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.
Toronto’s chief planner Gregg Lintern (who you can follow over here on Twitter) was recently in the Toronto Star talking about the city’s plans to allow more multi-unit dwellings in our low-rise single-family neighborhoods.
I was careful to say “more” because they are already permissible in some areas. The challenge is that they’re not happening at any sort of meaningful scale, which is an obvious signal that some key ingredients are still missing.
Or perhaps there are too many required ingredients. For example, right now the zoning by-law requires one car parking space for every dwelling in a multi-unit building. This is, of course, dumb and the requirement should be completely eliminated.
Changes like this, as well as many others, are long overdue. Not just in Toronto, but in many other cities. And it is partially what I was getting at when I wrote about laneway housing this past weekend and hinted at the need for other solutions to increase housing supply.
So when you have a few minutes, I would encourage you to complete the city’s survey on expanding permissions for multiplexes across the city. I just did it and voted to bring on the multiplexes.
Eric Jaffe, of Sidewalk Labs, recently wrote about an interesting research paper — from the Journal of the American Planning Association — that looked at the developer response to an inclusionary zoning policy change in London. The full research paper can be found over here.
The change was an expansion to existing mandatory IZ policies. Between 2005 and 2008, each of the 33 local authorities in Greater London reduced the minimum threshold for new housing projects. Previously it only applied to new developments with 15 or more units, but it was reduced to projects with 10 or more units. In other words, projects with a total of 10-14 units were now subject to IZ, whereas they were previously exempt.
These feel like small unit counts, but I guess it speaks to the scale of development happening in London. You generally need pretty high prices to make these kinds of boutique projects pencil out. By comparison, the IZ threshold here in Toronto is expected to be 100 or more units.
In any event, here’s what happened in London:
Before the policy change developers were effectively building up to the 14 unit mark (to avoid IZ). Following that new supply dropped off. After the change, developers simply adjusted their project sizes and built more projects with less than 10 units.
Interestingly enough, the researchers found that there was generally no net loss of new homes during the study period (2004 to 2014); developers simply built more projects with lower unit counts. But more importantly, the team discovered that the policy change only kind of worked.
The increase in affordable housing was modest. The researchers uncovered a net increase of two affordable units per borough, per year, among projects within the 10-14 unit band. That’s something. But London is a big place.
Of course, this is a response to a particular kind of policy change in a particular kind of market. Development is a local business and it’s oftentimes hard to generalize. But it does speak to the fact that there are nuances, complexities, and market distortions to consider when it comes to land use policies.
We talk a lot on this blog about laneway housing and ADUs, including, of course, the one that Globizen built earlier this year. But beyond being exceedingly cool (see above), what has this policy change meant at the macro level? To what extent is it actually helping housing supply? Let’s consider Toronto.
As a reminder, “laneway suites” became permissible in the former/old City of Toronto in 2018. The policies where then expanded to the entire city of Toronto in the summer of 2019. So we’ve had just over 2 years of this housing type being fully allowed city-wide.
Though it’s worth keeping in mind that there are only so many laneways in Toronto (which is why “garden suites” are going to be important and may actually end up being more impactful):
Between the introduction of laneway suites and June 2021, the City of Toronto received 306 permit applications to construct, of which 238 were associated with a unique address (the same address can have multiple permit applications).
During this same time period, 183 permits were issued. 107 were still under review at the time this report was written. 15 were refused. And 1 was classified as “unknown”, which I guess means it got lost in the ether or under someone’s desk.
Some of you will probably argue that this isn’t enough new housing for a city of 3 million people with high home prices, high demand, and high immigration. And I would agree.
But it’s still early days, there will be an adoption curve, and the policies are still being tweaked to further remove some of the barriers associated with delivering this housing type. Of the 238 unique addresses that submitted a permit application, just over a quarter of them had an associated minor variance application, which means that they did not fully conform to the current laneway suite by-law.
The most common obstacles appear to be the 1.5m laneway setback, the soft landscaping requirements, and the required fire access. But I know that there are others too. I could have used another foot or two in height on mine.
But as I mentioned before, there are more areas in this city without laneways than with. And so garden suites are going to be an integral component of city-wide ADUs. This will certainly help the adoption curve.
I continue to believe that these are all steps in the right direction and that this is an exciting time for Toronto. We are in the midst of transforming our laneways. But we’re not done yet. We’re going to have to make many other tough decisions in order to further increase housing supply. I’m positive we’ll get there.
There is a commonly held view that short-term rentals (such as the ones you might find on platforms like Airbnb) are bad for housing affordability because they take long-term rentals out of the market and they help to drive up property values. And there’s evidence for this. A study published in Harvard Business Review found that home-sharing alone might be responsible for about 20% of the average annual rent increases across the US.
Findings like these have encouraged municipalities around the world to put restrictions in place for STRs. But like most policy issues, there are nuances. And the thoughtful answers are rarely as obvious as they may initially seem. This has been part of my complaint around inclusionary zoning. It sounds good when politicians say it: let’s just get developers to build us free affordable housing. But again, there are nuances to consider.
Short-term rentals are similar. A recent follow-up study that was again published in Harvard Business Review has actually uncovered some interesting longer-term benefits to STRs.
Using residential permit data, Airbnb listings, and STR policies across the US, the team found that when you look over a longer time horizon, Airbnb listings actually tend to increase the supply of residential housing. On average, a 1% increase in Airbnb listings led to a 0.769% increase in permit applications. Supply is of course good for a whole host of reasons, one of which is boosting the local tax base.
