A Quantitative Framework for Highest-and-Best-Use Site Analysis: Integrating Zoning Yield, Infrastructure Cost, and Market Absorption

Mid-rise multifamily development with ground-floor retail on urban infill site.

Every parcel of land in America carries a latent question: What should be built here? The answer—arrived at through highest-and-best-use (HBU) analysis—determines whether a ten-acre tract becomes a 300-unit apartment community, a last-mile logistics facility, or a neighborhood retail center. The developer who quantifies this decision correctly captures value; the one who doesn't leaves it on the table—or worse, builds into a failing market. Yet despite the stakes, too many feasibility studies treat HBU as a qualitative exercise rather than an integrated quantitative framework. With U.S. construction spending reaching $2.18 trillion in 2024 and the National Association of Home Builders reporting average new-home construction costs at a record $428,215, the margin for analytical error has never been thinner.

The formal HBU methodology, codified by the Appraisal Institute in The Appraisal of Real Estate (15th Edition, 2020), requires that any proposed use pass four sequential tests: it must be legally permissible, physically possible, financially feasible, and maximally productive. What follows is a framework for making each test quantitative—anchored in current zoning data, infrastructure cost benchmarks, and absorption metrics from the nation's most active growth markets.

The zoning envelope defines the upper bound of value

The first test—legal permissibility—is where most HBU analyses begin and, critically, where the greatest value differentials emerge. Floor Area Ratio (FAR), the ratio of gross building area to lot area, functions as the master constraint. A 50,000-square-foot parcel zoned at FAR 2.0 yields 100,000 buildable square feet; rezone it to FAR 5.0 and the same dirt supports 250,000 square feet. That arithmetic is elementary. What makes it consequential is how dramatically FAR limits vary across U.S. growth markets—and how rapidly they are changing.

Austin's residential zones historically capped FAR at 0.40 to 0.45, meaning a 10,000-square-foot lot produced just 4,000 square feet of building. Then Texas passed SB 840, effective September 2025, which stripped cities of the authority to regulate FAR for residential and mixed-use projects and mandated a minimum density of 36 units per acre in most commercial zones. Overnight, the zoning yield on thousands of parcels multiplied. Nashville uses a density-per-acre system rather than FAR—its RM100-A zone permits 100 dwelling units per acre—while Phoenix regulates through character-area height maps in its Downtown Code. Denver approved more than 130 zoning code amendments in December 2024, eliminating parking minimums downtown and permitting multi-story apartments on formerly single-family lots. Salt Lake City is consolidating 26 mixed-use and commercial zones into just six form-based categories.

The most aggressive move came from New York City, which in 2024 removed a longstanding 12.0 FAR cap on residential buildings, mapping new high-density districts at 15.0 and 18.0 FAR—a change the city described as monumental. San Diego's Complete Communities initiative now grants qualifying infill projects FAR of 8.0 or even unlimited FAR when affordable housing is included. Approximately 75% of land in American cities remains constrained by zoning that exclusively permits single-family residences, according to research cited by the American Planning Association. The U.S. housing shortage stands at 3.79 million units. These two facts explain why zoning reform has become the central battleground of development economics.

The empirical evidence on what upzoning does to land value is instructive for any HBU analyst. A 2023 study of New York City by researcher Peng found that parcels receiving high upzoning—FAR increases exceeding 92%—saw approximately 8% more housing units after ten years. An NBER working paper studying São Paulo's zoning reform found areas with the largest density increases experienced 17.1% more construction and a 4.6% decrease in housing prices. Yet Freemark's 2020 study of Chicago transit-area upzonings found property values rose but no additional housing was built over five years—a reminder that zoning yield is necessary but not sufficient. The physically possible and financially feasible tests still have to clear.

Infrastructure costs determine which sites actually pencil

Physical possibility and financial feasibility converge most visibly in infrastructure economics. Site development costs—grading, utilities, stormwater management, roads, and offsite improvements—represent the gap between raw land and a buildable pad. Nationally, residential subdivision infrastructure runs $50,000 to $150,000 per acre, while commercial site work ranges from $100,000 to over $300,000 per acre. These figures have been climbing: the ENR Construction Cost Index rose 3.6% in 2025, with skilled labor costs jumping 5.7% as construction unemployment tightened to 4.1%. Building materials are up 35.6% since 2020.

