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The Open House festival is on this week in London. It’s an annual festival that celebrates London’s urban landscape and it is something that has been going on for the past three decades. (Toronto has something similar called Doors Open.) But this year, as is the case for all of us, they had to get a little creative with online events and other kinds of programming. Below is a short video that was created as part of the Open House Films collection. It is about the brutalist Glenkerry House in East London. Its architecture (by Ernő Goldfinger). Its ideals. And the people who call it home. Looking for more short urbanism films similar to this one? Look here.
Why do some buildings cost more to build than others? And how is it that some cities, as a whole, seem to build more cost effectively than others? Without getting into the specifics of how different markets work, I thought it would be valuable to outline some of the cost drivers that impact new developments. But keep in mind that this is by no means an exhaustive list. So, please feel free to add whatever I’ve missed to the comment section below.
Below-grade parking is hugely expensive. It’s almost always a loss leader. You lose money building it. That’s why parking ratios matter a great deal. If you’re building in the suburbs at 1 to 1 parking vs. 0.2 in the core, you’re simply building more of something that doesn’t make money. There’s also the question of whether you need to build a watertight below-grade, or if you can discharge any groundwater into the municipal infrastructure. Big cost difference.
Union vs. non-union construction labor.
Building stepbacks add cost and create additional complexity. To build more cost effectively, you really want repetition. But terraces are awesome. I get it.
Impact fees, development levies, and other government fees can vary widely across cities. As I’ve mentioned many times before on the blog, these line items can add up to 20-24% of the price of a new condominium here Toronto.
Time is expensive. One of the bigger line items in a development pro forma is financing interest charges. The longer things take, the more expensive the housing needs to be.
Markets are unique. Quebec, for example, has relatively low electricity rates. For this reason, it’s pretty common for homes in Quebec to use electric heating, which is usually pretty cost effective to install. According to this 2019 study, 68% of Ontario households rely on natural gas heating. In Quebec, the number is only 5%.
Depending on what you’re building next to, you may face additional costs. For example, if you’re building right up against a rail line, you may need to construct a “crash wall” in order to safeguard against possible derailments and you’ll probably need to up the STC rating on your windows because of the higher noise levels. These costs will not be insignificant.
In theory, land costs are supposed to be the residual claimant in a development pro forma. What that means is that you should back into your land value after calculating your projected revenue and considering all of your other development costs. If your revenue is lower, so too should be your land cost. Land cost as a percentage of total costs will, naturally, vary across different markets.
Here’s a weekly round up of links and articles that you may find interesting. The topics cover the sorts of things that we usually talk about on this blog.
The latest Mackay Laneway House update is now live on the Globizen Journal. The ground floor steel is complete, with framing currently underway. The post has some background on the challenges faced in order to get to this stage.
Brick comparison. Here’s a recent tweet of mine. I’m curious if any of you can tell the difference between these two brick finishes and if you have a clear preference. One of them is stamped concrete and the other is real brick (precast concrete with brick slips).
Pools as art. Apparently this is a trend right now, but it’s not necessarily a new one. Pablo Picasso accidentally created one when he “signed” the bottom of one in Spain back in the early 1960s. A pool would be fun right now. [FT paywall]
Alley house in King’s Cross by architect David Adjaye is currently on the market for £6.5 million. Lots of black. I love the mint green room with the exposed concrete ceiling. Oh, and there’s a pool.
Nightclubs are, not surprisingly, really struggling. Most have been closed since March. Unlike restaurants, you can’t really hack together a solution with outdoor dining, heat lamps and takeout. They’re predicated on people being proximate to each other. [Sorry, another FT paywall]
Monocle has just published a new book about “gentle living.” It’s a guide to “slowing down, enjoying more and being happy.” I’m trying to do more of this, or at least be more mindful about it. It doesn’t always/usually work. Perhaps I need this book.
“Decade of the home.” Opinion piece about the current desire for suburban over urban locations. If you’re a regular reader of this blog, you’ll know that I am steadfast in my belief that urban life is going to prove to be incredibly resilient on the other side of this.
McKinsey report about the impact that lockdown is having on digital adoption, e-commerce penetration, and the overall customer experience. You’ll need to enter some information in order to download the PDF, but it’s free.
