Brandon Donnelly

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.

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Category: Housing

  • How to properly complain about development charges

    In the wake of Bill 23, there has been a lot of discussion and concern around development charges and parkland dedication revenues. At a high level, the concern is that the proposed changes will reduce the amount of money that cities are able to collect from developers, and that this will exacerbate any existing funding shortfalls and possibly force municipalities to do things like raise property taxes. In the case of Toronto, the estimated figure is about $230 million of lost revenue per year.

    For all intents and purposes, this is objectively true. Bill 23 includes changes that will reduce the amount of revenue that cities are able to collect when new stuff is being built. Here is one such example:

    New sections 4.1, 4.2 and 4.3 provide, respectively, for exemptions from development charges for the creation of affordable residential units and attainable residential units, for non-profit housing developments and for inclusionary zoning residential units.

    This makes for great headline fodder: “Bill 23 is bad, it is going to reduce city revenues by $X million, your property taxes may need to go up, so you should be deeply upset about this.” Hmm. We should talk about this. I’m not going to suggest that Bill 23 is entirely perfect. But I do think it is important to consider two important facts when it comes to things like development charges.

    Firstly, the above exemption (to use just one example) is specifically related to affordable and attainable housing. It is not a reduction in DCs for the sake of reducing DCs. It is an attempt to recognize that we need more affordable/attainable housing and so maybe we should do things that make it easier and less costly to build it. And this brings me back to a point that I frequently make on this blog, which is that we can talk all we want about the need for more affordable housing, but at the end of the day it comes back to this: Who is going to pay for it? There is no such thing as a free lunch.

    The common rebuttal to exemptions like this is that developers will always profit maximize and price their housing at the most the market will bear. In other words, there is no evidence that developers will pass on any cost savings to the end consumer. But this is not entirely true. For developers, pricing a project is typically a cost-plus exercise: how much is this going to cost to build and what do I need in revenue in order to hit my required returns?

    When costs go down, it reduces what you need to make a project feasible. This in turn reduces developer risk, because there is always a very real question of absorption. The more you push pricing, the more you slow market absorption. So you might actually be better off selling for less, more quickly. An example of this line of thinking is when condominium developers choose to sell 100% of their inventory upfront as opposed to holding some back with the expectation that prices will increase in the future. Doing this means that you value certainty over profit maximization.

    Secondly, this is what development charges are for (taken from the City of Toronto):

    Development charges are fees collected from developers at the time a building permit to help pay for the cost of infrastructure required to provide municipal services to new development, such as roads, transit, water and sewer infrastructure, community centres and fire and police facilities.

    Put differently, development charges are based on the idea that growth should pay for growth. When you build something new you create additional servicing demands, and so developers should pay for whatever incremental needs their projects are creating. This is, of course, fair. However, it is not the intent that growth pays for existing services. i.e. Ones that would be required regardless of whether there was the presence of development.

    So in theory, if new development were to shut off entirely and if development charge revenue were to go to $0, there shouldn’t be any issues funding the existing services. And in theory, nobody should be complaining about this lost revenue, because there is actually no need for this additional revenue. There is no growth to fund and all existing services are being adequately funded by the residents who are already there and using them.

    Of course, not all city services are self sustaining. Public transit, for instance, typically requires subsidies. Ridership fares aren’t enough to pay for operations, and this shortfall got understandably a lot worse during the pandemic. But is this a growth-related problem or is it an existing-resident problem? I mean, technically the problem is not enough riders. So isn’t that kind of the opposite of growth related? More people would be a benefit right now.

    In any event, the point I am raising today is that there is a right way and a wrong way to complain about lost development charge revenue. The wrong way is thinking, “ah, this lost revenue is going to impact my quality of life and the existing city services that I enjoy. I may have to pay higher property taxes.” The relevant points for this particular discussion should not be that there’s an operating budget shortfall or that existing taxpayers maybe can’t afford to pay.

