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.
Last month we spoke about how our current economic environment is going to negatively impact housing supply in the short-term. Now here’s some further evidence for this argument (via Bloomberg):
“As rates started ticking up, the faucet started to turn off,” says Jonathan Gertman, senior vice president for development at the NRP Group, one of the largest multifamily housing developers in the country. “The number of projects starting this year already has been cut significantly. Anything that started in 2022, in most of the country, comes online 18 to 24 months later. So by the middle of 2025, you see that new supply start to go down significantly.”
This is also being reflected in Federal Housing Administration (FHA) loan applications for new multi-family housing:
Or put another way: FHA multifamily loan applications are on track to total as much as $18 billion for FY 2023, compared with $29 billion for FY 2022, $51 billion for FY 2021 and $45 billion for FY 2020.
The above article is specifically talking about a looming affordable housing shortage. But these exact same headwinds are also impacting new market-rate housing. Of course, there’s always a lag when it comes to development. So it’ll likely be a few years until we really feel the impacts.
I opened Twitter today and one of the first tweets that I saw was about Austin passing a new resolution that allows 3 homes on every lot by-right; lowers the minimum lot size to 2,500 sf; and expedites planning approvals for triplexes and fourplexes. I then scrolled a bit further and found a tweet on how Vancouver is about to vote on a new motion that will allow 4-6 homes on every residential lot as-of-right. (The US typically uses the term “by-right”, whereas in Canada we use “as-of-right”.)
None of this is surprising. As many of you know, Toronto just did something similar by allowing fourplexes + a laneway or garden suite on every residential lot. But all of this is still noteworthy because it reinforces one simple fact: cities across North America are all starting to rethink their low-rise single-family neighborhoods. I know that many of you will say that fourplexes are not enough. We should be doing more. But I think this is an important step.
The single-family home hegemony is ending. We are now asking our cities to do more with the same amount of land.
There is a common narrative that, when it comes time to start a family and have kids, you should probably consider moving to the suburbs. Sure, you’ll have a painful commute, but you’ll get more space for your money, and maybe you’ll end up with better kids.
I don’t know, obviously not everyone agrees with this. I certainly don’t.
But it is something that commonly happens and, in many cities, it is now happening more often. Here is a map from the Centre for London showing the change in the proportion of households with at least one dependent child from 2001 to 2021:
A darker borough means that it lost households with at least one child. And a lighter borough means that it gained more kids. Why this is concerning is that it means the trendline is toward more, and not less, childless cities. Here’s an excerpt from a recent FT article:
A future with dwindling numbers of children is one many cities, including San Francisco, Seattle and Washington DC, are grappling with. In Hong Kong, for every adult over 65 there are, to put it crudely, 0.7 children, and in Tokyo it is even fewer (0.5).
Of course, this is not a new phenomenon. And we know the main drivers:
Randal Cremer is one of several planned primary school closures and mergers in inner London triggered by low birth rates, families moving away because of expensive childcare, Brexit, and parents re-evaluating their lives during the pandemic. The biggest factor, says Riley, is that “housing is just becoming unaffordable”. Philip Glanville, mayor of Hackney, calls it “the acute affordability crisis”.
So how do we start to solve this? Here are a few ideas that we recently talked about on the blog, but it is by no means an exhaustive list. In my opinion, this is a problematic trend that deserves a lot more attention. Because cities are at their best when they work for everyone — from the young to the old.
There was once a time — generally in the early 20th century — when some people used to order their new home from a catalogue.
You would pick the model you wanted and then all of the required materials, along with assembly instructions, would get mailed to you.
Mind you, this was never the most popular way to make a new home. According to Brian Potter, mail-order homes, even at their peak, represented less than 10% of all yearly housing starts in the US.
So arguably, it was never entirely successful as a model. Building a home is tough work, especially without fancy power tools.
Still, it’s interesting to think about its relative simplicity: “Here’s a bunch of raw building materials and some instructions. Go figure it out. It’s like an Ikea bookshelf, except it’s your entire house.”