The line items that most often surprise developers are impact fees and offsite requirements. The national average impact fee for a single-family home is $13,627, but California's average reaches $37,471 per unit—2.75 times the national figure. At the extreme, Fremont, California charges $157,000 per unit. The RAND Corporation found that California's total municipal fees average roughly $29,000 per unit compared to $1,000 or less in Texas, a differential that fundamentally alters the HBU calculus between otherwise comparable Sun Belt sites. Impact fees alone can represent 6% to 18% of a home's sale price in California jurisdictions.

Stormwater management has become a particularly consequential variable. The ASCE's 2025 Infrastructure Report Card assigned stormwater a D grade—among the lowest of any category—reflecting decades of underinvestment that municipalities are now pushing onto developers. Underground stormwater detention runs $8.50 to $17.00 per cubic foot installed, and a typical five-acre commercial site with 70–80% impervious cover requires 50,000 to 100,000 cubic feet of detention capacity. A single traffic signal triggered by a traffic impact analysis costs $1.2 to $1.4 million. Sewer main extensions run approximately $75 per linear foot; water mains roughly $70.

For the HBU analyst, these costs create inflection points. An infill parcel with existing utility connections and road frontage may support a use that a greenfield site three miles away—requiring half a mile of sewer extension and a new traffic signal—cannot. The EPA has quantified this advantage: brownfield redevelopment produces 32–57% less stormwater runoff and requires 23–55% fewer vehicle miles traveled than greenfield alternatives. Atlanta's BeltLine project, built on contaminated former rail corridors, has catalyzed over $775 million in private development precisely because infrastructure proximity offset remediation costs.

Absorption rates are the market's verdict on feasibility

The financially feasible test ultimately reduces to a question of timing: Can the market absorb what the site yields at prices that cover development costs plus an adequate return? This is where absorption analysis—the measurement of net space newly occupied minus space vacated over a defined period—becomes decisive.

The current absorption landscape across U.S. asset classes reveals sharply divergent feasibility environments. Multifamily absorbed approximately 552,000 units in 2024, nearly 2.8 times the long-term annual average of roughly 200,000 units—driven by record-high homeownership costs that have locked renters in place. CBRE reported Q4 2024 multifamily absorption of 183,600 units, the strongest fourth quarter on record and twelve times the pre-pandemic Q4 average. Vacancy fell to 4.9% nationally by year-end, below the long-term average of 5.0%. Yet this national picture masks dangerous local variation: Austin, Nashville, and Phoenix all posted vacancy rates above 8%, and Austin rents fell 4.5% year-over-year as developers delivered a 40-year-record 636,000 new units nationally. By mid-2025, multifamily construction starts had plunged 74% below their 2021 peak, a direct market response to absorption data signaling oversupply.

Industrial absorption stabilized at 176.8 million square feet in 2025 after a correction year, with vacancy plateauing at 7.1%—just 10 basis points above the pre-pandemic historical average. Cushman & Wakefield data shows inland markets like Dallas-Fort Worth (31.1 million square feet absorbed) dramatically outperforming port-proximate markets, which captured only 13% of absorption versus a historical 20–25% share. Retail, meanwhile, occupies a position of structural scarcity: only 10.2 million square feet of new retail space delivered in all of 2025—an all-time low, 63% below the 2015–2019 average—while shopping center vacancy held at 5.7%, well below the pre-pandemic norm of roughly 7%.

Office tells the starkest absorption story. Net absorption was negative 6.7 million square feet for 2025, though this represented a dramatic improvement from the prior five-year average of negative 50.5 million square feet annually. National vacancy reached 20.5%, roughly double the pre-2020 norm of 12%. Yet Class A office space posted positive 9.2 million square feet of absorption for the full year, underscoring the flight-to-quality dynamic that now defines the sector. The bifurcation is so extreme that in Manhattan, office-to-residential conversions surged from under 1.2 million square feet annually before 2020 to 4.1 million square feet through August 2025 alone— with another 9.5 million square feet planned for 2026. For the first time in two decades, renovations have overtaken new construction in U.S. architectural billings, according to Bloomberg and the AIA.