    The more valid way to complain would be to say, “hey, these reduced development charges are going to make it difficult to fund the growth-related upgrades needed to support new and more housing in my community. And we need more housing!” Because if the concern is not actually this second one, then the headlines are a great big red herring. We have a larger financial problem on our hands that we are not speaking about.

    Photo by Scott Webb on Unsplash

  • Learning from Kyoto’s machiya

    Japan has a building typology known as machiya. They are found throughout Japan, but my understanding is that they are most closely associated with downtown Kyoto. The typical machiya consists of a long wooden home with a narrow street frontage, and at least one interior courtyard garden.

    But perhaps the most interesting aspect of these townhouses is that, for the centuries that they have existed, they have always been mixed-used. The front of the building traditionally served as a kind of “shop space”, and the private residential spaces were tucked behind it (though this line between public and private was fairly fluid).

    And so for hundreds of years, the humble machiya became a flexible building typology that allowed shops, restaurants, and various other small businesses to flourish. This has changed over the years. People went off to work in offices and Western ideals around housing started to infiltrate Japan, among other reasons. But that doesn’t mean that there aren’t important lessons to be learned from Kyoto’s machiya.

    Here in Toronto, we remain deeply terrified of things like triplexes creeping into our single-family neighborhoods and we remain reticent to allow non-residential uses outside of their designated areas. Old habits die hard.

    But take a walk, cycle, or drive across one of our non-Avenue-designated arterial roads (which I did yesterday), and it’s hard not to imagine something much better. My mind immediately goes to an improved streetscape with (1) less on-street parking, (2) a lot more homes (as-of-right), and (3) flexible ground floor permissions that allow for crazy things like a “shop space”.

    And then, what kind of city might we have if we had fewer barriers in the way of infill housing and if we allowed for low-cost spaces that could flex up and down based on the needs of small entrepreneurs? I’m pretty sure it would be a better one. And of course, it’s been done before.

    Photo by Akira Deng on Unsplash

  • The effect of new market-rate housing construction on the low-income housing market

    Here is an interesting working paper that assesses the effect of new market-rate housing construction on the low-income housing market:

    Increasing supply is frequently proposed as a solution to rising housing costs. However, there is little evidence on how new market-rate construction—which is typically expensive—affects the market for lower quality housing in the short run. I begin by using address history data to identify 52,000 residents of new multifamily buildings in large cities, their previous address, the current residents of those addresses, and so on. This sequence quickly adds lower-income neighborhoods, suggesting that strong migratory connections link the low-income market to new construction. Next, I combine the address histories with a simulation model to estimate that building 100 new market-rate units leads 45-70 and 17-39 people to move out of below-median and bottom-quintile income tracts, respectively, with almost all of the effect occurring within five years. This suggests that new construction reduces demand and loosens the housing market in low and middle-income areas, even in the short run.

    This paper is not suggesting that everything will be fine so long as you build lots of new and expensive market-rate housing. But it is suggesting that a “filtering” of housing downward does oftentimes take place.

    When you build new supply, you tend to free up some existing supply, and that generally has the opposite effect of what we recently spoke about here, which is an instance of housing filtering upward.

  • Opendoor wants to be a transaction layer for homes

    We have spoken a lot over the years about Opendoor. And for a period of time, iBuying seemed like a very good idea. Zillow go into it. Redfin got into it. Everybody was iBuying. But then this year everybody started losing money, mostly due to algorithms that could not contend with falling prices.

    It turns out that being a market maker for homes can be a tough business because there is a lag between when you buy the home and when you hope to sell it. And so right now, few people want to be an iBuyer. Zillow no longer does it. Redfin no longer does it. And Opendoor’s stock is, at the time of writing this post, down 87.19% YTD.

    It is pretty easy to be pessimistic on this space, and that pessimism may be warranted. Though it may not be. My thinking has always been as follows. The process of buying and selling a home will eventually move online. The industry is ripe for change and there is no debating that. The real question is: how the hell do you do it? Everybody, including me in my late 20s, has tried.

