Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

Category: Development

  • The great balcony debate — revisited

    Over the years, I have written a few times about the great balcony debate. It’s a discussion that comes up time and time again as those of us in the building industry go through the process of designing new residential buildings. One the one hand there are the arguments that balconies don’t really get used all that much and that they are bad for the environment (thermal bridging through the slabs). And on the other hand there’s the argument that, regardless of whether or not they actually get used, they form an important part of the buying/renting decision. Usually the former is made by architects and engineers and the latter is made by sales and marketing teams.

    Back in 2016, I remarked that I was starting to see more Juliet balconies across Toronto (could have been some sort of bias at work — like when you’re shopping for a new car and then all you can see is that new car). Regardless, there are countless examples of architects and developers omitting balconies and finding creative ways to connect inside and out. But given that this pandemic has forced us to reconsider and reallocate how we use space in our cities, it’s probably worth revisiting the great balcony debate. Has COVID-19 changed how we view outdoor space? And if so, will it last?

    I’ve decided to start with a Twitter survey (see above tweet) and then either do a long-form article or a series of posts on the topic. If you have any thoughts that you would like to share (ideally before I write), please leave a comment below or on Twitter.

  • The urbanization of families

    Toronto has more people living in apartments than not. Looking at 2016 census data, the City of Toronto has about 1,112,930 occupied private dwellings and the breakdown between apartments (both lower and higher than 5 storeys) and grade-related housing is roughly 60/40. If you look at what’s been built more recently, the split is closer to 80/20. From 1996 to 2014, about 78% of all housing completions in the city were condominiums/apartments.

    So what is obvious to me is that the City of Toronto is becoming more dense, rather than less dense, and that family housing is destined to become more urban. As of 2011, there were 10,145 more families with children living in apartments/condominiums in the city compared to 15 years earlier. By comparison, the number of families with children living in low-rise housing remained more or less flat over this same time period.

    Of course, what this data doesn’t speak to is the number of people and families that may have opted to leave the City of Toronto for the suburbs — driving until they qualify for the kind of housing product that they would like to consume. The number of children living in higher density housing might be increasing within the city, but we probably shouldn’t ignore the pull toward the suburbs that still exists during family formation.

    Cities around the world are working to make their urban environments more suitable to families and young children. Here in Toronto we have something known as the Growing Up Guidelines. But the focus seems to be largely on design considerations — think playrooms and stroller-friendly foyers. That’s crucial, but it’s not everything. There are also very real economic realities to consider.

    The average price of remaining condo inventory in the Greater Toronto Area last quarter was nearly $1,100 psf. That puts a family-sized 1,000 sf suite at $1.1 million — and a lot more if you’re in a central neighborhood. The average would be closer to $1.5 million downtown. Obviously not all families can afford this. So there’s an affordability challenge. It’s one thing for the critics to say that developers should be building larger suites, but the market needs to be there.

    Another consideration is that of financing. Most developers rely on construction financing in order to build their projects. And in order to build a new condominium, there is typically a requirement to pre-sell a certain number of suites (revenue is the actual governor). This is generally a lot easier to do with smaller suites and with investor suites because these buyers tend to be more comfortable waiting out construction.

    Families, on the other hand, usually have a more immediate time horizon. It’s harder to forecast when the need will arise and it may not be financially viable to do that pre-emptively. And so I would argue that in addition to having an affordability challenge, we also have a financing structure in place that biases the type of homes that get built. There are, of course, advantages to this model. Pre-sales are a way for lenders to mitigate risk. It helps to ensure that the market doesn’t get ahead of itself. But there are side effects.

    Despite all this, we are seeing more families with children in higher density housing. Anecdotally, I see it happening in elevators with the number of strollers. This trend is destined to continue, but the winds are not entirely at the back of this shift.

  • Mackay Laneway House is now under construction

    Well, it only took 11 years.

    I still remember the first time I walked into Etobicoke Civic Centre and showed the lady at the counter my design for a laneway house. She didn’t know what a laneway house was and she couldn’t figure out where it fronted. “Wait, it’s behind the main house? It has no frontage. Where’s the street? Huh?” A lot has changed over the past decade, as I knew it would. All of the building permits are now in and Mackay Laneway House is under construction in Toronto’s Corso Italia neighborhood.

    Kilbarry Hill is overseeing the construction process. (Construction was supposed to start earlier this summer, but COVID-19 had something to say about that.) Regular updates will be posted on the Globizen blog and on the socials, with the goal of creating a kind of “how-to guide” for laneway suites. Expect detailed construction updates, a list of the individual trades that are being used, post-completion costing information, and probably a bunch more.

    The first order of business is the site servicing work, all of which has to be done via the existing house. No connections off the mains because, remember, these are intended to be secondary suites, similar to basement apartments. This raises the question of how best to submeter the utilities. Thankfully, the good folks over at Lanescape were kind enough to share how they have done it.

    Click here to subscribe to the Globizen Bulletin.

