February 2019 Commercial Newsletter
Why Infill Land is Important to Real Estate Developers
If you’ve never heard the term “infill land”, it refers to land that’s located within highly developed areas. The land will typically be surrounded by buildings, and it will be one of very few remaining parcels of vacant land within the area.
The reason that real estate developers like to find infill land, is because the supply and demand for buildings in the area have already been determined over a long period of time, and it will be very difficult for other developers to find additional land to compete with any new project that’s going to be built
This is important because as a developer you now have the ability to build a new building in the area that could easily become the most desirable building, and you’re not in danger of other developers seeing the success of your new project, and then building their own projects to compete with it. So you now have the opportunity to create the most desirable building in the area, charge the highest rent in the area for it, or maybe even be able to sell the building to someone else for a nice profit.
Now contrast this instead with being the first developer to build a building within an area, with plenty of additional land still being available for your competitors to rush in and build their own projects immediately afterwards. As an example, let’s say you’re noticing that the population is expanding in a particular area, and you determine that it’s ripe for new development. So you do your homework, you get your design done, get your building permits, and then you begin construction. Then you complete the project, you rent it out successfully, and you’re very thrilled with the results. But then your competitors, seeing how successful your project has now become, rush in, they buy land in the area, they build their own projects, and now they’re competing directly against you.
So several years down the road, your tenants are now demanding rent reductions, because there are nicer, newer buildings now available that directly compete with yours, and all the owners of these buildings are having to compete by lowering their asking rents in order to attract tenants to move into their buildings. In addition, there’s still a ton of vacant land available for other developers to continue on in building new buildings.
So this is why developers like to find good parcels of infill land, or parcels where older buildings can be demolished, with new buildings then being built upon the land. The demand for buildings in the area has already been determined, it will be very, very difficult for developers to add any additional new buildings to the existing supply, and you now have a great chance as the owner of the new building to command premium rents for it.