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.
Good read, thanks.
Why would you back into land value? The value of the land is unchanged regardless of unit revenues and costs.
You back into land value when you’re trying to figure out how much it’s worth 😉