The photo above is a beautiful sight. No mere pile of dirt, the picture shows excavation for the foundation of a new house in a formerly vacant lot. Located at 1502 10th Street NW, the lot has been vacant at least as long as I’ve lived nearby (2 years) and most likely much longer. Although estimates range, the city of D.C. has thousands of vacant buildings and lots (the official list of buildings alone has over 3,500). Many other cities have much more – roughly 30% of the land of Detroit is vacant. While perhaps some should be reserved for public use, much of this should return to residential and commercial uses.

Holding aside the related issues of housing cost and neighborhood change, redeveloping vacant property in the center city is a good thing. The address discussed here near public facilities, served by public transit, and served by existing infrastructure. It’s also located close to jobs, and it’s a safe bet the future tenant will drive very little, if they own a car at all. It’s smart growth.

Up the street, another long-vacant property is being converted into housing at the corner of Q and 9th. Neighbors celebrated when a property owner evicted a used car lot at 9th and P, posting a large banner advertising the land for sale. Through a rough economic analysis, I argue these events are related. Vacant property is being developed in this part of Shaw because housing sale prices have reached the cost of construction.

My simple model of redevelopment is this: residential development will happen on vacant land when it can be sold for more than it costs to construct. I assume land costs and taxes are sunk costs, and land owners are rational and build when they can make a profit, not speculators. Luckily both sale prices and building costs are available. Let’s see how the numbers work out. (For simplicity I’ll discuss home and condo sales, however from an economics perspective the reasoning should also work for rental properties through a net present value calculation.)

Sale Prices

A review of recent sales (I used Zillow.com) in the Dupont Circle neighborhood finds sale prices ranging from $500 per square foot to over $710 per square foot for homes and condominiums. Conversely, recent sales in eastern Shaw are less, ranging between $303 per square foot for a property on 7th to $502 per square foot for a condo at 6th and Q. Although there is some variation in each neighborhood, sale prices generally follow a pattern when measured by the square foot.

As for our property, just up the street at 1516 10th Street, a 756-square-foot condo sold in 2005 for $332,000, roughly $439 dollars per square foot.

Zoning

Zoning determines how much housing can be built on our lot. The parcel, measuring 1,285 square feet, is zoned R-4, a standard residential zone in the district for row home neighborhoods. Here’s the summary of what the zone requires:

Permits matter-of-right development of single-family residential uses (including detached, semi-detached, row dwellings, and flats), churches and public schools with a minimum lot width of 18 feet, a minimum lot area of 1,800 square feet and a maximum lot occupancy of 60% for row dwellings, churches and Flats, a minimum lot width of 30 feet and a minimum lot area of 3000 square feet for semi-detached structures, a minimum lot width of 40 feet and a minimum lot area of 4000 square feet and 40% lot occupancy for all other structures; and a maximum height of three (3) stories/forty (40) feet. Conversions of existing buildings to apartments are permitted for lots with a minimum lot area of 900 square feet per dwelling unit.

Note the actual lot size is smaller than the zone’s “minimum” size, this is typical for historic neighborhoods. I’m not sure if this affected the owner’s actual lot occupancy, but I can find no mention of the property on the Board of Zoning Adjustment website. It was subject to historic preservation review but the report does not mention the planned lot coverage. If we assume the owner is allowed the 60% coverage, that results in a building footprint of 771 square feet. Multiplied by the allowed height of three stories we get 2,313 square feet for the new building.

Building Costs

Costs of construction can vary depending on a host of factors and the design and character of the structure. The RSMeans website provides a free calculator for zip-code specific costs for various types of buildings. Each estimate includes the building cost, contractor profits, and architectural fees. Using their free cost estimator, I estimated the cost of a 2,313 square foot wood frame apartment building. The estimates ranged from $806,766 on the low end to $1,120,508 on the high end. Recently contractors have been affected not only by increased costs of gasoline, but also increasing costs for metals, piping, and other raw materials. Furthermore, the historic preservation review process may have resulted in additional architectural fees.

Adding it Up

If the new house sells at $300 a square foot, the going rate for condos farther east in Shaw, the property would net $693,900, over $100,000 below RSMean’s lowest cost estimates. At $400, the property would bring in $925,200, and at $500 the property would be worth $1,156,500. Although the calculations are rough, they do seem to corroborate the theory. According to the RSMeans estimate, housing cannot be profitably built in the neighborhood at $300 a square foot, but at $500 a square foot a small profit looks possible. Of course, there are a host of variables that can make housing profitable in neighborhoods with lower prices, including the greater economy of larger buildings and public subsidies like tax credits. Nonetheless, the exercise serves to underscore the role of construction costs in neighborhood investment patterns. If you’re wondering why nothing’s happening with vacant land in your neighborhood, get calculating. Or ask a developer, since they would likely know best.