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The numerical impacts of inclusionary zoning

Our cost consultant, Finnegan Marshall, gave our team a presentation today on what’s happening with construction costs in Toronto and across Canada. I’ve said this before, but hard costs are no joke right now.

One of the areas that they focused on was the impact that inclusionary zoning is likely to have on development economics here in Toronto. To illustrate the point, a sample high-rise condominium pro forma was used. Think something in the 30-35 storey range.

Assuming a requirement of 10% affordable (the policy details are still TBD), there is going to be a real cost to development pro formas that will need to be somehow paid for.

One school of thought is that land prices will simply adjust downward. In this case, the landowner would be the one paying. I don’t think this will be the case (land prices tend to be sticky), but if they were to adjust downward, it would need to drop by $44 per square foot buildable to maintain the project’s margins in this example. (That’s $13.2 million on a 300,000 sf project.)

If, on the other hand, the price of the remaining market rate condominium suites were to increase to offset the cost of the affordable component, they would need to increase by $91 per square foot. This translates, in the above example, into a sticker price increase of approximately $60,000 per suite.

These numbers are, of course, not exact. That is not the point of this post. Every project is different. But hopefully it gives you an idea of some of the levers that will invariably need to be pulled when inclusionary zoning comes into force.

My sense is that this latter scenario is more likely to happen. I have yet to see land prices adjust downward in the face of rising costs. So all of this is likely to be bad for broad-based affordability, but good if you want to be bullish on market rate home prices.

1 Comment so far

  1. Could you do a piece on the changes in unit ceiling heights? It seems to me that older apartment buildings, like mine, have the minimum floor-to-ceiling heights of 8′ whereas many of the newer apartment buildings have 10′ or even 12′ floor to ceilings. The higher the ceiling, the fewer units can be put into the same height building, of course. A 300′ tall building with 8′ ceilings, assuming a 1′ slab, can have 33 floors (assuming lobbies and mechanical room floors are the same height), whereas with 10′ ceilings it can only have 27 floors, leaving off the fractional remainder in both cases. This extra height – which will never be “occupied” even by the tallest human beings – reduces the number of units, while increasing the cost per unit, hurting affordability. This is a major unaddressed issue, but I don’t know the statistics on this.

    Liked by 1 person

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