Over the weekend, we spoke about how the "GTA condo market is in a state of economic lockdown." What this generally means is that the math isn't making sense to build new condominiums. And so the market is necessarily pausing.
We spoke about what this will likely mean for supply in the coming years, but I think it's also interesting to talk about this in the context of something else: unfunded inclusionary zoning.
As a reminder, inclusionary zoning is, in its most basic form, a requirement to build a certain amount of affordable housing as part of new housing developments. And what I mean by "unfunded" is that there are no subsidies or other incentives being provided to the project.
This means that the cost of providing this housing -- and there is an additional cost -- needs to be shouldered by the project, which ultimately means the market-rate units need to pay for it.
Which is why if you look at most policy studies, you'll often find recognition that, because of this economic reality, IZ tends to work better in areas where home prices/rents are higher. And again, that's because the market-rate homes need to shoulder the cost.
We have questioned, many times, on this blog, whether this is the right approach to delivering affordable housing, but I think this question becomes even more critical in our current market environment.
If the entire market is, for the most part, in a state of economic lockdown, should we really be layering on additional costs and making it broadly more difficult to build any sort of new housing? It seems counterintuitive.
For more on this topic, check out this recent Sightline article by Dan Bertolet.
Today was a fantastic day for the development manic meter. This was finally installed at Junction House:
If you happen to find yourself in the area, check it out at 2720 Dundas Street West. And if you'd like to know a little bit about how this placemaking art came to be, click here.
Following yesterday's post about the most expensive home in Brooklyn's Dumbo, Jed Bryne of Oak City CRE fame shot me a note asking about the typical land multiple that developers need in Canada in order to make a project feasible. In other words, if your land cost is $X, what multiple on this would your top line number need to be in order to have a project? And he mentioned that in North Carolina, he often sees multiples in the range of 3-5x the land acquisition cost.
My initial response was that we don't typically look at this metric. Many years ago, the rough rule of thumb for new condominiums here in Toronto used to be 10x the land price per buildable square foot. So if you were buying development land at $100 per buildable square foot (calculated as land price divided by the total gross floor area of the project), then you likely needed to sell your condominiums for somewhere around $1,000 per square foot.
On some level this can be a useful metric, because it allows you to quickly tell if a parcel of land is too expensive. And in some situations, it might allow you to compare sites/markets. If you have two different markets and land at the same $X price pbsf, but one requires a 10x multiple to be feasible and the other a 5x multiple, then it tells you something about the cost structures of these two markets. Construction costs probably won't vary all that much (assuming similar builds), but project timelines, development charges, and many other things sure can.
But again, this isn't a number that we typically care a great deal about.
There are a lot of variables in a pro forma and the "required" multiple can change overnight. Maybe it's 10x today, but then development charges go up by 49% and now you need an even higher multiple in order to make the project feasible. So for us, the salient land number is the price per buildable square foot. What is the price per pound of development density? And the way you determine if you have a reasonable number is by doing a residual land value calculation.