen as a positive. Besides, if that builder is willing to pay a premium for entitled land — a big if in today’s market where entitled land is selling for less than unentitled land would have fetched two years ago — the overall profit isn’t increasing; it’s simply being split up along the way. Rent or condo prices are no higher in a project that was acquired after rezoning compared to one that went all the way through with the same developer.
Some have erroneously pointed to the thousands of units that have been approved but not yet built as evidence that these meddling middlemen are winning entitlements and then hoarding property as a way of driving land prices up further. But these owners aren’t holding land in some evil inflationary plot. They’re stalled because there is no way, in this market, to finance those projects: they just don’t pencil.
The City of Vancouver, in particular, has also pushed many owners to rezone defensively, ahead of when their property might naturally come up for redevelopment. Policies that limit tower allocations on a given block, or that necessitate a certain frontage size, have incentivized owners to join an assembly, or rush through the entitlement process, for fear of losing the potential to ever increase density in the future.
So, consider the bigger picture: governments at all levels have created an extremely complicated matrix of rules and regulations, obstacles, and fees. The barrier to entry is huge, and even when a project is finally approved, it takes incredibly deep pockets and an enormous appetite for risk to see it through to occupancy. Instead of condemning those who participate and seek fair compensation for their efforts, we should focus on the main goal: getting more homes approved, built, and into the hands of tenants and homeowners. Playing favourites and micromanaging how and by whom those homes are delivered isn’t going to get us to the objective any faster.