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“Missing middle” units represented 1% of all residential units proposed between 2014 and 2018

As many of you already know, the City of Toronto is currently studying ways to increase the supply of “missing middle” type housing in our low-rise neighborhoods. This week they published a new report called, “Expanding Housing Options in Neighbourhoods.” The Globe and Mail has already written about it over here, but I would like to share some numbers from the report to help put things into context. All of these are verbatim from the City’s report. I’m just arranging them neatly into blocks.

Development applications active between 2014 and 2018 were reviewed to identify those representing “missing middle” housing typologies, i.e. more than 1 proposed residential unit and 3-6 storeys. 144 “missing middle” applications out of 508 total active applications in Neighbourhoods were identified during this time frame.

The missing middle applications represent 5,090 units approved or built in Neighbourhoods. The vast majority of these applications—94% of applications and 89% of proposed residential units—are 4 storeys or less, consistent with the general height limits for Neighbourhoods in the Official Plan.

Of the 5,090 proposed residential units, almost half were part of large site redevelopment projects, often townhouse subdivisions on former school sites in inner suburban areas of
Scarborough, Etobicoke, and North York. The remaining half of proposed missing middle type units were in lowrise intensification and infill of existing housing, with activity clustered primarily within the former City of Toronto.

The approximately 5,000 missing middle type units in development applications represent
approximately 1% of the 400,000 total proposed residential units in projects active between 2014 and 2018
, while the approximately 2,500 net new units added through as-of-right building permits from 2011 to 2018 represent only 0.6% of the total proposed residential units.

One percent. I guess that’s why it’s called the missing middle.

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The new normal, whatever that is

Back in February, I shared a presentation by Benedict Evans about the macro and strategic trends that have been playing out in the tech industry. (Of course, the potential impacts go well beyond tech.) Well that was February and lot has happened since then. So he has updated a bunch of his slides and it is now called, “Tech and the new normal.” We know that things have changed, but we don’t know what things will really look like when this is all over — and which changes will have durability. Benedict doesn’t necessarily prognosticate in his presentation, but he does provide valuable historical context and some great data. So there are a lot of conclusions that you might be able to draw from it on your own. It’s also my kind of slide deck. Not a lot of text. Lots of graphics/diagrams. And really only one key takeaway per slide. Here you are.

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Where developers won’t build even with $0 land

Building on yesterday’s post about inclusionary zoning, below is a telling diagram from the Urban Land Institute showing which areas of Portland can support new development and which areas cannot. To create this map, ULI looked at achievable rents in each US census block to determine, quite simply, where rents will cover the cost of new development (all types of construction).

However, in their models they are also assuming a land value of $0. And typically people want you to pay them money when you buy their land. So in all likelihood, this map is overstating the amount of blue — that being land where new development is feasible.

But it does tell you something about developer margins. A lot of people seem to assume that the margins on new developments are so great that things like inclusionary zoning can simply be “absorbed” without impacting overall feasibility. The reality is that there are large swaths in most cities where development is never going to happen even if you were to start handing out free land.

This map is also helpful at illustrating some of the impacts of IZ. If you assume that rents are the highest in the center of the city and that they fall off as you move outward, then the outer edge of the above blue area is going to be where development is only marginally feasible. And so any new cost imposed on development would naturally start to uniformly eat away at the blue feasible area — that is, until rents rise enough to offset it.

Of course, this is a simplified mapping. Land usually costs money. Land values might also be highest in the center and fall off as you move outward, or there could be pockets of high-cost land. There may be more price elasticity in certain sub-markets compared to others. So the impacts of a new development cost may not play out as neatly as I outlined above.

Regardless, there will be impacts, which is why I find this map telling even if it isn’t fully accurate or up to date. Maybe some of you will as well.

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What would you like to know about real estate development? (Also, inclusionary zoning)

I asked this question on Twitter this morning because I am planning to write more development-related posts. It’s a topic that seems to be of interest to a lot of people. One question that I received was about the kind of profit margins that Toronto developers have been making over the past few decades. More specifically: How much have they increased? My response was that they haven’t increased. In fact, if anything, they’ve been compressing as a result of rising/additional costs. (I’ve touched on this before in posts like this one about cost-plus pricing.) I think a lot of developers are actually wondering how much elasticity is left in the market to continue absorbing these cost increases.

Follow-up question to my response: Why then does this report by Steve Pomeroy claim that developers could still make a 15% margin even if they earmarked 30-40% of their units as affordable? Well, this was news to me so I went through the report and committed to responding on this blog. To be more precise, the report finds that there’s room in as-of-right developments to dedicate 10% affordable in medium-cost areas and 25% affordable in high-cost areas. For rezoned sites, the numbers are 30% affordable in high-cost areas and 15% affordable in medium-cost areas. These are a potentially dangerous set of takeaways for a few reasons.