    Two-sided marketplaces are tricky, because you always run into a chicken-and-egg problem. If you don’t have buyers, no seller is going to bother with your real estate marketplace. And if you don’t have sellers (i.e. homes), no buyer is going to bother with your real estate marketplace. So generally speaking, the way to build a marketplace is to start with one side, somehow get them on and using the platform, and then open it up to the other side.

    And this is exactly what iBuying hopes to do. Today it is largely a tool for sellers. It is a tool that says, “I will give you instant liquidity for your home so you don’t have to worry or care about who might actually buy it.” This is, of course, convenient for sellers, which is why people have been using it; but it is capital intensive and, as we have seen this year, it transfers some risk to the iBuyer.

    In the world of Opendoor, they call this a first-party (1P) transaction. It is them buying directly from sellers. But the larger vision is for Opendoor to become more of a transaction layer and instead just facilitate third-party (3P) transactions. This is currently being done through Opendoor Exclusives and the objective here is to match buyers and sellers directly, so that Opendoor can avoid taking on the risk of actually owning homes for a period of time.

    Will this work? I don’t really know. But I do think it is exciting and I do think it is the way to think about what Opendoor is ultimately trying to do with their business.

    Reminder: I am long $OPEN

  • What gentrification looks like

    One criticism that you will sometimes hear about development is that the construction of new housing can spur gentrification. The thinking, I think, is that when you create new market-rate housing, richer people will then move in and the area will begin (or continue) its ascent upwards.

    If on the other hand, one were to just stop developing new housing, then the neighborhood would remain stable and static and the fear of gentrification would simply go away. But the flaw in this line of thinking is that it assumes no infill development equals some sort of urban homeostasis.

    Cities are constantly changing. The reality is that what we are talking about, particularly in the case of low-rise single-family areas, is that we want the physical character of neighborhoods to remain more or less the same. But what happens on the inside is whatever.

    Here’s an example:

    https://twitter.com/LenniBug/status/1593645422370848777?s=20&t=goCZ5T0V7CX6VEclAdMnNg

    What you are seeing here are 4 electricity meters, meaning that at some point this structure housed 4 separate homes. But 3 of the 4 meters have now been removed, which presumably means that this structure has been converted (probably back) to a single-family home. So this is 4 homes being reduced to 1.

    I don’t know what this place looks like on the outside, but I’m going to guess that not much has changed in terms of its physical character. It probably looks about the same. But this is still gentrification; it is still an example of a neighborhood moving upmarket.

    The irony is that we tend to be generally okay with this change. We are okay with reducing the number of homes in a neighborhood so long as it happens in a largely inconspicuous and convenient way. But what we are (sometimes) not okay with is increasing the number of homes in a neighborhood. Apparently that creates too much pressure on the existing housing stock.

  • Families in multi-family buildings

    There is an ongoing debate in Toronto, and many other North American cities, about how to encourage more families to live in multi-family buildings. And here that has generally translated into (1) mandating a certain number of larger family-sized suites and (2) creating design guidelines to better equip both suites and buildings for families.

    But what we often ignore is the very real economic reality of buying a large family-sized suite. If you look at the latest Q3-2022 data from Urbanation, the average price of a new condominium in the entire Greater Toronto Area right now is about $1,427 psf.

    So if assume that a good family-sized suite is, oh I don’t know, 1,200 sf, the average price would be about $1.7mm, before you add in any parking (if necessary).

    If this is too big and you can get away with something more similar to a post-war bungalow — let’s say 900 sf — you’re still at nearly $1.3mm, again before any parking. At these sorts of prices, you have a few options, particularly if you’re willing to sprawl outward. And I think it’s important to recognize this.

    The other hurdle remains our industry’s requirement to pre-sell suites in order to obtain financing and start construction. What this effectively means is that you need buyers who can say to themselves, “I’m probably going to need a family-sized suite for the 1.4 kids I may have in 4-5 years.” This isn’t for everyone.

