What Types of Urban Development Pay?

I recently completed a research project on what rate of return different types of land development will produce as part of a greater project. I looked at the four main types of development observed in an urban study area over a twenty year span: surface parking, historic rehabilitation, subsidized development, and walkable private for-profit development. My interest in profitability stems from conversations with developers last year who reported that they had to make a 30% return on their investment in order to consider a project.

1. Surface Parking. It's cheap, it's profitable, it's the most common type of development in the study area. The return on investment is well beyond 100%, assuming appreciation in land value over twenty years.

2. Historic Rehabilitation. It's expensive, it gets federal, state, and local tax breaks, and there are many examples in the study area. The return on investment ranges between 30% and 40%. Some of the largest empty historic buildings haven't been restored, but it may only be a matter of time, or a problem related to the scale of the costs.

3. Subsidized Development. It's not as expensive as a rehab project and the financing is much simpler. There's only one catch: the government has to foot a major portion of the bill, if not the whole thing. The return on investment is similar to historic rehab, between 30 and 40%. A handful of these were found.

4. For Profit Development. It's expensive, it gets no handouts of any kind, and the return is only about 20%. No surprise, you don't see a lot of this, and none at an urban scale. The only recent for profit development has been low density and auto-oriented.

Note: These numbers assume an identical development with the same land area (except the surface parking, which lacks a building) and the same 20 year financing.

Next up I'll talk about how these development choices work out for local government.