Unlocking Hidden Value: The Infill Development Opportunity for Operators

Existing and new operators are increasingly seeking ways to diversify portfolios and optimize returns as the cost of capital has been so high. One opportunity we have been discussing with operators lies in infill development—the creation of housing or mixed-use spaces on vacant or underutilized land within established urban areas. Infill development offers a compelling opportunity to unlock hidden value for operators traditionally focused on greenfield developments or multifamily projects.

In this post, we explore the benefits and challenges of infill development, particularly to resource allocation, risk assessment, and investor communication strategies.

Impact on Resource Allocation: Optimizing Portfolio Balance with Infill Development

Redirecting funds toward infill development requires a shift in thinking and operations, but the benefits can be significant. Unlike greenfield investments, which typically involve purchasing undeveloped land and building from scratch, infill projects leverage existing infrastructure and proximity to urban amenities, lowering overall project costs.

Key Advantages:

  • Capital Efficiency: Infill projects use capital more efficiently because they target areas with existing infrastructure and ministerial permitting opportunities.

  • Demand and Market Stability: These developments typically occur in urban centers with higher housing demand and lower supply, helping ensure more stable and faster absorption rates.

For example, infill developments in California’s urban areas, such as Los Angeles and San Francisco, have demonstrated that while land prices are higher, the demand for housing is so high that rental yields and property values appreciate more quickly. According to the Urban Land Institute, urban infill projects in these cities have seen price appreciation rates 10-15% higher than their suburban counterparts.

Risk Assessment: Weighing Infill Development vs. Greenfield Investments

When shifting from greenfield to infill development, it’s essential to assess the risk profiles of each type of project.

Greenfield Investment Risks:

  • Longer project timelines and permitting risk

  • Uncertain demand due to reliance on new infrastructure

  • Market volatility tied to economic expansion

Infill Development Risks:

  • Navigating zoning regulations

  • Potential complexities with scattered site parcels

  • Higher initial land/acquisition costs in urban locations

Despite these risks, infill development has advantages. One significant benefit is reduced exposure to speculative market cycles. Because these projects are located in areas with existing demand, they are less susceptible to the kind of market volatility that can plague greenfield developments, which rely heavily on speculative growth.

Additionally, infill projects benefit from regulatory incentives in California. Many cities, including Los Angeles and Sacramento, have implemented policies to encourage Accessory Dwelling Units (ADUs) and cottage courts on underutilized lots, reducing permitting times and increasing project viability.

Case Study: California’s ADU Boom

In 2017, California passed statewide legislation making it easier for homeowners and developers to build ADUs, also known as "granny flats" or "backyard cottages." This legislative change has significantly impacted infill development, particularly in cities like Los Angeles, where housing shortages are acute.

Results in Los Angeles:

  • According to data from the California Department of Housing and Community Development, permit applications for ADUs surged by over 1,500% from 2016 to 2020.

  • Many of these ADUs have been built on infill lots in high-demand neighborhoods, providing a much-needed increase in affordable rental housing without requiring new infrastructure.

  • Rental yields from ADUs have been notably high due to the proximity to urban amenities and heightened housing demand.

For Operators, these policy shifts offer an opportunity to invest in infill projects with lower regulatory risk and faster approval timelines.

Stakeholder Communication: Highlighting the Long-Term Value Proposition

Explaining the long-term value of infill development to investors requires a strategic approach, particularly since these projects might seem smaller in scale or more complex than traditional investments. Operators should emphasize key points highlighting these developments' long-term benefits.

Key Communication Strategies:

  1. Urban Migration Trends: Despite occasional fluctuations, cities attract a younger, more mobile workforce. Urban housing demand is expected to remain strong, particularly in tech hubs like Northern CA, San Diego, and Los Angeles. Infill developments in these regions benefit from stable rental demand and price appreciation.

  2. Sustainability and ESG: Infill projects align with sustainability goals, reducing urban sprawl and providing much-needed workforce housing (80-120% AMI). These attributes align with the Environmental, Social, and Governance (ESG) criteria many LP’s prioritize.

  3. Success Stories: California’s ADU boom illustrates how regulatory changes can lead to higher returns. Highlighting the strong rental yields and shorter development timelines of infill projects can reassure LPs that these opportunities provide both immediate and long-term gains.

Myth vs. Fact: Addressing Common Misconceptions

Myth: Infill development is too costly and complex to be profitable.
Fact: While infill projects may have higher upfront costs, the savings on infrastructure, shorter timelines, and faster absorption rates often result in better financial outcomes. In addition, advances in modular construction are making infill projects more cost-effective, helping to mitigate some of the perceived complexity.

Conclusion:Unlocking Value and Impact

Infill development represents a significant opportunity for Operators to diversify portfolios and unlock undervalued land in urban centers. By strategically reallocating resources toward these projects, assessing their risks relative to traditional greenfield investments, and effectively communicating their long-term benefits to investors, Operators can position themselves for success in a shifting housing policy landscape that favors higher-density development on vacant and single-family-zoned properties.

California’s ADU boom illustrates the potential for regulatory incentives to drive growth in infill projects, offering Operators a low-risk, high-reward strategy. Infill projects provide strong returns and contribute to creating sustainable, vibrant communities, adding financial and social value for investors.

Key Takeaways:

  • Infill developments can balance portfolios by targeting high-demand urban areas.

  • Risk profiles for infill projects tend to be lower due to existing demand and regulatory incentives.

  • California’s ADU legislation showcases how policy changes can drive successful infill development.

  • Communication strategies should highlight urban migration trends, sustainability, and success stories to reassure investors of the long-term value proposition.

By thoughtfully navigating these opportunities, Operators can tap into the hidden potential of infill development and maximize both returns and impact. Contact us to learn more about how our approach could benefit your future developments. Visit www.bequall.com or email contact@bequall.com to start a conversation.

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Raising Your First $5-10M Infill Fund: Small Fund, Big Opportunity