  • Building great mid-rise buildings

    Alex Bozikovic is right to praise Gairloch’s upcoming development in the Junction. It’s a beautiful project and it’s exciting to see so many architecturally significant projects in one neighborhood — either completed or to be completed. I’m thinking specifically of DUKE Condos (TAS and Quadrangle), our Junction House project (currently under construction), and now Gairloch’s.

    But Alex (as well as Jeremiah Shamess) is also right to point out some of the tensions and contradictions that are inherent to building at this scale. We want European-type mid-rise buildings all along our avenues, but we also want our housing to be more affordable. Problem is, mid-rise buildings are the most expensive way to build.

    The approvals process also tends to privilege urban design considerations over things like livability and construction costs. We talk about the shadow impacts that the project might have on the surrounding community, but not about how well the suites will layout when it’s all said and done — not to mention how expensive they will be to build.

    The cynics will tell you that it doesn’t matter what it costs to build because developers will always profit maximize (as is the case with every other for-profit business). But that’s an oversimplification that ignores a bunch of factors.

    One, it’s not as simple as just price. You also have to consider sales velocity. Price and sales velocity tend to be inversely correlated. In other words, as prices increase, sales velocity tends to naturally slow. You then begin to trade-off higher prices for increased time (which has a cost) and more market risk.

    As I’ve said many times before on the blog, development happens on the margin. Usually the way this plays out is that you create a development pro forma, you look at all of your project costs, and then you say, “oh shit.” You’re then stretching to figure out how you’re going to make the math work.

    Two, there are usually always parts of a city where development isn’t feasible (in some unfortunate cases, it might be the entire city). The potential revenues simply don’t support the costs. And as costs continue the rise, any areas that have not seen a corresponding increase in prices and/or rents will also become undevelopable.

    So there’s price, and there’s also a question of where great buildings are even possible. As many have already pointed out, it’s certainly not everywhere.

  • Urbanation releases Q2-2020 condo market survey results

    Urbanation released its Q2-2020 condo market survey results earlier this week. This data represents the first full quarter of sales to be entirely impacted by COVID-19. Not surprisingly, sales activity was way down. But pricing and construction starts actually increased. Here are some of the highlights:

    • New condo apartment sales totaled 1,385 units across the Greater Toronto Area. This represents an 85% year-over-year decline and the lowest sales activity since Q1-2009. Only six projects launched during this quarter.
    • Most of the projects that did launch were outside of the core of Toronto. So that skewed pricing downward. In the first quarter of 2020, the average selling price for new launches was $1,159 psf. In Q2, this number was $889 psf — again, reflecting a shift in geography.
    • But if you control for geography and compare year-over-year launch prices within the same submarkets, prices did in fact increase in Q2 compared to last year. At the same time, the average price for unsold units in Q2 increased by about 9% year-over-year to a record high of $1,087 psf. Unsold inventory also declined by about 19% from last year.
    • On the construction front, a total of 7,388 units started construction in Q2. This is a 45% increase from Q2-2019. A lot of this growth is coming from the suburbs, where presumably there are fewer supply constraints.
    • Given the resiliency that the market has been showing, Urbanation expects to see an increase in new project launches in Q3.

    Chart: Urbanation

  • Marking up drawings

    Apparently I’ve been living in the dark ages. The One Delisle project team just introduced me to Bluebeam Revu and, frankly, I’m not sure how we were marking up PDF drawings before this. It’s faster and more responsive than Adobe Acrobat. Everyone’s comments sit nicely in the cloud. And you can even take measurements off of the drawings. It kind of feels like a light and friendlier version of AutoCAD (which I haven’t used in over a decade). Marking up drawings is something that I do regularly as part my job. Sometimes I do that with trace paper (I did that for probably every suite at Junction House). But more often it has been with Adobe Acrobat. If you’re in the same boat and aren’t yet using Bluebeam, I would encourage you to check it out.

  • One Delisle approved at Community Council

    Back in March of this year, which seems like a very long time ago, I wrote about how One Delisle came to be and how City Planning at the City of Toronto were recommending approval of its development application. Well today I am thrilled to announce that, after two deferrals, these recommendations were adopted (with some amendments) by Toronto and East York Community Council. Though it will still need to go through City Council on July 28, 2020, this milestone is a big deal for the project. It’s now time for the next chapter in this story. So stay tuned. For those of you who are new to One Delisle and would like a bit of background, here is a good place to start.

  • What will our customers think? Condo vs. rental.

    Condo developers are merchant builders. They build a project and then move on. Because of this, there’s a belief that there’s little incentive to build for durability, in comparison to say purpose-built rental buildings where the developer might continue to own over an extended period of time. While it is true that putting on an operations hat will make you hyper-focused on everything from garbage collection to how you’re going to manage all of your suite keys, there are a few things to consider in this debate.

    One, as developers we certainly think and care a lot about our brand and our reputation, both with our customers and with Tarion (warranty program). We ask ourselves: “What will our customers think if we do this?” Irrespective of the tenure we’re building, we want our projects to be carefully considered. And in the case of condominium projects, we would like our customers to feel excited and comfortable about buying in one of our future projects. That’s the goal. This is no different than any other product that you might buy that doesn’t come along with some sort of ongoing subscription.

