Every year my friends at Urban Capital publish an annual magazine called Site. And every year it contains some great articles about the real estate development industry across Canada. (Some of you may also remember that I’ve written a few articles for it in previous years.)
Well this year’s issue is out and there are a few featured articles that I’d like to draw your attention to:
- What happens when 175 (mostly) women get together to design a condominium? Link
- How (not) to build a public park Link
- Why have Toronto condos become so %@$#$! expensive? Link
This last one is a topic that we have talked about many times before on the blog. But here, UC has provided a quantitative comparison between a project they did in 2005 and a project that they’re doing today in 2020. Here’s what they found:
Average condo prices in the City of Toronto are up about 150%. But…
Land costs are up 160%.
Soft costs are up 118%.
Construction and related costs are up 91%.
Financing costs are up 93%.
Government fees, charges, and taxes are up 413%.
And development charges (a subset of the above) are up 3,244%!
At the same time, the profit margin over costs is down about 45%.
(As a point of comparison, CPI only increased by about 26.5% during this same time period.)
The point here is that condos are so %@$#$! expensive largely because of cost-plus pricing. Government fee increases are also outpacing every other cost bucket.
If you’re developing new housing in Toronto, you have no choice but to accept these rising costs. You have to pay development charges and you have to pay them when you’re told, even if that means swallowing some new massive increase.
So by necessity, end prices get continually pushed as a way to try and absorb these costs. You figure out what your costs are going to be and then you price accordingly. But of course, you also have to ask yourself: Can people actually afford this kind of pricing and can this neighborhood support it?
Sometimes the answer is yes, which is why development continues. But sometimes the answer is no. In this case, the next step is simple: you don’t build.
It is even worse than that in some NIMBY cities like NYC, where virtually any project will face legal challenges now, and large projects multimillion dollar lawsuits. As you know, those lawsuits don’t put a pause on interest costs, which continue to rack up while a project is on legal “hold.” This almost happened infamously on the Amazon HQ2 project in Queens, but Amazon bailed before it could get that far. It’s happened on an LSRD 4-tower/3 developer consortium project in downtown Manhattan (still in court: 2+ years), Industry City in Brooklyn (cancelled), Waterfront project in Flushing, Queens (in court), and too many smaller projects to mention.
The NIMBYs have become much more successful in electing anti-development politicians who will value existing constituents over potential incoming ones who can’t vote, and in class-hiring of lawyers to fight any kind of development.
Developers do often prevail still (Inwood, Manhattan is an example) but it can take years and add time value and lawyer fees in the 10s of millions, or even more for the very largest, and always challenged, projects.
Pingback: Two perplexing development narratives |