Contrast this to what it takes to build new urban housing today. There is a litany of new barriers. It’s nowhere near as simple as ordering a kit of parts; so it’s no wonder housing is more expensive.
For more on “The Rise and Fall of the Mail-Order Home”, check out this recent post from Brian Potter’s Construction Physics newsletter.
Over the last few weeks, a number of people have told me that, when it comes to their current home, they have a number in mind. They more or less said, “I’ve already spoken with my husband/wife about it and, if someone were to offer us $X, we would sell and move immediately.”
What’s fascinating about this is that it’s a form of housing supply that generally doesn’t exist anywhere right now. Sure, the people I was speaking with would sell and move for a price, but how does something like this actually happen? How do buyers find them?
I suppose it could happen through word of mouth. I now know their prices and so if someone I know were interested in such homes, I could tell them. It is a low probability, but it’s still a possibility. Alternatively, someone (an agent or otherwise) might just show up on their doorstep and make them an offer. My dad actually sold his last home this way.
But again, how likely is this to happen? It doesn’t seem scalable. And this is why Zillow used to have something called a “Make Me Move” listing. Rather than a traditional listing, it was a listing for, “I don’t necessarily need to sell, but if you offered me $X, I would move.” For whatever reason, though, Zillow no longer offers this service. Presumably, it’s because it wasn’t working. Hmm.
Here’s how I’m thinking about it.
Today, most housing markets are binary. A home is either for sale or it’s not. Sometimes enterprising people manage to secure an “off-market home”, but generally speaking the market is binary. If a home isn’t for sale, most people don’t usually bother with it. Mostly because they can’t easily find it.
But market conventions aside, the conversations I’ve been having suggest that it’s actually more of a gradient. On the one side are people who really don’t want to sell. Maybe they’re never sellers. Let’s pretend that the home has been in their family for generations and so to convince them to sell you’d probably have to offer them an absurdly high price and that might not even do it.
On the other end of this gradient are people who are ready to sell today. In an extreme example, they might even need to sell by a certain date, or else. In this case, a below-market price could get them to sell. They are highly motivated and one sure-fire way to increase speed is to lower price.
But for everyone else in between, it is a big unknown gray area where price and desire to sell are, I would think, inversely correlated. As desire to sell increases, expectations around price probably need to come down until they reach a point where the market can bear it and a transaction will occur. This is my hypothesis at least.
But if it’s true, and there’s a big untapped gray area, then the housing market is a lot bigger than we think it is.
One of the most important considerations for livability in a multi-family building is the elevators. And as someone who has lived in a condominium building for the last 10 years, I know firsthand that it can be frustrating when they aren’t working properly. So this is obviously something that we pay a lot of attention to in our own projects.
The very general and crude rule of thumb is that you want at least 1 elevator for every 100 homes. For example, at Junction House, we have 151 suites and 2 elevators. So that means we have 1 elevator for every ~76 homes. At One Delisle, we have 371 suites and 4 elevators. So 1 for every ~93 homes. At the same time, I live in a building with 357 suites and 3 elevators (1 for every 119), and it works just fine.
But again, this is a very general rule of thumb. There are many other factors that can influence performance such as the number of levels in the building, the number of suites per floor, the number of below-grade parking levels, and so on. In my building, we have all above-grade parking, so I’m sure that impacts things.
If you have a building with a lot of below-grade parking, that will generally decrease performance all else being equal (i.e. increase weight times). Because now you have that many more stops, even if the number of homes remains constant above.
One common way to mitigate these impacts is to add a parking shuttle elevator. This is a dedicated elevator for just the parking levels, and it’s something that you’ll often see in office buildings. This helps service levels. It can also help the overall building efficiency (saleable area/gross construction area) by potentially eliminating the need for another elevator shaft in the above-grade levels.