    Two, there’s often a spread between condominium and rental values. For example, let’s consider a brand new 550 square foot condominium in a central neighborhood of Toronto and let’s say it would cost you $1,300 psf to buy it today. (Obviously it could be more or it could be less depending on the area and the building.) Now let’s start with a rent and back into a value, using some basic assumptions.

    Unit Size (SF)550
    Monthly Rent$2,400
    Rent PSF – Monthly$4.36
    Rent PSF – Annual$52.36
    NOI Margin72%
    NOI$37.70
    Exit Cap3.75%
    Value PSF$1,005

    Here I’m assuming that same suite would rent for $2,400 per month. I’m converting that to an annual PSF rent. And then I’m assuming that if you were managing a whole building of these kinds of units, your operating costs might be somewhere around 28%. Crude back-of-the-napkin math to get to a Net Operating Income (psf). Finally, I’m capping this NOI at 3.75%. We can debate my assumptions and if this were in a development pro forma you might “trend” the rents. But I find this comparison helpful. Here we are getting to a value of around $1,005 per square foot. Less than our $1,300 psf above.

    The point is that the margins are tighter, which helps to explain why for a long time we saw very few purpose-built rentals being constructed in this city. So even though you might argue that the incentives are in place to build for durability, you do have to weigh that against the realities of what you can actually afford to build. Development is filled with all sorts of these tradeoffs. But if you and/or your investors really want a consistent yield, this strategy can work just fine. Personally, I’m a fan of the long-term approach.

    Three, rent control policies can have an impact both on the feasibility of new projects and on people’s ability to actually perform maintenance. If you have a scenario where your operating costs — everything from taxes to utilities — are rising faster than your allowable rent increases, then you’re in a bad situation and you have zero incentive or financial ability to actually invest in the building, despite being a long-term owner.

    Finally, there is nothing stopping a purpose-built rental developer from also being a merchant builder. i.e. Selling the entire rental building once it is done and it has been stabilized. So you could argue that we’re right back at my first point. Whether you’re selling to individual condominium owners or the entire building to one entity, you as the developer have to sit back and ask yourself: “What will our customer(s) think if we do this?”

  • Deferring development charges on a laneway suite

    Currently, if you’re building an Ancillary Secondary Dwelling Unit (such as a laneway suite) in the City of Toronto, you can defer the payment of any development charges for 20 years from the date that a building permit is issued for the unit. But really what this means is that, if you don’t do anything bad for 20 years (event of default), you won’t have to pay anything. The payable charge goes to $0 at the end of the term and the agreement goes away. Cool.

    So what are some of the bad things that you’re not supposed to do?

    Well the main thing is that you’re not allowed to create a new lot at any point during the 20-year deferral period. This is because the laneway suite policies are designed to encourage the creation of new rental housing and not new for sale housing. So you can’t sever off the back of your lot. The other thing you need to do is make sure that if you were to ever sell your property that the new owner(s) assumes these same obligations.

    This all makes sense.

    There is some fine print to consider. The payable development charge amount that the City enters into these agreements is the rate for single detached dwellings. Currently that figure is $76,830. This is more than double what you would have to pay if you, well, just paid the DCs for your ancillary secondary unit instead of deferring them. The reason for this is because, if you do do something bad such as sever your property, you’ve now no longer built an ancillary secondary unit. You’ve built a detached dwelling. Rates go up.

    Moral of the story: Don’t create a new lot. For more information on the program, click here.

    P.S. I’m not a lawyer. Please don’t take this post as any sort of legal advice. This post was also revised from its original version to correct a misunderstanding on my part.

  • Where developers won’t build even with $0 land

    Building on yesterday’s post about inclusionary zoning, below is a telling diagram from the Urban Land Institute showing which areas of Portland can support new development and which areas cannot. To create this map, ULI looked at achievable rents in each US census block to determine, quite simply, where rents will cover the cost of new development (all types of construction).

    However, in their models they are also assuming a land value of $0. And typically people want you to pay them money when you buy their land. So in all likelihood, this map is overstating the amount of blue — that being land where new development is feasible.

    But it does tell you something about developer margins. A lot of people seem to assume that the margins on new developments are so great that things like inclusionary zoning can simply be “absorbed” without impacting overall feasibility. The reality is that there are large swaths in most cities where development is never going to happen even if you were to start handing out free land.

    This map is also helpful at illustrating some of the impacts of IZ. If you assume that rents are the highest in the center of the city and that they fall off as you move outward, then the outer edge of the above blue area is going to be where development is only marginally feasible. And so any new cost imposed on development would naturally start to uniformly eat away at the blue feasible area — that is, until rents rise enough to offset it.

    Of course, this is a simplified mapping. Land usually costs money. Land values might also be highest in the center and fall off as you move outward, or there could be pockets of high-cost land. There may be more price elasticity in certain sub-markets compared to others. So the impacts of a new development cost may not play out as neatly as I outlined above.

    Regardless, there will be impacts, which is why I find this map telling even if it isn’t fully accurate or up to date. Maybe some of you will as well.