    So if we are truly serious about encouraging more families in multi-family buildings (which is an obviously good idea), I think it can’t just be viewed as a design problem and/or the result of greedy developers who just want to profit maximize by building smaller suites. We need to be looking at both the cost structure behind these homes and new ways to finance them.

  • Bill 23 is more homes built faster

    The government of Ontario is trying to encourage the construction of a lot of new housing over the next 10 years. More specifically, the plan is for 1.5 million new homes from now until 2033. To have a chance at hitting this target, the province has rightly recognized that some things will need to change around here and so they’ve been busy coming up with legislative changes such as Bill 23 (the More Homes Built Faster Act, 2022).

    The Bill is really long, so I personally appreciate it when the act name itself does a good job of summarizing what it’s all about: more homes, built faster. But if you’d like to read the entire thing, you can do that over here. I also attended a breakfast this morning — put on by Goodmans — that provided a great summary of the key points. I took all of my notes on Twitter through a live stream, so if you’d like something more digestible, click here.

    At a very high level, I would say that there are some obviously good changes in the Bill and some other things that will need refinement, such as the proposed changes around third-party appeals. The devil is in the details. And that was actually one of the key takeaways from the breakfast: This government is not afraid of being bold, moving quickly, and then working iteratively with stakeholders. It’s a less typical approach for government, but done is better than perfect, right?

  • Distributed Japanese capsules

    Japanese Metabolism was a post-war architectural movement that was based around the idea that cities and buildings should be able to grow and transform just like other organisms. There are other elements to the movement, but this was at its core. And perhaps the best example of the Metabolism movement was the Nakagin Capsule Tower in Tokyo (pictured above).

    Constructed between 1970 and 1972, the 13-storey tower consisted of two structural elements and 140 self-contained / prefabricated capsules that were hung off the building’s cores.

    The original intent was that these capsules could be removed and replaced over time and that the building could evolve just like any other organism might. But that never really happened and, coming on the end, only about 30 of the 140 capsules were apparently still being lived in, with the others being used for various purposes, such as storage, or not at all.

    And so after a whole lot of debate, the building was disassembled earlier this year, which isn’t quite the same as a straight demolition. The pods were removed and then the core came down.

    But a number of the pods have been salvaged. The architect’s family took 4 pods and created an Airbnb retreat a few hours outside of Tokyo. And a longtime resident in the building decided to quit his job, acquire 23 of the capsules, and dedicate his life to now getting these things into museums and other commercial settings.

    I don’t feel like it’s my place to comment on whether disassembling the tower was a good idea or not. But I do think there’s something poetic about an icon of Metabolism having its capsules removed, restored, and then sprinkled around various places. Wasn’t that always kind of the intent?

    Photo by Roman Davydko on Unsplash

  • Two multi-family booms

    Here is an interesting chart, from Mike Moffat, that looks at housing completions — both ownership and rental — in the province of Ontario. The way to read this chart is that, for each date, you are looking at completions for the previous 10 years. (It says 12, but that seems to be a mistake.) For example, Q4-1964, which is the start of this chart, equals all homes built between Q1-1955 and Q4-1964.

    Three things will probably immediately stand out to you:

    1. We built a lot of multi-family housing in the 1960s and 1970s. In fact, we built more than we’re building right now and that wasn’t just the case in Toronto and Ontario. In Canada as a whole, the majority of building permits (60%) issued between 1962 and 1973 were for multi-family buildings. More specifically though, this was a rental apartment boom, as opposed to a condominium boom.
    2. We then said: “Nah, let’s not build so many apartments anymore. Let’s go back to building more single-family houses.”
    3. And that’s what we did — by a fairly wide margin — until the early 2000s when the next great multi-family boom started to take hold. This time, though, it developed into a condominium boom.