This recent WSJ article, which is largely about single-family home landlords in the United States, has some interesting charts about mortgaged homes. The following chart shows the percentage of US homes that are worth less than their debt (i.e. they’re underwater). Following the financial crisis, the figure was about a quarter of all mortgaged US homes, and it stayed that way until almost 2012. This percentage surprised me.
The other chart that I’d like to share today shows the percentage of US mortgages in forbearance (i.e. people deferring payments). Not surprisingly, the percentage really increased in April, peaked in early summer, and has since started to seemingly decline. I say seemingly because who knows what this fall/winter will bring. As of September 6, the number was about 3.5 million home loans (or about 7.01%).
The point of the WSJ article is that there are a segment of people who are house-rich, but cash-poor. They have equity that they have built up, but maybe not a lot of cash to weather a storm. That could force some to sell. And it could be a boon for the rental-home landlords, who have been, in many cases, betting on the the suburban rental market since the last recession.
It has been well documented that Tokyo tends to build a lot of housing. And the argument goes that this has helped to maintain a certain level of housing affordability. The city is constantly building and rebuilding. It also has different views about housing. Now, we could, of course, debate how much of its relative affordability is a direct result of supply but, regardless, there seems to be a lot of it. In 2014, the city of Tokyo saw 142,417 housing starts, according to this recent FT article. This is compared to ~5,000 units across the Bay Area (2015 data), 83,657 units for the state of California, and 137,010 units for all of England.
If you’re wondering how Toronto is doing, here are the latest numbers:
# of units included in BPs issued (housing starts) for Toronto: 18,737 in 2019; 19,239 YTD in 2020 (Note: given multi year construction period, Toronto in the last few years has had about 45k units under construction at any one time)
This week it was announced that Social Capital Hedosophia II — a special purpose acquisition company associated with Chamath Palihapitiya — will merge with the real estate startup Opendoor, effectively taking the company public. Without going into all of the details, SPACs are kind of popular right now. They’re a way to take companies public without going through the traditional IPO process. And Chamath is clearly a believer in the approach, as he has gone ahead and reserved all of the symbols from “IPOA” to “IPOZ” on the New York Stock Exchange. $IPOB is what will be merging with Opendoor.
But SPACs are not the point of this post. The point is that I have written a lot about Opendoor over the years on this blog. (Here are those post.) And I’m pretty sure that, on a number of occasions, I have referred to it as one of if not the most promising consumer-facing real estate startup. So in my view this announcement is a pretty big deal for both the company and for the industry. As Chamath puts it in the below investment thesis, “real estate is the largest, undisrupted form of buying/selling in the US worth more than $1.6 trillion annually.” And it’s only a matter of time before that process moves online.
Big News: $IPOB is merging with @Opendoor and will take them public. More than $1B is being invested to help Opendoor build a legacy company.
This is my next big 10x idea (memo attached).
Tune into @SquawkCNBC today at 8am ET to hear more.
In it, they committed to becoming a “zero-emission platform” by 2040, with 100% of rides taking place in zero-emission vehicles, on public transit, or with micromobility. In the US, Canada, and Europe, they have gone even further and committed to 100% of rides taking place in an electric vehicle by 2030. And at the corporate level, they are similarly targeting net-zero emissions by 2030.
To achieve all of this, the company will be focusing on helping drivers transition to EVs by 2025, investing in their multimodal network, and trying to encourage less reliance on personal car ownership, among other things. They’ll also be incentivizing both drivers (+$1.50 per Green ride) and consumers (3x Uber Rewards points per Green ride, instead of 2x). And I think these will be key.
According to Uber, global carbon emissions fell by some 17% in the month of April as a result of lockdowns. But by June that decline had diminished to only 5%. What is obvious is that this was a short-term blip. “Normal” will return at some point. But once on-demand mobility is able to fully transition to electric vehicles, we’ll certainly be looking at a different kind of normal.
That is the argument that Joshua Gordon, who is an assistant professor in the Simon Fraser University School of Public Policy, recently made in this opinion piece in the Globe and Mail. In his view, there’s no evidence to suggest that housing supply can actually help housing affordability. It’s just something that developers throw around to “stymie action on the demand-side” and to help with their rezoning efforts. Really, the housing problem is due to intense demand from foreign buyers, investors, and from “high rental demand.”
