Crisis and Opportunity

Everybody Breaks

Redefining Relative Values

If a parcel’s value is directly correlated to its production potential, then most straightforward way to quantify new parcel value is to compare the former and current per-acre production potential of each parcel type. An early understanding of this value creation creates a first-mover advantage throughout the execution of any investment strategy.

The scope of the new opportunity depends heavily on the parcel composition of the market. Parcel frequency totals can be used to gauge the impact of value increases associated with each specific parcel type.

Determining DBL Strategy

Once market composition and target density bonus levels have been established, parcel sizing scenarios can be run for each zoning designation to determine the minimum acreage required to produce a viable project. It is easier to generate these scenarios using a vba enabled density calculator that can handle all of the zoning characteristics associated with each parcel type. The goal is to compare the corresponding minimum project acreage required in 2024 vs 2025. These calculations also incorporate the increase in permitted concessions from 3 to 4. All scenarios were run with current construction costs in addition to location-based rent tiers and land costs.

Prior to 2025, the California Density Bonus Law (DBL) carried a maximum bonus of 50% when allocating anywhere from 15% to 44% of the base unit density to affordable housing. As of 2025, qualifying for maximum density means a base affordable unit allocation of 25% at 50% AMI (88.8% bonus) or 30% at 85% AMI (100% bonus). When comparing the two options in Santa Cruz, residential parcels tend to see a more significant value increase using the 85% AMI density bonus structure. Commercial and mixed-use parcel density tends to be more commonly determined by FAR and higher land coverage ratios, and therefore carry a similar minimum acreage requirement regardless of their maximum density bonus structure. Current sizing scenarios show a value shift of >10% for residential and lower-density parcels and <10% for non-residential parcels.

Comparing Results

Spatial Opportunity Assessment

Once value change can be quantified by zoning designation, the results can be applied to a parcel map to build a spatial understanding of the new value framework. Understanding this data can help investment teams de-risk their projects as they focus their efforts on undervalued parcels in locations with a high degree of unrealized potential. Once transitioned to map format, the information can also be combined with other relevant map types (traffic, transit, crime, etc) to uncover additional value.

Having worked on a number of large West Coast projects, I wanted to to add a section to discuss the unique opportunity emerging from the current housing crisis along the Pacific coast. The map above is a Newsweek illustration taken from a 2025 article on housing shortages across the U.S. As many “development friendly” markets deal with supply shock, there is no region with more immediate opportunity for housing development than California.

Considered unnecessarily risky and complex by many national investment teams, the state of California has gone to extreme lengths since 2019 to stimulate housing development by producing legislative initiatives to incentivize and protect developers. After six years of refinement, density is finally being generated in highly desirable markets that have been known to torpedo large projects for decades.

Most investors and developers who have explored California markets are aware of the broad changes since 2019, but few firms have taken the time to fully appreciate the value created in 2025. In Santa Cruz, for example, there is only one market rate project in the development pipeline utilizing a density bonus over the previous 2023 maximum of 50%. Firms have not yet taken the proper steps to fully understand the most recent wave of legislative value creation.