Very little mid-rise and high-rise development happens as-of-right in the City of Toronto. I don’t know what the exact percentage is, but I suspect it’s low. It would be very difficult to buy land if you were valuing it on this basis. And when you are valuing it — that is, running a development pro forma — it’s not enough to pull averages from a cost guide and run high-level numbers. You can start there, but ultimately you’re going to have to get more granular. Are you factoring the hundreds of thousands of dollars (more for bigger projects) that the City will charge you to occupy any public right-of-ways? What about your public contribution monies? This has historically been hard to estimate because the math that is used is akin to a secret recipe.

In this particular report, they assume a 100-unit building with 88,750 square feet of gross floor area. Since GFA typically factors some allowable deductions, the gross construction area for the project is going to be greater. Let’s assume it’s 5% more — so about 93,190 square feet. This is how your construction manager will think about and do take-offs for the project. In the report, they peg total construction costs at $23,208,480. That works out to just shy of $250 per square foot (costs divided by above grade GCA). You cannot build a reinforced concrete residential building with below-grade parking for this number in Toronto. In today’s market, and at this small of a scale, you might be looking at $350 to 400 psf.

On the low end of this range, that would mean your costs have just gone up by $9.4 million — which just so happens to be the expected developer/builder profit in this model. Except now you’re underwater and you won’t be able to finance and build your project. It’s probably time to look at your revenues and see if you can increase your projected rents at all. This is what I was getting at with cost-plus pricing. I would also add that I/we typically shy away from projects of this scale. There isn’t a lot of margin for error. One or two surprises and you might be cooked. So with or without inclusionary zoning, these can be challenging projects that many developers won’t even look at.

My point with all of this is twofold: development pro formas are delicate and margins aren’t as generous and locked-in as most people seem to think. More often than not we end up passing on sites because we simply can’t make the numbers work. The land is just too expensive. Development happens on the margin. So talking about developers “absorbing” the costs of inclusionary zoning is perhaps the wrong way to frame this discussion. A more appropriate set of questions might be: Who is going to pay for the cost of inclusionary zoning? Are landowners going to suddenly drop their prices? Is the City going to reduce their development charges/impact fees? Or will developers wait until market prices and rents increase so that they can cover these new costs? This latter scenario is how it has worked so far.

If you have other questions about development that you would like me to take a stab at answering, please leave a comment below or tweet at me.

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Project Profile: Writer’s Shed

Sometimes when you’re a writer, you just really need a quiet shed in which to work. This “writer’s shed” by Matt Gibson Architecture + Design out of Australia is remarkably simple — it’s 10 square meters — but also exceedingly cool. All photos by Shannon McGrath.

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The many forces shaping our cities

Richard Florida has a three-part essay over on Bloomberg CityLab about the forces that are currently shaping American cities. In part three, he argues that this pandemic will likely accelerate many of the trends that were already underway — families will continue to like the suburbs and young people and businesses will continue to cluster in dominant global cities. At the same time, he argues that we will see a kind of “urban reset.” A window of opportunity where we just might be able to rebuild our cities to be more affordable, more inclusive, and more productive. Could this be the moment where we commit to transforming our suburbs into more walkable mixed-use communities? Could this crisis actually strengthen our cities, as I have argued before on the blog? At this point in time, the only thing I really know for sure is that most of our predictions will be wrong.

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The problem of Erie Terrace (and why Craven Road has one really long fence)

On the east side of Toronto is a north-south street called Craven Road. It runs from Queen Street in the south to Danforth Avenue in the north. It’s an odd street in that there are only homes on one side of it — the east side. The west side is fenced off. No garages. No laneway suites. Just one long fence separating Craven Road from the backyards belonging to the homes on neighboring Ashdale Avenue. Given that Craven Road is a real city street with things like services and a name, you might be wondering, as I did, why this condition exits. Surely the people on Ashdale Avenue would be better off if they took proper advantage of their “through lots.”

What gives?

Turns out there is a reason for this and it dates back to the beginning of the 20th century. Before 1923, Craven Road was actually called Erie Terrace. It began its life as a smaller laneway outside of the city and was initially home to a “shacktown.” The street was a kind of linear slum, housing new immigrants and providing a place for people to cheaply throw up whatever they could afford to build.

