Emily Badger's recent piece on "how 'developer' became such a dirty word" has been getting passed around within the industry over the last few days. I had a chuckle when I read this bit:

The notion that development is inherently bad, or that developers are inherently bad actors, seems to ignore that the communities residents want to protect from developers were once developed, too, and often by people who made money at it. (That is, unless you believe in “immaculate construction.”)

The article hits on a number of points that are absolutely true. There's generally a lack of understanding around the economics behind new housing. And the cost structures, today, are dramatically different compared to the suburban-industrial complex.

To provide one example, our cost consultant, Finnegan Marshall, recently shared with me a chart (dated April 2019) that broke down the various government fees that typically make up every new condo suite in Toronto.

What it showed is that between 20-24% of the price of a new condo is generally compromised of government fees and taxes that span all three levels of government. This includes everything from development charges (impact fees) to parkland dedication.

Similarly, the article quotes one developer from Montgomery County who estimates that the impact fees alone for his projects are usually upwards of $60,000 per housing unit. (This is pretty cheap compared to Toronto.)

I raise this as an example because development charges/impact fees have become an important source of revenue for cities across both Canada and the US. They often offset lower property taxes. (Whether this is appropriate is an entirely other debate.)

And so I find it paradoxical that many homeowners would like to simultaneously see lower property taxes, no new development, and more public services and infrastructure.

Photo by EJ Yao on Unsplash

On my way back from Philadelphia this past weekend I wrote a post called, The Philadelphia (real estate) story. It was about how opposite the market is in Philly compared to Toronto.

After writing that post and because of a discussion in the comment section, I started thinking about condo vs. rental apartment development across the US. Because unlike cities such as Toronto and Vancouver, it struck me that – outside of maybe New York and Miami – most U.S. cities are really not building a lot of for sale condos. And if you’re from Toronto or Vancouver, I bet that feels odd to you.

But what exactly is that number?

As of the first quarter of 2015, condos as a percentage of all new multifamily (apartment) construction in the US was only 5.5%. That’s a tiny number and is down from over 50% before the Great Recession, which means most cities in the US really are building mostly rental. Last year the US built 264,000 multifamily units across 11,000 buildings.

So why is that happening?

There appears to be a number of factors, according to a recent article in the Wall Street Journal.

There’s a supply side constraint:

Another obstacle cited by developers: construction loans. Matt Allen, chief operating officer of the Related Group, a developer based in Miami, said he can get a construction loan for roughly 75% of the cost of building an apartment complex. But lenders will cover only 50%, on average, of a condo complex’s cost because of the greater risk, he said.

There’s a demand side constraint:

As a result, the Federal Housing Administration, which backs mortgages made to low-wealth buyers, tightened its lending standards in a series of moves from 2008 to 2012. Under the new rules, in order for the FHA to insure mortgages in a given condo complex, at least half of the units must be owner-occupied and no more than half can be FHA-insured, among other requirements. For condo projects under development, at least 30% of units must be under contract for sale before the FHA will start backing mortgages there. Mortgage giants Fannie Mae and Freddie Mac tightened their standards as well.

And there are macroeconomic factors:

On the entry-level end, tepid job growth early in the recovery and the younger generation’s affinity for flexibility have fueled demand for rentals. Apartment rents are up nearly 16% since 2010, according to Reis Inc.

Notwithstanding the above, could this be a post-recession policy pendulum that has swung too far in one direction?

Emily Badger's recent piece on "how 'developer' became such a dirty word" has been getting passed around within the industry over the last few days. I had a chuckle when I read this bit:

The notion that development is inherently bad, or that developers are inherently bad actors, seems to ignore that the communities residents want to protect from developers were once developed, too, and often by people who made money at it. (That is, unless you believe in “immaculate construction.”)

The article hits on a number of points that are absolutely true. There's generally a lack of understanding around the economics behind new housing. And the cost structures, today, are dramatically different compared to the suburban-industrial complex.

To provide one example, our cost consultant, Finnegan Marshall, recently shared with me a chart (dated April 2019) that broke down the various government fees that typically make up every new condo suite in Toronto.

What it showed is that between 20-24% of the price of a new condo is generally compromised of government fees and taxes that span all three levels of government. This includes everything from development charges (impact fees) to parkland dedication.

Similarly, the article quotes one developer from Montgomery County who estimates that the impact fees alone for his projects are usually upwards of $60,000 per housing unit. (This is pretty cheap compared to Toronto.)

I raise this as an example because development charges/impact fees have become an important source of revenue for cities across both Canada and the US. They often offset lower property taxes. (Whether this is appropriate is an entirely other debate.)

And so I find it paradoxical that many homeowners would like to simultaneously see lower property taxes, no new development, and more public services and infrastructure.

Photo by EJ Yao on Unsplash

On my way back from Philadelphia this past weekend I wrote a post called, The Philadelphia (real estate) story. It was about how opposite the market is in Philly compared to Toronto.

After writing that post and because of a discussion in the comment section, I started thinking about condo vs. rental apartment development across the US. Because unlike cities such as Toronto and Vancouver, it struck me that – outside of maybe New York and Miami – most U.S. cities are really not building a lot of for sale condos. And if you’re from Toronto or Vancouver, I bet that feels odd to you.

But what exactly is that number?

As of the first quarter of 2015, condos as a percentage of all new multifamily (apartment) construction in the US was only 5.5%. That’s a tiny number and is down from over 50% before the Great Recession, which means most cities in the US really are building mostly rental. Last year the US built 264,000 multifamily units across 11,000 buildings.

So why is that happening?

There appears to be a number of factors, according to a recent article in the Wall Street Journal.

There’s a supply side constraint:

Another obstacle cited by developers: construction loans. Matt Allen, chief operating officer of the Related Group, a developer based in Miami, said he can get a construction loan for roughly 75% of the cost of building an apartment complex. But lenders will cover only 50%, on average, of a condo complex’s cost because of the greater risk, he said.

There’s a demand side constraint:

As a result, the Federal Housing Administration, which backs mortgages made to low-wealth buyers, tightened its lending standards in a series of moves from 2008 to 2012. Under the new rules, in order for the FHA to insure mortgages in a given condo complex, at least half of the units must be owner-occupied and no more than half can be FHA-insured, among other requirements. For condo projects under development, at least 30% of units must be under contract for sale before the FHA will start backing mortgages there. Mortgage giants Fannie Mae and Freddie Mac tightened their standards as well.

And there are macroeconomic factors:

On the entry-level end, tepid job growth early in the recovery and the younger generation’s affinity for flexibility have fueled demand for rentals. Apartment rents are up nearly 16% since 2010, according to Reis Inc.

Notwithstanding the above, could this be a post-recession policy pendulum that has swung too far in one direction?