You might hear the word “developer” and think “bad”, or “greedy”, or “evil”. You might imagine developers destroying old buildings that we love, building new ones we hate, and making lots of money by doing this. You might think developers are swimming in the piles of money they make!
If developers are making so much money, we expect they should make concessions for everyone in the community when they build buildings. These concessions could be affordable houses, or park space, or using nice, attractive materials like brick. Surely these developers could easily make beautiful, affordable housing with plenty of green space if only they were willing to share some of their hoard of wealth.
Some developers do make a lot of money, but it’s the landowners that usually make the most!
How could this be true? Let’s look at what it costs to build a new building:
- “Hard” costs are the expenses that directly go into making what you see. Construction materials and construction workers are part of those, and easily the largest portion of a typical project budget. It takes many different workers and stores in your community to build a new building, and those suppliers and laborers aren’t making huge profits for their work.
- “Soft” costs are fees that allow a project to be built, like permit fees and engineering fees. They are a smaller portion of project budgets. Developers pay these fees to many people, often through competitive bids for service, which again means profit margins are slim.
- Developers do charge fees for their work, but these fees must also be low. If they aren’t competitive, a different developer who is willing to charge a lower fee will be able to pay more for the land under a new building. Do keep in mind that these fees are a developer’s salary, and building is a job like any other!
All of the fees mentioned above are paid to many different people. In contrast, nearly all of the money paid for land is received by a single person: the landowner. Landowners who bought inexpensive property long ago, then held that property for many years, profit more than anyone else.
Keep in mind that it’s not just developers who are buying land - it might be you too. Homebuyers are paying top dollar for existing homes, and typically, nearly all profit is received by the seller.
In summary, unlike every other participant in the development process, homeowners aren’t competing for work. Rather, they are offering an increasingly scarce resource - land - on an open market. In US history, homeowners have been the most profitable land speculators.
- Opposition to Development or Opposition to Developers? Survey Evidence from Los Angeles County on Attitudes towards New Housing
- 6 Things to Know About How Development Works
- Who Benefits from the Housing Market?
- How Development Works
- NAHB: Cost of Constructing a Home
- Terner Center: The Cost of Building Housing Series
- Who's Responsible For High Housing Costs?