For a variety of reasons, Erie Terrace eventually became a problem and the City decided that it would be best to widen the street from its varying 18 foot width to the then standard 33 feet. The widening work was authorized in 1911. But as is always the case, there were a few problems. Who would pay for it? The City would pay for a bit of it, but the expectation was that the residents along Erie Terrace would also chip in. And since Erie Terrace was technically a one-sided street, they were in effect being asked to pay double what was typical at the time. Usually the burden would get split across both sides of the street.

There was also a socioeconomic question. The residents on Ashdale Avenue were thought to be wealthier than those on Erie Terrace and so they supposedly wanted the squalor out of their backyards. The City also had concerns that residents along Ashdale would use this double frontage to do wild and crazy things, such as build garages, sheds, and backyard cottages. Clearly there would be no room for such oddities after the widening.

I’m not sure which problem proved to be the thorniest, but ultimately a solution was found. Erie Terrace would be widened, but the City would retain a small sliver of land on the west side of it and erect a wooden fence in perpetuity. This would keep both groups separate and ensure that the folks on Ashdale — who had contributed some of their land, but not any money — didn’t get use of the road. And it has remained this way for over a century.

If you ask me, it seems silly to keep this fence up. This is an ideal street to infill with laneway suites and other missing middle-type housing. But I’m sure I’m not the first person to stumble upon this east end anachronism. For a more detailed history lesson on the Craven Road fence, click here.

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Integral House sells for $18 million

One of the most famous and important houses in Toronto, and in North America, just sold. It was reported last week in the Globe and Mail in an article called, “Integral House finds buyer amid wave of high-end Toronto deals.”

Designed by Shim-Sutcliffe Architects, the 18,000 square foot Integral House was commissioned by mathematician and musician James Stewart. It was completed in 2009 at a cost that seems to vary widely depending on where I look online. But it did just sell for $18 million.

For photos and drawings of the house, click here. The section is really interesting because of the way in which the house is built into the side of a ravine. The house is 5 storeys, but only 2 of these levels would be visible from the street.

The article goes on to mention a bunch of other high-end transactions that were consummated during this pandemic, ranging from a $13 million home in Forest Hill to a $9 million condo in Yorkville. These are all positive signs for this pandemic market.

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Reallocating urban space

Back in March and April, the belief seemed to be that cities had lost their allure. Density had proven to be a bad thing and we were now all going to live in the country and spend our days working via Zoom. But as our cities begin to slowly reopen, something else seems to be taking place. In fact, the great irony of this pandemic is that it will probably strengthen our cities in the medium and long-term.

We’re pedestrianizing our streets. (Above is a photo of King William Street in Hamilton that I took last week. London is similarly looking at pedestrianizing parts of Soho.) We’re encouraging restaurants to expand their patio footprints. We’re adding bicycle lanes faster than we ever have before here in Toronto. And we’re finally becoming a little less uptight about the public consumption of alcohol. This is among many other things.

The reopening of our cities isn’t going to happen overnight. Some, if not all, will probably stumble as we find our way. But as unfortunate as this period of time is for most of us, it is forcing us to reconsider how life is lived in our cities and how we allocate urban space. Some of this will be temporary, but I suspect that a great deal of it will actually stick.

We’ll then wonder, “why didn’t we do this sooner?”

Photo: King William Street, Hamilton

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Three-legged stool

A good friend of mine, who is also in the industry, once described real estate development as a three-legged stool. In order to develop, you really need three things: expertise, capital, and a site (i.e. land). This probably seems fairly obvious. I mean, you need to know what you’re doing, you need the money to do it, and then you actually need a place to build. But as simple and as obvious as this may seem, there are barriers to entry. Real estate is a capital intensive industry. And despite what the general public seems to believe about the pockets of developers, most are raising outside capital.

The thing about this three-legged stool is that you don’t necessarily need to have all of the legs at once, and in many cases you won’t. If you have two of them in place, it’s usually feasible to figure out and get the last one. For example, if you know what you’re doing (expertise) and you have a site (owned or “under control”), then presumably you have a development pro forma that makes some economic sense. And with those things, you generally should be able to find the capital that you need to execute on your project.

I’ve also met people who have managed to build this three-legged stool starting with only one leg. They didn’t have much development experience or capital connections, but they learned enough to figure out how to value development land. They then went out and started knocking on doors, eventually putting together a development assembly. They then took this assembly to developers (people with expertise) and the stool eventually got built. Starting with only one leg just means you’re going to have to work harder to fill in the others.

A one or two-legged stool won’t stay upright on its own. But hustle will hold it up temporarily while you figure out a creative way to attach the missing leg(s).

Photo by John Boatile on Unsplash