Marty over at Laneway Housing Advisors published this listing in his newsletter today. It's for an entitled lot at 78 Gladstone Avenue in Toronto that has been approved (by way of a minor variance) for 6 units. Five units in the front where a house currently sits and one unit at the back in a standalone laneway suite. Though it also happens to be a corner lot and so the laneway suite isn't really "in the back".

It's listed for $2.5M. And according to the description, you can build about 5,500 square feet (4,200 sf in the front with a 1,300 sf laneway suite). This ask translates into a land cost that is just over $450 per buildable square foot, which is far more than what high-density land typically trades for in the city right now. This is usually the case for smaller low-rise sites.

To help put this figure into some kind of context, Bullpen Consulting published in their latest insights report that the average high-density land price in Q4-2021 was $135 per buildable square foot in Toronto (416 area code only). Of course, averages only tell you so much. To truly evaluate the feasibility of a site like this, you'd need to create your own pro forma and do your own residual land value calculation. The value of development land depends on what you can build on it.

If you were to do that, I suspect that you would discover at least two things: 1) you would find it challenging to make the numbers work, particularly for rental housing, and 2) you would quickly realize that this sort of "missing middle" housing isn't, in its current form, some undiscovered bastion of housing affordability.

Part of the problem is that these 6 units are not being delivered on an as-of-right basis. Somebody had to go out and entitle the land in order to secure these permissions. That means that time and money were spent and that the current owner is now rightly seeking a margin for their efforts. But if we collectively believe that this is an appropriate and sensible form of housing, then this should not be a necessary step in the whole process. Especially for only 6 units.

All of this being said, we know that Toronto and many other cities around the world are taking a hard look at this issue. And that there is a groundswell of interest in allowing more housing in our low-rise communities. It's going to be a battle -- just look at how Toronto's new garden suite policies have now been appealed by various resident's groups. But I'm certain that we'll get there, just like we are getting there with laneway housing and other types of ADUs.

The venture capital industry likes to talk about the importance of investing in ideas that are and turn out to be both non-consensus and successful. The idea here is that if an idea or opportunity is already consensus, then there's too much money flooding into that space and it becomes too difficult to make money. This is particularly true in venture capital where a select few companies usually end up generating most of the returns. This is a high risk business. Supposedly, even the best VCs end up having to write off a big portion of their deals.

But I don't think that this logic need only apply to venture capital. In real estate development, you are often faced with similar situations. For example, if an area is already consensus -- that is, it is already considered to be highly desirable -- then capital is going to naturally flow into it and land prices will be relatively high. These high land prices might be justified by the revenue side of your pro forma, or they might not be. I know many developers who avoid "core" locations simply because the land is too much and the margins are too little.

On the other hand, if an area is non-consensus -- that is, you're not sure people will want to rent or buy new space in the area -- then the land prices should reflect this. But here's the thing. What you're doing is trading, among other things, a lower land price for greater market risk. Because the non-consensus bet could turn out to be either successful or unsuccessful. People will either want to occupy space here or they won't. And remember, by definition, it being non-consensus means that most people believe they won't -- or at least not at the prices you might need in order to make the math work.

What all of this means is that if you're right about something that most people think is wrong, then you have the opportunity to do quite well. (Though I am not suggesting that you need to follow this framework in all situations.) This is on my mind right now because it feels to me that there are certain consensus opinions emerging as a result of this pandemic. For example, opinions around the demise of office space and the demise of downtown living. If you're a regular reader of this blog, you'll know that I think these death-of-the-city predictions are largely bullshit.

I could be wrong. Or I could be right.

Marty over at Laneway Housing Advisors published this listing in his newsletter today. It's for an entitled lot at 78 Gladstone Avenue in Toronto that has been approved (by way of a minor variance) for 6 units. Five units in the front where a house currently sits and one unit at the back in a standalone laneway suite. Though it also happens to be a corner lot and so the laneway suite isn't really "in the back".

It's listed for $2.5M. And according to the description, you can build about 5,500 square feet (4,200 sf in the front with a 1,300 sf laneway suite). This ask translates into a land cost that is just over $450 per buildable square foot, which is far more than what high-density land typically trades for in the city right now. This is usually the case for smaller low-rise sites.

To help put this figure into some kind of context, Bullpen Consulting published in their latest insights report that the average high-density land price in Q4-2021 was $135 per buildable square foot in Toronto (416 area code only). Of course, averages only tell you so much. To truly evaluate the feasibility of a site like this, you'd need to create your own pro forma and do your own residual land value calculation. The value of development land depends on what you can build on it.

If you were to do that, I suspect that you would discover at least two things: 1) you would find it challenging to make the numbers work, particularly for rental housing, and 2) you would quickly realize that this sort of "missing middle" housing isn't, in its current form, some undiscovered bastion of housing affordability.

Part of the problem is that these 6 units are not being delivered on an as-of-right basis. Somebody had to go out and entitle the land in order to secure these permissions. That means that time and money were spent and that the current owner is now rightly seeking a margin for their efforts. But if we collectively believe that this is an appropriate and sensible form of housing, then this should not be a necessary step in the whole process. Especially for only 6 units.

All of this being said, we know that Toronto and many other cities around the world are taking a hard look at this issue. And that there is a groundswell of interest in allowing more housing in our low-rise communities. It's going to be a battle -- just look at how Toronto's new garden suite policies have now been appealed by various resident's groups. But I'm certain that we'll get there, just like we are getting there with laneway housing and other types of ADUs.

The venture capital industry likes to talk about the importance of investing in ideas that are and turn out to be both non-consensus and successful. The idea here is that if an idea or opportunity is already consensus, then there's too much money flooding into that space and it becomes too difficult to make money. This is particularly true in venture capital where a select few companies usually end up generating most of the returns. This is a high risk business. Supposedly, even the best VCs end up having to write off a big portion of their deals.

But I don't think that this logic need only apply to venture capital. In real estate development, you are often faced with similar situations. For example, if an area is already consensus -- that is, it is already considered to be highly desirable -- then capital is going to naturally flow into it and land prices will be relatively high. These high land prices might be justified by the revenue side of your pro forma, or they might not be. I know many developers who avoid "core" locations simply because the land is too much and the margins are too little.

On the other hand, if an area is non-consensus -- that is, you're not sure people will want to rent or buy new space in the area -- then the land prices should reflect this. But here's the thing. What you're doing is trading, among other things, a lower land price for greater market risk. Because the non-consensus bet could turn out to be either successful or unsuccessful. People will either want to occupy space here or they won't. And remember, by definition, it being non-consensus means that most people believe they won't -- or at least not at the prices you might need in order to make the math work.

What all of this means is that if you're right about something that most people think is wrong, then you have the opportunity to do quite well. (Though I am not suggesting that you need to follow this framework in all situations.) This is on my mind right now because it feels to me that there are certain consensus opinions emerging as a result of this pandemic. For example, opinions around the demise of office space and the demise of downtown living. If you're a regular reader of this blog, you'll know that I think these death-of-the-city predictions are largely bullshit.

I could be wrong. Or I could be right.