But the trade-off is that you now need to transfer elevators, usually at the ground floor. Some people don’t mind this and think it helps with building security. If someone sneaks into the garage, there’s another obstacle to getting up into the residential floors. But it does mean that if you’re coming home with groceries in your hands, you need to take 2 elevators.
I’d be curious to hear from all of you what you think about parking shuttle elevators in residential buildings. Because I suspect that as building heights increase and as parking ratios continue to decline, parking shuttle elevators will likely become more common in cities like Toronto. Let me know in the comments below.
Disclaimer: I am not an elevator consultant! I am telling you just what I have learned over the years from speaking with actual professionals. So I recommend you speak with one before making any important elevator decisions on your own projects.
Yesterday evening I visited the future of Toronto’s neighborhoods. It is located at 367 Howland Avenue. And it takes the form of 10 homes on a lot that previously used to house only 1. Developed by Green Street Flats and designed by Craig Race Architecture, it is a near perfect example of what Toronto hopes to achieve with its new multiplex policies. As Craig put it last night, “we found the missing middle!”
Now to be fair, this is a double lot, measuring about 10m wide in total. And so this is twice the size of what the new policies now allow on a single lot — a fourplex plus a laneway suite or garden suite (4+1). But it is still generally consistent with what you could do today if you had two contiguous lots.
That said, this project predates the new multiplex policies, meaning it required a long list of zoning variances and it led to an inevitable fight with the neighbors. This small project required an 8-day contested hearing before it was granted approval! Start to finish, Howland took over 3 years.
That is ridiculous and so I think all of us should view the new multiplex policies as meaningful progress in our city. What was once contentious and a huge pain is now permissible as-of-right. Isn’t it funny how rules and perspectives change? “No, you can’t do this! Okay, now you can. Please do a lot of it.” So for the purposes of this post, let’s talk about Howland as if it were built on an as-of-right basis and you could do the same on your own lot if you were so inclined.
From a design perspective, the homes are organized as follows:
There’s a full-floor basement suite, a full-floor suite on the main level, two back-to-back two-storey upper suites, and then a laneway suite at the back. One reason for this configuration is that it means you never have to walk up more than one flight of stairs to get to your main living space. This was one of the design criteria and I think it works very well. Here’s an example of what this looks like (this is a suite #3):
For this particular site, the entrance to suite #4 is at the back of the fourplex and accessed via an adjacent laneway. But for the “inboard” fourplex, each suite is accessed via the main street. Once again, I think this all works very well. I just wonder if there could be an opportunity to shave additional costs by moving some of the circulation outside (kind of like this). I guess it would depend on the width of the lot.
Of course, the big question remains: Do projects of this scale actually make any money? Because if they don’t, then people aren’t going to continue building them. Though, I would say there are two ways to think about underwriting a project like this.
The first is from a 100% investment standpoint: build 5 homes, rent 5 homes, and then collect a reasonable risk-adjusted return. The second is a hybrid approach. Maybe it’s build 5 homes, rent 4 homes, and live in the other one. In this case, the math is likely a bit different. It could just be about subsidizing your living expenses as opposed to generating a commensurate return.
But in both cases, we know that these are very skinny projects. You need to be extra careful with your costs. And from what I gleaned last night, 6 or more suites is a better underwriting starting point (compared to 5). We also know that these projects only pencil with CMHC financing. Period. Full stop. If CMHC financing were to go away or meaningfully change, so to do these missing middle projects.
So as we look toward the future of housing in Toronto’s neighborhoods, we need to keep in mind that these projects happen very much on the margin (as does all development, but it’s an even thinner line here). Meaning it remains to be seen whether these will happen at scale across the city, which is now the hope. It’ll also be interesting to see if developers like Green Street don’t scale up over time. I suspect they will.
Congratulations to Green Street Flats, Craig Race Architecture, and the rest of the team on helping to pioneer this new housing typology. It’s a glimpse of the future and, judging by the turnout at last night’s open house, Toronto is ready for it.