    Both multi-family booms have mirrored periods of overall economic expansion. But you also need to look at what government was doing. In the 1960s and 1970s we made it attractive to build rental housing (whereas today it’s a very challenging asset class to underwrite). And then more recently, we decided that much of our growth should happen in existing built-up urban areas. That generally means more multi.

    But multi-family is a fairly broad term. Are we talking about 4-storey walk-ups or are we talking about 40-storey tall buildings? For those of you who are able to look through this chart to what’s happening in the market, you’ll know that we are far more effective at the latter. We have a lot of work to do when it comes to the in-between housing scales.

  • Sorry, you can’t build that kind of housing here — downtown or the distant suburbs

    Between 2016 and 2021, and according to this recent report from Statistics Canada, the population of the Toronto CMA (Census Metropolitan Area) grew by over 274k people:

    The population of the Montréal CMA grew by nearly 188k people:

    And the population of the Vancouver CMA grew by over 179k people:

    These are the three largest CMAs in the country and they, not surprisingly, also have the three largest “downtowns.” As of the spring of 2021, the most populated downtowns were as follows: Toronto (275,931 people), Vancouver (121,932 people), Montréal (109,509), Ottawa (67,169 people), and Edmonton (55,387).

    In this exercise, Statistics Canada breaks down each CMA into 5 categories, which are generally based on two things: (1) your typical monocentric city model (downtown in the middle with a declining gradient of surrounding sprawl) and (2) how long it takes to commute — by car during non-rush hours — from downtown to the surrounding areas.

    The good news in all of this is that Canada’s downtowns seem to be doing just fine. Broadly speaking, they are growing at a faster rate than their respective CMAs and growing at 2x the rate of the previous census cycle. Halifax’s downtown grew at 26.1% from 2016 to 2021 and Calgary grew at 21%, to give two more examples. So I think you can safely ignore what you may have heard about a pandemic exodus. Those people are now returning from the country after realizing that there aren’t any pretentious coffee shops and expensive butcher shops.

    But something else is also going on in Canada’s largest urban centers. The concurrent trend is continued urban sprawl. The biggest downtowns are growing quickly, but so are the distant suburbs (30 minutes or more from downtown). And they are growing at a faster rate than everything in between. This is not entirely surprising, but it is obviously concerning from a climate change perspective and because it suggests that people are being forced to do the old “drive until you qualify” thing.

    These two phenomena are the most pronounced in the Toronto CMA. If you scroll back up to the top of this post, you’ll see that downtown absorbed a decent chunk of the population growth (about 14%), particularly considering its small footprint. But then if you look at the distant suburbs (the mustard color), you’ll see that it’s where 72% of new entrants went!

    The question I like to ask with all of this is, “are people choosing to move to the distant suburbs because that’s the housing and location that they truly want, or are people choosing it because it’s all they can afford?” There is an argument out there that sprawl is a natural market outcome and that we shouldn’t be forcing people to live in higher-density housing. And I am certainly sympathetic to giving people as much choice as possible.

    But how much choice are we really giving people in our biggest cities? We have figured out how to intensify our downtowns through mid- and high-rise development. And evidenced by the growth rates, many people are enjoying this form of housing and the kind of urban lifestyle that comes along with it. But if it happens to not work for you, our current solution is, “either be rich so you can remain close to downtown or go for a drive.”

    What is clear from this latest census data is that we haven’t yet figured out the in-between. The missing middle is still missing. And that’s because we have clear mechanisms in place to more or less ensure this is the case: (1) We restrict meaningful growth from taking place in our single-family neighbourhoods and (2) we have made a habit out of shifting some of the incumbent tax burden to new entrants through things like development charges.

    Overall, it’s a devilishly clever system where two things happen: “Sorry, you can’t build that kind of housing here. Build it somewhere else. By the way, I’d like to keep my property taxes as low as possible, so not only do I not what you close to me, but I’d also like you to help pay for some things. Cool?” This is the arrangement that we are seeing playing out in these charts. It can be easy to ignore, but it’s there.

    Charts: Statistics Canada