January 27, 2023
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The inclusionary zoning paradox

What do you get when you have some of the most stringent affordable housing requirements in the United States? You might think that you get lots and lots of affordable housing, but that is not the case in San Francisco. Paradoxically, you still get some of the most expensive housing in the United States. And part of the reason for this — according to this inclusionary zoning review committee — is as follows:

Of all 40 scenarios, only four, all of them ownership-based, penciled out while satisfying the inclusionary program. Many of the projects that were designated as feasible, or came close to it, were smaller. That could be because larger structures use more expensive union labor and tend to contain advanced safety systems, like elevators that can operate during fires, said Strachan Forgan, principal at SCB, an architecture and design firm.

Among the 20 that were rental projects, only one was shown to be feasible, but it did not satisfy the city’s mandatory inclusionary policy. While not yet ready to make recommendations, the committee members accepted the findings as accurate. Multiple development experts who reviewed the analysis for The Chronicle said it appeared to be well done.

What is often missing from analyses about inclusionary zoning is how many projects it makes infeasible as a result of the requirement. It is not no-cost affordable housing. There are real costs and real impacts. But we like to tell ourselves that this isn’t the case because, at the end of the day, we’re not really that serious about building more housing and building more affordable housing. Too inconvenient. Too disruptive.

January 26, 2023
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Social media as zoning review board

This is an interesting article about the neighborhood-based social network, Nextdoor, and how it has become a tool for housing politics:

Overall, activists both for and against more housing regard Nextdoor as an increasingly influential and even critical tool in the fight, which conflicts with the platform’s marketing as a friendly, kinder social media. Rather than being the neighborhood bulletin board, Nextdoors around the country are looking more like the local zoning commission hearing.

Housing debate is no stranger to social media, but in the case of Nextdoor, the audience gets focused down to the scale of a neighborhood. And that clearly changes things.

For the full article, click here.

January 25, 2023
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Build whatever you want

As a gross generalization, there are probably two ways in which one can approach the building of a new building. The first is based on demand. You believe that there is demand for new housing or new office space or some other use, and so you decide to build new space in order to satisfy that exact demand.

Sometimes developers get it wrong and build too much space or the wrong kind of space, but the reason for building remains the same: you believe that there is a market waiting for you.

The second way to build is to completely disregard the market and just build whatever you feel like building because it is going to serve some other alleged purpose. And that is arguably what is happening in Saudi Arabia with The Line and what happened in places like North Korea with its “Hotel of Doom.”

I suppose that there is a chance that somebody in North Korea believed (or pretended to believe) that there was demand for a skyscraper that was 1,000 feet tall and housed 3,000 hotel rooms, but in reality, the real reason was that leadership thought it looked cool and that it would make for good propaganda.

To be fair, there was probably also some hope that it would spur demand and attract foreign investment. But it’s still a case of just building whatever you want.

January 24, 2023
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Development is slow

Whenever we submit a development application for a new project, we typically get a ton of inbounds from people who are looking to sell us something, partner in some way, or buy/rent space in the development. These can be positive connections and we have completed deals based on these sorts of inbounds.

But what is clear to me is that many people do not understand the development process and how long it takes to actually bring a new building to fruition. By the time a development application is filed, it is not uncommon for the developer to have already been working on the project for at least a year, and oftentimes longer in the case of more complicated projects.

And after the application is filed, it is not uncommon (at least in this city region) for the approvals process to take another few years. We have projects that are on year 7 and we still can’t put shovels in the ground. This is a bit of a unique situation, but even still, when it’s all said and done, a “typical” mid-rise or high-rise project could take 7-10 years from beginning to end. And sometimes longer.

A decade is a long time. So it’s no wonder that low-rise sprawling cities with permissive land-use policies tend to have more elastic housing supply. Quicker builds. And quicker approvals.

I say all this not because I expect everyone to understand how the development process works. I’m saying it because maybe if more people knew how long everything takes, they’d be more open to streamlining the delivery process and to encouraging the construction of more missing middle housing.

January 23, 2023
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What we value the most

One natural response to yesterday’s post about (housing) affordability vs. beauty is to think that I put forward a false dichotomy. Why can’t we have both? Why does it need to be a zero-sum game? Surely there’s a middle ground. Our cities should be both inclusive and beautiful. And of course, I don’t disagree.

What I was trying to do with the post was force a thought exercise. There are lots of things that we do as city builders which serve to increase the cost/price of housing. Going to a design review panel adds time/cost. Deciding to use that really nice material from Europe adds cost (and maybe time). And even adding a simple building stepback adds time/cost.

So in doing these things, we are in effect deciding that these are more important that just building cheaper and lowering the resulting rents/sales prices. We can certainly debate the right balance and how much should be spent on things like design and/or sustainability, but it doesn’t change the fact that, for better or for worse, we are saying, “it is important that we spend the money on this particular item.”

Now, there is also a common counter argument that none of this really matters, because developers will always price new housing at whatever the market will bear (i.e. the maximum possible price). But as I have tried to argue many times before on this blog, this is not always true. Pushing prices too far increases risk and slows absorption.

It also ignores the fact that in any given city there are going to be sites that are infeasible to develop with new housing. That is, when you look at all the costs and, yes, what the market will bear, the numbers just don’t work. And so what can happen when you reduce development costs is that you now unlock more sites for new housing, increasing overall supply.

None of this is to say that our cities shouldn’t be beautiful or that we shouldn’t strive for creative design solutions. This is exactly what we should be doing! Instead, this post (and yesterday’s) is simply a reminder that time and things do cost money, and that the decisions we make are rarely benign. In fact, they usually speak to what we value the most.