Now, as many of you know, I am a developer, and not a professor. So you can take this post however you would like. But I do have a few thoughts.
One, I think it’s an oversimplification to argue that there have been no regulatory changes over the last decade that have meaningfully and negatively impacted the supply of new housing. To give you one example, this fall, development levies in Toronto will complete a phase-in that has seen them double over the last couple of years. Almost a quarter of the price of a new residential condominium now goes to pay government fees and taxes. This has an impact on supply, even if the “regulatory environment” hasn’t necessarily changed.
Two, I don’t buy the argument that, “surrounding cities have also seen rapid price appreciation and it’s easier to build there, so housing supply mustn’t be the problem.” Building outside of cities like Toronto and Vancouver isn’t necessarily easier. In fact, in some cases it can be more difficult if they’re not accustomed to more progressive urban infill-type developments.
Three, it’s important to keep in mind that we have a financing structure in place that biases the types of homes (specifically residential condominiums) that get built. This approach is designed to mitigate financial risk, but it also means that investors serve an important function in the delivery of new housing. I’m not saying that the system is perfect; but I am saying that things are maybe not as simple as they may seem.
Four, just because there are cities with lots of single-detached homes and relatively affordable housing, I don’t think we can safely assume that single-family land use policies have no impact on supply and pricing in cities like Toronto and Vancouver. In fact, I would argue the opposite. This probably goes to show you the importance of an elastic housing supply. Indeed, some of the most affordable housing markets are dominated by low-rise houses precisely because it is a typology that is quicker and cheaper to build than most urban infill housing.
Finally, I’m not sure why anyone would consider high rental demand and a strong labor market to be symptomatic of a problem. Isn’t that what you usually want out of cities? You want there to be an abundance of good jobs that pay people money so that they can, you know, have a life and consume things like housing. But maybe that’s just the way that I look at things. I am a developer after all.
The width of a standard parking space in Toronto is generally 2.6m. I say generally because it depends on a few other factors, such as whether it’s “obstructed” or whether it’s being accessed off a substandard drive aisle. But for the purposes of this post, let’s agree that the width of a standard Toronto parking space is 2.6m.
The reason I mention this is because Onexn Architects has recently completed a 2.6m wide cafe in Shenzhen called Joys. Pictured above, the 9 square meter space used to house an air conditioner repair shop.
Now, some of you are probably looking at the photos and thinking that this maybe isn’t such a big deal. But small spaces force you to be creative.
Look at the grey exterior paving that creates the impression that the cafe is spilling out onto the sidewalk. And look at how they used an illuminated 5 meter tall canopy to try and accentuate the space.
In some places and in cities, a retail space like this might easily become forgotten space. But here, it was something worth designing.
At a high level there are two components to the value of a house. There’s the value of the land and there’s the value of all the improvements. That is, the bricks, wood, and other stuff that form the actual house. When a media outlet runs a sensational headline about some shack in Toronto selling for, oh I don’t know, a million dollars, what it actually means is that the land in this particular area was just valued by somebody at this number. In fact, if the property is very clearly a “knock down” the improvements sitting on the land become a liability/cost rather than anything of value. Because whoever buys the land will almost certainly need to remove the improvements before they can build whatever it is they want to build.
This distinction between land and improvements is a valuable one for many reasons. Here’s one example. In cases where the improvements aren’t some shack, you may be faced with a scenario where a property can be valued in two different ways. You can value it based on the development potential of the underlying land or you can value it based on the income (either in-place or potential) that the improvements are generating, or could be generating with some hard work on your part. If the development value is greater than the value of the improvements, then there will be pressure to redevelop. Conversely, if the opposite is true, it is likely that not much will happen other than maybe capital expenditures applied to the existing building(s).
Of course, you could also run into a scenario where there’s little development potential and there’s zero ability to invest in the existing improvements, either because the market rents are too low in the area or because they’re capped and/or controlled in some way. In this scenario, it’s likely that not much will happen other than the normal and expected depreciation of the improvements. Maybe one day the development/investment math will work. But in the interim, you probably won’t be seeing any of those sensational media headlines.
