Every single real estate development project I have worked on has generally gone something like this:

• Design the project.

• Budget the project.

• Realize: "Oh shit, this is way too expensive and will never work."

• Cut out some of the parking (a loss leader on most projects).

• Look for value engineering and other creative opportunities.

• Repeat the cycle until the project works (hopefully).

This is so typical that if I went through this process and everything just magically worked, I would be immediately suspicious. This can't be. We must be overlooking something! The expectation is that the project isn't going to work until we, as developers, figure out a way to make it work.

This is what we mean around here when we say that "development happens on the margin." Projects are sensitive to even slight changes in market conditions. If rents soften, costs go up, and/or interest rates move in the wrong direction, that could be the end.

Current market conditions have only heightened this dynamic. More than ever, developers need to be both creative problem-solvers and disciplined managers because there's very little elasticity on the revenue side to help cover up any mistakes (if the revenue side even exists at all!).

Development is hard. But working through challenges is a big part of what makes it so rewarding. On that happy note, enjoy the long weekend, everyone.

Cover photo by Shivendu Shukla on Unsplash

In the olden days here in Toronto, approved development land used to sell for a premium compared to unapproved land. This was true because approved land meant you could start construction much sooner. And since time has value, this was worth something.

Today, this is far less valuable to developers (if at all) because, in most cases, the market does not support new construction. So, the land may be approved, but what does one do with it?

Rather than speed, I would say that the most valuable feature right now is the ability to be patient. Developers need to be able to stay solvent long enough for the market to return. But this does not mean that there isn't a cost to permitting, approvals, and lengthy pre-construction periods.

Here is a recent paper (that I discovered via Thesis Driven) by economists Evan Soltas (Princeton) and Jonathan Gruber (MIT) that asks: "How Costly Is Permitting in Housing Development?" What they discovered in the Los Angeles market is the following:

• Developers have been willing to pay roughly 50% more for pre-approved development land (averaging about $48 per square foot).

• The permitting process in Los Angeles accounts for about 40% of the time required to develop and construct a new housing project.

• Approximately one-third of the gap between home prices and construction costs can be explained by permitting costs and delays.

This last point is an interesting one to focus on because it tells you how much regulatory fat there is in the system. In a perfectly free and efficient market, the market price of a home should, in theory, be roughly equal to the cost of the land, construction costs, and the developer's margin.

When you have a massive gap between the cost of the physical materials and labour required to build the home and the price of the home, it means that there are other costs being shouldered. The paper refers to some of these as "pure wait" (time) and "capitalized hassle" (dealing with bullshit).

This is an important way to think about the efficiency of housing markets, because minimizing the gap is a clear way to make housing more affordable.

Cover photo by Josh Miller on Unsplash

At the end of this month, the last tenants will vacate the Tour Montparnasse in Paris to make way for its renovation. Nouvelle AOM, a collective of architects formed to respond to the project's international design competition, first won the commission back in 2017. And initially, the plan was to complete the renovation in time for the Paris Olympics in 2024.

But that time came and went, as it does, and now construction is starting this year. Nouvelle AOM, which includes Franklin Azzi Architecture, ChartierDalix Architectes, and Hardel Le Bihan Architectes, is in charge of the tower. And Renzo Piano Building Workshop is in charge of redesigning the commercial podium at the tower's base.

We've spoken about the Tour Montparnasse many times over the years on the blog (here, here, and here). Parisians customarily hate it, and after visiting it in 2023, I can confirm that it's desperately in need of a renovation, and that the ground plane experience is abysmal at best. It is of that era where grandiose "slab-based planning" was going to elevate us beyond the pathologies of fine-grained urbanism.

Here's a Google image from atop the site's enormous podium:

What's interesting about the design from Renzo Piano is that it will reuse a lot of the structure that's already in place. The plan is to carefully open up the site, stitch it back together with the surrounding urban context, and then build up from there. Importantly, at the centre of the project will be a large, planted piazza that is intended to become a new civic space for the community.

The project renovations are expected to last until "at least 2030." So, we have several years until we'll know if it's an urban and financial success. But my prediction is that this project will positively transform how Parisians think about the Tour Montparnasse, and maybe how they think about tall buildings.

The tower itself will, of course, need to be beautiful. It's a highly visible object. There's only a trifecta of buildings and structures inside Paris proper that exceed 150 meters in height: the Eiffel Tower, Tour Montparnasse, and the Tour Triangle (Herzog & de Meuron), which is currently under construction and expected to finish this year. In this case, architecture is not irrelevant.

But it is the ground plane experience that will ultimately revitalize the area and demonstrate that tall buildings can be good urban neighbours, even in a sea of Haussmannian mid-rise buildings. I've said before that the reconfiguration of the podium is arguably the project's most crucial design move.

Get it right and you'll see what happens.

Cover photo by Luxigon via Nouvelle AOM

Aerial and street view photos from Google

Model photos from Renzo Piano Building Workshop