January 22, 2023
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Affordable vs. beautiful

If you had to pick one, would you say that it’s more important for new housing to be affordable or to be beautiful? Many of you are probably thinking that it should be both. And while it is true that good and thoughtful design doesn’t always need to be more expensive, nice things do often cost money. And sometimes, doing as little as humanly possible costs even more money.

Let’s consider two development scenarios. In scenario A, the developer has well-oiled machine that delivers relatively affordable, but identical rental housing all across the country. The buildings are functional and there’s virtually no vacancy, but the architecture is undoubtedly bland and it certainly doesn’t respond to its local context. Standardization and efficiency trumps all, including aesthetics.

In scenario B, the developer is similarly building new rental housing, but she instead invests heavily in custom designs. Each building is unique. And each building goes through a “design review panel”, after which extensive changes are made in order to ensure that the design is truly beautiful and that it responds to its local context. As a result, there is a real price premium to these homes.

These are perhaps extreme examples. Usually, the goal is some sort of balance between affordability and beauty. But I do think it speaks to some of the tensions that our industry faces. So if you had to choose one, which one would it be? What kind of new homes do our cities really need more of? And if your answer is scenario B, does it change after a certain premium?

January 20, 2023
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What is the correlation between urban density and housing affordability?

There’s lots of data out there to suggest that there is a correlation between urban density and housing unaffordability. Take Hong Kong. It is very dense, and also one of the most expensive housing markets in the world. But I think the real question is: does urban density actually cause housing unaffordability, or do the two simply tend to be correlated when you plot a country’s biggest cities?

One the one hand, there are factors that do drive up home prices when you build more densely. Building a reinforced-concrete high-rise is always going to be more expensive on a per square foot basis than building a wood-framed bungalow. But of course, the former also uses land a lot more efficiently, which is what you need to do in big and supply-constrained cities.

Michael Lewyn’s view (credit to Robert Wright for sending me the article) is that density is incorrectly used as a scapegoat to fight compact development. It does not actually cause higher rents. One counter example he gives is that of Manhattan, which went from 2.3 million people in 1910 to just under 1.7 million in 2020. In other words, it got less dense, while at the same time its rents grew exponentially.

Like most important city matters, the answer is complicated. But this is an interesting topic that I think we should spend more time on here.

January 19, 2023
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Schwarzenegger’s real estate career

I grew up watching Arnold Schwarzenegger movies, and I have always found him to be a super impressive guy. Bodybuilding, movies, and politics — he always seems to have the discipline and the confidence to accomplish his goals. But what some of you may not be aware of is that he actually had an illustrious real estate career before he became a movie star, and that this side hustle made him a millionaire before he ever starred in Conan.

Here’s an excerpt from a recent interview that he did with Tim Ferriss:

I did not rely on my movie career to make a living. That was my intention because I saw over the years the people that worked out in the gym and that I met in the acting classes, they were all very vulnerable because they didn’t have any money and they had to take anything that was offered to them because that was their living. I didn’t want to get into that situation. I felt like if I am smart with real estate and take my little money that I make in bodybuilding and in seminars and selling my courses through the mail orders, I could save up enough money to put down money for an apartment building.

I realized in the 70’s that the inflation rate was very high and therefore an investment like that is unbeatable. Buildings that I would buy for $500K within the year were $800K and I put only maybe $100K down, so you made 300% on your money. You couldn’t beat that. I quickly developed and traded up my buildings and bought more apartment buildings and office buildings on Main Street down in Santa Monica and so on. The investments were very good and it was just one of those magic decades.

Today you couldn’t do it in that same field. There’s another field in real estate where you can do it, but in this particular field I don’t think you will see those kind of jumps ever again. I benefited from that and I became a millionaire from my real estate investments. That was before my career took off in show business and acting, which was after Conan the Barbarian. In 1982 that movie came out. We shot it in 1981 and in ’82 it came out. From that point on my career took off because people saw that the movie was successful at the box office and then I signed a contract to do Conan number 2 and then that led to a contract for Terminator 1 and then Commando.

To listen to the interview, click here. Or for the full transcript, click here. It’s great.

January 18, 2023
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Multiple on land cost

Following yesterday’s post about the most expensive home in Brooklyn’s Dumbo, Jed Bryne of Oak City CRE fame shot me a note asking about the typical land multiple that developers need in Canada in order to make a project feasible. In other words, if your land cost is $X, what multiple on this would your top line number need to be in order to have a project? And he mentioned that in North Carolina, he often sees multiples in the range of 3-5x the land acquisition cost.

My initial response was that we don’t typically look at this metric. Many years ago, the rough rule of thumb for new condominiums here in Toronto used to be 10x the land price per buildable square foot. So if you were buying development land at $100 per buildable square foot (calculated as land price divided by the total gross floor area of the project), then you likely needed to sell your condominiums for somewhere around $1,000 per square foot.

On some level this can be a useful metric, because it allows you to quickly tell if a parcel of land is too expensive. And in some situations, it might allow you to compare sites/markets. If you have two different markets and land at the same $X price pbsf, but one requires a 10x multiple to be feasible and the other a 5x multiple, then it tells you something about the cost structures of these two markets. Construction costs probably won’t vary all that much (assuming similar builds), but project timelines, development charges, and many other things sure can.

But again, this isn’t a number that we typically care a great deal about.

There are a lot of variables in a pro forma and the “required” multiple can change overnight. Maybe it’s 10x today, but then development charges go up by 49% and now you need an even higher multiple in order to make the project feasible. So for us, the salient land number is the price per buildable square foot. What is the price per pound of development density? And the way you determine if you have a reasonable number is by doing a residual land value calculation.