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Many, or perhaps most, developers I know have a minimum project size that they will work on. That's why you'll hear people say, "No, that project is too small. I need at least X square feet or Y number of units." Given that smaller scale development such as laneway housing and "the missing middle" are so in vogue today, I thought I would discuss some of the reasons why scale matters.
But first, it's worth mentioning that "laneway suites," as we have structured them here in Toronto, are intended to be built by individual homeowners and not by developers. The lots can't be severed and most lots will yield less than 1,000 square feet. So this is a bit of a unique circumstance. As most of you know, I am a big supporter of this initiative.
When you get into larger developer-led projects, it's a different ball game. For one, it's hard to even find sites. And good luck if you need to deal with multiple owners as part of an assembly. Most landowners have pricing expectations that do not even remotely align with "missing middle" level densities.
But assuming you've been able to find land at a reasonable price, you still have to contend with the fact that projects have a lot of fixed costs, as well as diseconomies of scale. In other words, there are schedule, cost, and resourcing considerations that won't change no matter how big or small you go. It's still going to take this long and cost this much, and you're still going to need a set of humans to manage it through.
This can then create a situation where there's not enough margin for error. The project is simply too small to absorb any shocks, such as an unforeseen delay or an unforeseen groundwater concern that is now adding millions to your project budget. There's a lot of risk with development and it's prudent to have contingency room. That's harder to do with smaller projects.
The other problem developers run into with smaller projects is that the construction subtrades also tend to think of them as smaller projects. They have their own set of fixed costs and margins to worry about. So unless you happen to catch them with an opening in their schedule, you run the risk of them telling you they're too busy or them giving you a stinky price, which is just another way of them saying they don't want the job.
On top of all this, there's minimum project size inflation. If capital is not a constraint, there's a tendency to want to do bigger projects (see above). And because the cost of everything keeps going up, it's simultaneously getting harder and harder to make smaller projects pencil; unless you, maybe, go ultra luxury and ultra exclusive. But that's kind of the opposite goal of this whole "missing middle" movement, is it not?
Photo by JOHN TOWNER on Unsplash
Bloomberg recently came up with a new index to define the distribution of wealth across adults in the world. They're calling it your "net worth number" and the scale ranges from -2 to 11. Sadly, because the gap is so significant between the rich and the poor, it is based on a logarithmic or non-linear scale. Here's how they break it down:
Newly released data from the US Census Bureau has just revealed that the average household size is increasing for the first time in over 160 years. Put differently, the formation of new households has started to trail overall population growth. And that is causing the average number of people per household to increase.
In 1790, there were about 5.79 people per household in the United States. That number has been in decline pretty much since then, though there was a slight increase in the decade that began in 1850. Last year (2018), the number grew to 2.63 people per household (2.71 for owner occupied households and 2.48 for renter occupied households).
Here are two charts from Chris Fry's recent piece at the Pew Research Center:
So what is causing this?
Well, we know that US fertility rates aren't on the rise. In fact, they're generally viewed as hitting record lows. I say "generally" because there are a number of different ways to measure fertility. There's the general fertility rate, completed fertility, the total fertility rate, and others. But we are seeing some alignment here: fertility rates are down.
One probable explanation is the fact that more Americans are living multi-generationally. According to the Pew Research Center, 1 out of every 5 Americans lived in such a household as of 2016. Part of this may be a result of immigration. Asian and hispanic populations are more likely to live in a multi-generational household compared to white people.
Another demographic trend is the increase in people living in shared quarters, whether that might be with a roommate or someone else. This is interesting because it suggests that there's an affordability constraint. Are people being forced to "double up?" The current co-living trend is at least partially because of this.
These are all noteworthy trends because household formation is viewed as "the underlying driver of long-term demand for new housing." I am assuming that more people per household also means less square footage per person.
Graphs: Pew Research Center
Logarithms of negative numbers aren't a thing, and so, technically, if your liabilities exceed your assets (i.e. you have a negative net worth) you shouldn't appear on this index. But Bloomberg has added those people -- which could be students with debt, after all -- into the -2 category of their scale. These are people with a penny to their name.
Now, the number of adults in each bracket is purely an estimate. If you look at different sources, you will end up with different numbers. Bloomberg believes that there are 2,800 adult billionaires in the world (numbers 9 to 11); whereas Credit Suisse's estimate is about 1,600. (I wonder if it's easier to estimate the number of billionaires or the number of -2's.)
Still, it is eye-opening to see where most adults sit (at number 3) and how bottom heavy this index is.
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