Real estate developers are always on the lookout for a prime piece of real estate to build new projects. One type of land used for new developments is a greenfield site. While the name implies that these are green fields such as a meadow or agricultural land, the term refers more broadly to any previously undeveloped piece of land.
Here's a closer look at what real estate investors need to know about greenfield developments.
What is a greenfield development in real estate?
A greenfield development is a real estate construction project on previously undeveloped land. Examples of typical greenfield development sites are:
- Agricultural fields.
- Forest land.
- Unused land parcels.
A greenfield site is often at the edge of a city, town, or suburban area, on a waterway, or near a highway off-ramp. Those locations make them ideal spots to construct new commercial buildings to support a region's growth.
How does a greenfield development differ from a brownfield?
Whereas a greenfield development is at a previously undeveloped site, brownfield development differs in a few significant ways. Brownfield development can include these factors:
- A location with an existing structure(s) that a developer will have to demolish to make way for the new construction.
- A site that has some environmental issues, such as a toxic chemical spill that requires remediation.
- A property with both existing structures and environmental issues.
While the costs of remediation and site preparation for a brownfield project can be quite high, the cost can be worth it if the site is in an ideal location, such as near water or downtown.
For example, a brownfield development can be an old industrial property at the edge of downtown. The developer would demolish any existing structures and replace them with office, residential, retail, hospitality, restaurant, or entertainment space. One of the most famous brownfield developments is the Hudson Yards project on the West Side of Manhattan. The 28-acre brownfield site used to store railcars. However, after extensive cleanup, prep work, and construction, the first phase of this multi-billion-dollar development opened in 2019, featuring a public greenspace and eight structures, including residences, a hotel, office buildings, a mall, and a cultural facility.
Conversely, most greenfield sites are further away from central business districts or existing infrastructure, which is why they've remained undeveloped over the years. However, as cities grow, these locations can become desirable for development, especially compared to the cost of a brownfield location that needs extensive environmental remediation or site preparation before construction can begin.
What are the pros and cons of greenfield development?
As with any real estate opportunity, there are benefits and drawbacks to a greenfield development project. Some of the positives of greenfield sites:
- It’s usually easier to build on undeveloped land.
- It’s often more cost effective compared to brownfield development, especially if that site has hazardous substances.
- Because many greenfield developments are in new areas, there's usually more space to allow for future expansion.
- There's often less congestion in greenfield areas.
- They can produce higher returns on investment compared to other real estate investment opportunities.
On the other hand, there are also cons of greenfield development:
- They are sometimes in a less desirable location compared to an infill project on a brownfield site.
- There is a higher risk of running into a permitting issue.
- They contribute to urban sprawl, deforestation, and the destruction of natural habitats.
- Developers often build a greenfield project speculating that the building can be fully leased or sold upon completion.
- Greenfield developments are at risk of underperforming expectations if too many developers construct competing greenfield projects in a region.
- It can be more difficult and costlier to finance a greenfield development project.
Should you invest in a greenfield?
Greenfield development projects have a higher risk profile for real estate investors than other opportunities, such as buying a stabilized property. That's due to potential issues with permitting, construction cost overruns, difficulty in obtaining financing, and the risk of oversupply if too many developers build competing projects. Because of that, many real estate investors, including several publicly-traded REITs, don't engage in any greenfield development.
However, as with most investment opportunities, there are always trade-offs. One of them is that greenfield development projects often produce much higher returns. That's evident by looking at the country's richest real estate investors, who made the bulk of their fortunes developing real estate projects.
Because of that, real estate investors need to weigh the risks of a greenfield development against its reward potential. Those who are already risk averse might not want to invest in these projects, either directly or indirectly via a publicly-traded REIT or a real estate crowdfunding platform. However, for those seeking higher-return opportunities, greenfield developments can be worth the risk.
Greenfield developments can turn a green field into a high-returning real estate investment
Greenfield real estate developers are often visionaries. They look at a vacant lot and see the green of a high-return real estate development project. While greenfield developments don't always pay off, the returns can be worth the risk when they do.