This proposal by Dubbeldam Architecture + Design, called Incremental Density, is both an obvious step in the right direction and a problem. It is directionally right because it is exactly the kind of “gentle density” that we need and that many of us hope to see in our cities.
Four to six storeys, prototypically built on an as-of-right basis all across city, possibly by small-scale owner/developers. In fact, this approach is one of the things that Toronto’s new mayor, Olivia Chow, has been speaking about on her first day in the office:
Further, Chow said she wants to make it “easy and fast” for those who want to “build up” their single-family, often detached, homes to address what is known as the “missing middle” due to a history of “red tape” around zoning.
“What I’m saying is ‘build, build, build, build,’ up to four storeys if you want to have four units,” she said. “You can rent out three of them and some money right. Then you are creating more housing, and you’re earning some extra dollars,” she continued.
“So I want to unleash the power of the homeowner and say to them, ‘go build it,’ because we need housing right here now.”
Here’s the problem, though. I’m going to go out on a limb and assume that at least a few people will not want 6 storeys beside them and their backyard. I mean, I struggled with a 2.5 storey laneway house for many years. (11 to be exact.)
So how do we get from where we are today to what you see above? It’s going to take some finessing. Maybe it’s only in specific areas and on certain sites to start, or maybe we need to gradually increase the massing over time. Either way, I too am ready to “build, build, build, build.”
We have spoken recently about the reset taking place in the development industry right now. It is difficult to underwrite new projects.
But even before this current environment, it was challenging to make new rental housing pencil. Condominium projects almost always look more attractive (at least here in Toronto) and generally speaking, the spectrum for rental housing feasibility goes from “no, this doesn’t work” to “yeah, maybe this will work if we trend rents over a long enough time horizon.”
The problem with this is that we know more rental housing would be a positive thing for our cities. So how do we address this? Here are some common solutions that get thrown around:
Make condominium projects less attractive to build. If fewer developers want to build condominiums and if fewer investors want to buy them, then maybe new purpose-built rentals will become more enticing to build. On some level, this makes sense. It should create downward pressure on land values. But this doesn’t help rental housing supply if it isn’t feasible to begin with. And why limit overall housing supply? (Related post, here.)
Make rental housing projects less attractive to build. I know this sounds counterintuitive when I say it this way, but we do do this. Rent controls, to give just one example, generally make it harder to build new rental housing. Yes, it can help those who are already housed, but it can disincentivize proper building maintenance, it can lead to more people being over-housed, and it absolutely hurts new supply. So there are trade-offs.
Make rental housing projects more attractive to build.
I find this last one intriguing, and so here’s one specific idea that I have raised before. Though this time, I’m quoting Benjamin Tal of CIBC:
But, by far, the most pragmatic step to take in the immediate future would be to waive or defer HST payments on purpose-built rental projects from first occupancy to the sale of the building, while keeping the same valuation methodology as the current regime.
It’s the most realistic option since it’s relatively easy to implement, and Ottawa will have a willing partner in the Ontario government. Buried in page 84 of the recent Ontario budget was the following sentence, “we call on the federal government to come to the table on potential Goods and Services Tax/Harmonized Sales Tax (GST/HST) relief, including rebates, exemptions, zero-rating or deferrals”.
Such a move alone would shave close to $60K from the unit cost of that 400-unit project in Toronto, resulting in a meaningful reduction in rent, while at the same time unlocking tens of thousands of rental units across the country in short order — clearly a step in the right direction.
We should do this.
P.S. Sam, thanks for sharing Tal’s article with me.
Here’s some data (via Jeremy Withers) explaining that a large portion — about 61% — of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower — about 24%.
Now, the premise of Jeremy’s tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).
But is non-owner occupied really such a bad thing?
First of all, non-owner occupied implies that somebody else is renting the place. I don’t think that a significant chunk of these homes are being left vacant. So isn’t the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?
One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.
This point cannot be overstated.
The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.
So if it weren’t for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.
