I was having round 1 of (Canadian) Thanksgiving dinner with my father on Saturday night and we inevitably started talking about the Blue Jays.
As I write this post, the Blue Jays are down 2-0 in the ALDS, but by the time you read this email in your inbox (assuming you subscribe), game 3 will have already happened. Either the Jays will be on their way to a great comeback or the season will be over. I am remaining fiercely optimistic.
But in addition to the regular sports chatter, we also started talking about the possible economic benefits of the Blue Jays winning and being in the playoffs for the first time in decades.
We assumed that 50,000 people buying tickets, heading downtown, and spending money on food, alcohol, parking, transit, taxis, and hotels, would be a great benefit to the local economy. And immediately I thought to myself: this would make a great blog post.
But it turns out that the local benefits of professional sports aren’t so clear cut.
There’s been a lot of research on public funding for sports stadiums and a lot of the research suggests that it may not be in the best interest of taxpayers. A considerable amount of the spending does not get retained by the local economy and instead gets siphoned off to the respective league and to concentrated private interests.
But Toronto already has the SkyDome, I mean, Rogers Centre. It’s a sunk cost. So looking forward, there must be some incremental benefits.
Well, a recent article in the Chicago Tribune asked this same question in light of the Cubs heading to the playoffs. And it turns out that it’s also not so clear cut.
Part of the problem is something called the “substitution effect.” When a sports team starts winning (and people jump on the bandwagon), money is simply redirected away from other forms of entertainment towards sports entertainment. In other words, instead of going to see a movie or going to the museum, people go to the game.
In fact, a 2001 study by Dennis Coates and Brad R. Humphreys called, “The Economic Consequences of Professional Sports Strikes and Lockouts”, found that during sports stoppages, 37 metro areas with professional sports franchises actually experienced no negative financial impact. And in many cases they performed better.
Interesting.
Having said all this, there’s a powerful sense of solidarity that takes over a city when everyone is rooting for the same team to win. And that’s hard to attach a value to.
In most big cities around the world, there is a pressing need for more affordable housing. We know that inclusive cities make for better cities. But from San Francisco to Hong Kong, you always hear people talking about how expensive housing is.
So why is this such a difficult problem to solve?
Part of the problem, I think, is that many people don’t understand the economics behind building a new building. Oftentimes I hear people say that because developers make so much money, they should just build more affordable housing. Done. Simple.
But things are not that simple.
To illustrate my point, let’s walk through the thought process for developing a new rental apartment building.
In its simplest form, developers are concerned with: revenue - costs = profit. And since many of the costs associated with building a new building just are what they are, it all starts with revenue, which in our case would be rents.
To build a new rental tower in Toronto, your rents typically need to be at least in the high $2′s per square foot per month. Otherwise the economics don’t work. But to make the math simple, let’s say you need $3 per square foot in rent. That means a 1,000 sf apartment would rent for $3,000 per month.
I live in a condominium in the St. Lawrence Market neighborhood of Toronto. And recently, I’ve had a number of “empty nesters” ask me if they could come check out my condo and get a feel for what it’s like to live in a downtown neighborhood like the Market.
And they’re asking because they’re contemplating something that has become quite common for folks whose kids have left the roost. They’re considering, for a number of reasons, selling their suburban home and right-sizing to a downtown condominium.
Whether it’s because they want to free themselves of cutting grass and shoveling snow, they don’t like stairs anymore, they want to be able to lock the door and head to Florida for the winter, or they want an amenity rich urban lifestyle, the uptake on condos has been significant both in Toronto and other cities around the world.
Indeed, the condo market has become great at serving “both ends” of the market: first time buyers/young professionals and empty nesters. But what I wonder is if we might be at a tipping point with respect to the middle segment of the market: families.
The average new construction low-rise home in the Greater Toronto Area is roughly $650,000 right now. But this would be more for houses in the center of the city. There, you’re probably looking at anywhere from $650,000 to $1 million for a “typical” 3 bedroom Toronto house.
By comparison, a new condominium might average somewhere between $550 and $600 per square foot in the city. So for a 3 bedroom condo at, say, 1,300 square feet, you’d be looking at somewhere between $715,000 and $780,000. Add in parking and you’re somewhere between the mid $700,000’s and just over $800,000.