In yesterday's post I spoke about the practice of buying land, rezoning it for a higher-and-better use, and then selling it for a margin. It may not make economic sense to do this in the current market, but it remains an important step in the delivery of new homes and other forms of real assets. Before you can build, you need entitled land.

But as I have mentioned before, there are people who look down upon this practice. They view it as a form of land speculation; one that just drives up land prices and doesn't ultimately create anything of tangible value. They might even go so far as to say that, if this is what you do, then you aren't actually a real estate developer!

Of course, this would be false and it shows a lack of understanding of how development works. It's also insulting to developers who work hard in this part of the business.

Let's consider Wikipedia's definition of development:

Real estate development, or property development, is a business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction or housebuilding, although many developers also manage the construction process or engage in housebuilding.

The two most important points for this discussion are bolded. One, development includes a range of activities that might include the sale of land or parcels to others. And two, real estate development is distinct from construction or housebuilding. So the more accurate way to describe a developer who sells land and doesn't build is to call them a developer who isn't also a builder. It's that simple.

But more important than nomenclature is the fact that there's nothing inherently wrong with securing development approvals and then passing off the land to a builder to complete the rest. Somebody has to do it.

Entitling a site often takes years — sometimes even decades. It’s a process that creates value and serves as a prerequisite to building new homes. Whether it’s done by one company or two shouldn’t matter.

Cover photo by Alexander Tsang on Unsplash

This week, Urban Toronto reported a record number of residential development applications submitted in the City of Toronto over the last quarter. A total of 25,598 residential homes were proposed across 12 condominium projects, 16 rental projects, and two projects that also include an office component.

The total area was around 20 million square feet. The total number of buildings was 66. The median height was somewhere around 23 storeys (~86 meters), with the tallest being 67 storeys. And the average parking ratio was around 0.3 spaces per home. (The below chart seems to suggest that parking minimums were previously constraining the market.)

This is, according to UT, the highest number of proposed new homes in a single quarter over the last five years:

So, should this be taken as some sort of leading indicator that the market is set to rebound? My view is no. It certainly shows some degree of optimism for the future of our market, but there are lots of reasons why a developer might submit a development application in a down market.

Developers could be seeking more density as a way to reduce their land basis. If you bought a site for $25 million and you have approval to build 250,000 sf, your land basis is $100 per buildable square foot. If you can now build 350,000 sf, you've just reduced your land basis to $71 pbsf. That effectively means it's cheaper, which is good; but importantly, it now means have more space to absorb. So there's a trade off.

Another reason could be that developers are reworking their sites for purpose-built rental (from for-sale condominiums). The figures provided by Urban Toronto show that the majority of the applications were for rental projects. I suspect that this could be a big driver. Converting a project from condominium to rental isn't as simple as just flipping the legal tenure.

Lastly, I will say that developers could be pulling the trigger on new development applications simply because they need or want to do something. We all have sites, and we're programmed to move and get stuff done. Sitting around doesn't accomplish anything and it frankly doesn't feel good. Question now becomes: who will be in a position to be patient once they get their approvals?

It's hard to pinpoint exactly what drove this surge, but it should not be assumed that it will translate into more new housing in the short term. The real indicator is market absorption. Without it, development density has very little value.

Cover photo by Bennie Bates on Unsplash