Residual land value ties the framework together

The quantitative integration of zoning yield, infrastructure cost, and absorption into a single HBU determination happens through residual land value (RLV) analysis—the calculation that answers the most fundamental question in development: What can I pay for this land?

The formula is direct: RLV equals gross development value minus total development costs minus required developer profit. A 150-unit build-to-rent community on a 20-acre parcel projecting $45 million in stabilized value, $30 million in development costs, and a 20% profit margin yields an RLV of $9 million—the maximum justifiable land price. Run the same calculation for an industrial building, a retail center, and a hospitality project on the same site, adjusting zoning yield for each use, infrastructure costs for each building type, and absorption timelines drawn from current market data, and the use producing the highest RLV is, by definition, the highest and best use.

The ULI/PwC Emerging Trends in Real Estate 2025 survey of over 2,000 industry specialists ranked Dallas-Fort Worth, Miami, and Houston as the top three markets to watch, with 65% of respondents expecting good or excellent profits—a 20-plus-percentage-point jump from the prior year. Construction costs and labor availability ranked as top concerns. These macro signals set the context, but the site-level decision still demands the granular work: parsing the zoning code for actual achievable density after setbacks, height limits, and parking requirements constrain theoretical FAR; budgeting the specific infrastructure costs that convert raw acreage into developable pads; and modeling absorption against the competitive supply pipeline in the relevant submarket.

The convergence ahead will reward analytical rigor

Three forces are converging to make quantitative HBU analysis more consequential than at any point in recent memory. First, the wave of zoning reform—from Texas SB 840 to New York's City of Yes to Denver's 130-plus code amendments—is rapidly expanding the legally permissible envelope on millions of parcels, creating value for those who identify the shift early and risk for those who rely on outdated assumptions. Second, infrastructure costs continue to climb at 3–4% annually while ASCE estimates a $3.7 trillion gap between planned investment and what the nation's systems require through 2033, meaning the physical-possibility test will increasingly separate viable sites from stranded ones. Third, the dramatic divergence in absorption across asset classes—record multifamily demand alongside historic office vacancy, industrial stabilization alongside retail scarcity—means the maximally productive use on any given site may look nothing like what it would have been three years ago.

The developers and analysts who treat HBU as a rigorous, data-driven framework—quantifying zoning yield to the buildable square foot, benchmarking infrastructure costs against current regional data, and modeling absorption with submarket-specific supply pipelines—will consistently outperform those who rely on instinct or precedent. In a market defined by record construction costs, tightening capital, and regulatory flux, the spreadsheet is the competitive advantage.

Sources:

• Appraisal Institute, The Appraisal of Real Estate, 15th Edition (2020)

• CBRE, U.S. Real Estate Market Outlook 2025 — Multifamily

• Cushman & Wakefield, U.S. Industrial MarketBeat (2025)

• Cushman & Wakefield, U.S. Shopping Center MarketBeat (2025)

• ULI/PwC, Emerging Trends in Real Estate 2025

• Fannie Mae, Multifamily Economic and Market Commentary (January 2025)

• U.S. Census Bureau, Value of Cxonstruction Put in Place (2024)

• ENR (Engineering News-Record), Construction Cost Index (2025)

• ASCE, 2025 Infrastructure Report Card

• U.S. EPA, Smart Growth and Infill — Brownfields Redevelopment

• American Planning Association, Equity in Zoning Policy Guide

• National Association of Home Builders (NAHB), Construction Cost Survey

• California YIMBY, The Impact of Fees Report

• RAND Corporation, California Municipal Fees Study

• Freemark, Yonah, "Upzoning Chicago," Urban Affairs Review (2020)

• Innowave Data, Infrastructure Cost Benchmarks and Site Development Analytics

• Texas Legislature, Senate Bill 840 (89th Session, 2025)

• City of New York, City of Yes for Housing Opportunity (2024)