Highest and Best Use: The Core Principle Driving Urban Land Economics

Cities do not grow randomly.
They grow where value is allowed to concentrate.

Behind every skyline, every gentrifying neighbourhood, every disputed zoning change, and every dramatic land price increase lies a single, quiet but powerful principle—Highest and Best Use (HBU).

It is the invisible hand that guides urban form.
It determines whether land remains underdeveloped or transforms into dense mixed-use hubs.
It explains why modest structures sit on extraordinarily valuable land—and why demolition is sometimes the most rational economic decision.

In land economics, buildings are temporary.
Land use decisions are somewhat permanent.

Understanding Highest and Best Use is not just essential for valuers and developers—it is foundational to understanding how cities evolve, why land prices rise, and where future opportunity lies.

Understanding Highest and Best Use

At its core, Highest and Best Use is a valuation and planning concept that asks a deceptively simple question:

What is the most valuable, legally permissible, physically possible, and financially feasible use of a piece of land?

But behind this question lies a rigorous analytical framework that governs modern urban land economics.

HBU is not about what currently exists on land.
It is about what should exist, given market forces, policy frameworks, and economic logic.

This is why valuers often say:
“We value land as if vacant and available for its best use.”

The Four Tests of Highest and Best Use

For a use to qualify as the Highest and Best Use, it must pass four sequential tests. If it fails any one, it is disqualified.

1. Legal Permissibility

Land use must comply with:

Zoning regulations
Planning policies
Development controls
Environmental and heritage restrictions

A high-rise apartment may be financially attractive, but if zoning allows only single-dwelling residential use, it fails the first test—unless rezoning is probable and supportable.

Urban land economics is therefore deeply tied to policy decisions, not just market demand.

2. Physical Possibility

The land must be physically capable of supporting the proposed use.

This includes:

Plot size and shape
Topography and soil conditions
Access and frontage
Availability of infrastructure (roads, sewer, power, water)

A narrow, landlocked plot may not physically support large-scale development—even if zoning allows it.

Cities reward land that is usable, accessible, and serviceable.

3. Financial Feasibility

The proposed use must generate a positive economic return.

This involves:

Construction costs
Financing costs
Market demand and achievable rents or sale prices
Developer margins and risk

Many uses are legally and physically possible—but economically irrational.

Urban transformation only happens when numbers work.

4. Maximum Productivity

Among all feasible uses, the one that produces the highest land value becomes the Highest and Best Use.

This is the decisive step.

If offices, residential apartments, and mixed-use development are all feasible, the use that yields the highest residual land value wins.

This is where land economics becomes competitive.

Why Highest and Best Use Drives Urban Growth

Cities expand not because land exists—but because land value can be intensified.

From Low Use to High Use

Urban growth often follows a predictable sequence:

Agricultural or vacant land
Low-density residential
Medium-density housing
High-density or mixed-use development

Each stage represents a higher and better use driven by:

Infrastructure investment
Population growth
Economic activity
Policy shifts

When land remains stuck at a lower use while surrounding areas intensify, value pressure builds. Eventually, redevelopment becomes inevitable.

The Demolition Paradox

One of the clearest illustrations of HBU is demolition.

When a structurally sound building is demolished, it is rarely because the building has failed.
It is because the land has outgrown the building.

A single-storey bungalow on a major urban corridor may still be functional—but if zoning and demand support a multi-storey commercial block, the bungalow represents economic underutilization.

In land economics, this is called functional obsolescence driven by land value.

Highest and Best Use vs Current Use

A critical distinction in valuation and planning is the difference between:

Current Use
Highest and Best Use

Current use reflects the present reality.
HBU reflects economic potential.

This distinction explains why:

Land prices rise ahead of development
Speculation occurs in transitional zones
Infrastructure announcements reprice entire corridors

Markets are forward-looking. They price land based on what it can become, not what it is.

HBU and Urban Density

Density is not ideological—it is economic.

As land prices rise, cities respond by:

Building upward
Intensifying use
Mixing functions

High-density development is not imposed; it emerges when land scarcity makes low-density use inefficient.

This is why:

Central business districts evolve vertically
Transit corridors attract apartments and offices
Mixed-use developments outperform single-use zoning in prime locations

Density is the market’s answer to land scarcity.

Infrastructure as a Catalyst for Higher Use

Infrastructure does not just connect cities—it unlocks new Highest and Best Uses.

Roads, rail, utilities, and public services:

Expand legal and physical feasibility
Reduce development costs
Increase market demand

A plot that was once suitable only for low-density housing may suddenly support:

Retail centres
Logistics hubs
High-rise residential

This is why infrastructure-led land value uplift is one of the most powerful forces in urban economics.

Highest and Best Use in Emerging Cities

In emerging and rapidly urbanizing cities, HBU analysis becomes even more critical.

These markets often experience:

Rapid policy changes
Infrastructure catch-up
Informal land use patterns

Land that appears underdeveloped is often not misused—it is waiting for legal and infrastructural alignment.

Savvy investors and planners focus not on what exists, but on:

Where zoning is likely to change
Where infrastructure is planned
Where demand is forming

HBU thinking is inherently forward-looking.

The Role of Policy in Determining HBU

Governments shape land economics more than markets alone.

Through:

Zoning controls
Plot ratios
Building height limits
Land use designations

Policy can either:

Unlock land value
Suppress development
Redirect growth

Well-designed policy aligns market forces with public good. Poor policy creates artificial scarcity, speculation, and affordability crises.

In this sense, urban planning is applied land economics.

HBU and Housing Affordability

Housing affordability is often discussed as a construction problem. In reality, it is primarily a land use problem.

When land is locked into low-density or single-use zoning in high-demand areas:

Supply is constrained
Prices rise
Affordability declines

Allowing higher and better use:

Increases supply
Improves efficiency
Reduces per-unit land cost

The solution is not cheaper buildings—it is better land utilization.

Highest and Best Use from a Valuation Perspective

For professional valuers, HBU is not theoretical—it is operational.

Valuation relies on:

Market evidence
Comparable land sales
Residual land value analysis

Land is valued based on its optimal use, not existing improvements.

This is why:

Two identical plots with different zoning have different values
Corner plots often outperform interior plots
Frontage and access materially affect land value

HBU analysis transforms raw land into an economic asset.

Speculation vs Strategic Land Holding

Not all undeveloped land is speculative.

True land banking is informed by HBU logic:

Understanding future zoning
Anticipating infrastructure
Aligning with demographic trends

Speculation ignores feasibility.
Strategy respects the four tests.

Markets reward informed patience.

The Future of Highest and Best Use

As cities face new challenges—climate change, sustainability, remote work—HBU will continue to evolve.

Future considerations include:

Mixed-use resilience
Transit-oriented development
Environmental constraints
Adaptive reuse

The highest and best use of tomorrow’s land may prioritize:

Flexibility
Sustainability
Community integration

But the core principle remains unchanged:
Land must be used where it creates the most value—economically and socially.

Conclusion: Why Highest and Best Use Matters More Than Ever

Highest and Best Use is not just a valuation concept.
It is the engine of urban transformation.

It explains:

Why cities densify
Why land prices behave the way they do
Why redevelopment is inevitable
Why policy decisions shape wealth

Buildings rise and fall.
Markets fluctuate.

But land, when aligned with its highest and best use, becomes the most enduring asset in any urban economy.

Understanding this principle is not optional for anyone serious about real estate, planning, or investment.

It is the foundation upon which cities are built—and rebuilt.

Highest and Best Use: The Core Principle Driving Urban Land Economics

Highest and Best Use: The Core Principle Driving Urban Land Economics

Understanding Highest and Best Use