Conversely, they found that restricting STRs tended to reduce the supply of new housing and renovations. After new regulations were put in place affecting STRs, Airbnb listings fell on average by about 21% and residential permits fell by 10%.
Restrictions also seem to have a direct impact on the construction of things like accessory dwelling units (laneway and garden suites for us here in Toronto). When analyzing data in and around the borders between jurisdictions in Los Angeles County, the researchers found that areas without STR regulations saw 17% more ADU permit applications compared to the areas that had restrictions.
For the 15 US cities that the team studied, they conservatively estimated that STR restrictions reduced property values by about $2.8 billion and impacted tax revenues by about $40 million per year. Some cities, like Chicago, have also found success using STRs as an economic development strategy in distressed neighborhoods, which would further bolster the tax base.
All of these findings suggest that a more nuanced approach to STR policies is probably merited.
The obvious story is that Zillow’s algorithms were not valuing homes correctly. But the story is more nuanced than this. In Q1 of this year, Zillow’s home flipping business was actually more profitable than it had initially expected. And that’s because its algorithms were consistently undervaluing homes. So when it did transact, it was doing so at favorable / low cost bases.
The problem was that the company was not transacting enough and there was a fear of losing ground to competitors like Opendoor. Apparently only about 10% of people who requested an offer from Zillow actually ended up accepting it. Margins were good, but volumes were too low.
So what Zillow did was tweak its algorithm to be more aggressive (see above chart from the WSJ). But this created the opposite problem: low/negative margins, higher volumes.
Once again, it shows you some of the challenges with bringing real estate online. The supply of homes is largely heterogenous and there are a lot of qualitative factors that play into what someone is willing to pay.
I was having a conversation this week with a few friends in the industry about the future of parking. We were specifically talking about Toronto, but I would imagine that much of this holds true for many other cities around the world.
Here in Toronto, it’s not uncommon to see new parking spaces in central locations selling for upwards of $200k. For those that are not in the industry and not seeing the work and immense costs that go into building parking, this often comes as a surprise.
But as I have said many times before on the blog, parking is often a significant loss leader for new developments. Even at relatively high prices, most developers aren’t covering their costs. So developers naturally aren’t racing out to build more of it. They’re trying to build just what is absolutely necessary for the market.
Given the strong incentives to build less parking, it’s no surprise that parking ratios continue to decline. But consider some of the other parking headwinds:
Push toward watertight undergrounds across the city (higher costs)
Tipping fees for disposing of contaminated soil (higher costs)
Increasing development charges / levies (higher costs)
Introduction of inclusionary zoning (higher costs)
Inflationary construction cost environment (again, higher costs)
There is a lag between changing cost structures and what the end consumer sees and feels. Junction House, for example, is fully tendered from a construction standpoint and so we are building with a kind of historic cost structure that would be impossible to replicate today. When the next project comes around, they’ll have higher costs and will have to price their homes accordingly.
As rising costs and new policies (like the ones I mention above) begin to work their way through the system, I think it’s fairly obvious that parking ratios will continue to be one of the first things that gets looked at and ultimately chopped down. This will make parking even more scarce in the city and surely far more expensive.
But as I have argued before, I am of the opinion that building around the car is not the way to build big and well-functioning global cities. Many of us recognize that we need to focus on alternative forms of transport — everything from public transit to new micro-mobility solutions. And given where costs are going, I don’t think we’ll have much choice.
San Francisco’s Board of Supervisors recently voted 8-3 in favor of rejecting a new 495-unit residential project at 469 Stevenson Street in SoMa. The property is currently a parking lot used by Nordstrom.
Of the project’s 495 units, 73 were to be offered at affordable rents (about 14% of the project). In addition, the developer was prepared to donate a nearby parcel for additional off-site affordable housing. This would have brought the total count up to 118 units (or about 1/4 of the project).
Apparently gentrification was a serious concern with this project:
“It’s very clear to me that this will have a very significant displacement and social-economic impact on the Sixth Street corridor, on the Filipino community, and the broader low-income community here,” said District 10 Supervisor Shamann Walton.
The mayor seems to get it though:
“This project met all the criteria for approval, and it would have created 500 new homes on what is currently a parking lot surrounded by tall buildings, located near transit,” Breed told the Chronicle. “We can’t keep rejecting new housing and then wondering why rents keep rising.”
Matt Levine’s latest column is a good follow-up to yesterday’s post about Zillow exiting the algorithmic home-buying business. In it, he talks about the differences between being a market maker and being a trader of homes. Part of his argument is that if you’re a pure market maker then, in theory, you don’t really care about where home values are going. Because either way, you’re just earning a spread.
Here’s an excerpt:
A market maker is someone who buys and sells an asset in order to profit from the spread, not someone who accurately forecasts the price of an asset six months from now. End users want to buy or sell stocks or bonds or houses, they want to do it quickly at a predictable price, so they go to a market maker who will provide that service. The market maker buys from sellers and sells from buyers and does its best to match them up; ideally it buys an asset from a seller and resells it to a buyer within a fairly short time. It collects a “spread” from the buyer and seller: It buys from the buyer at a bit less than the fair market price, and sells to the seller at a bit more than the fair market price, because it is providing them a valuable service, the service of “immediacy” or “liquidity,” the service of always being available to buy or sell.
The problem with real estate is that you’re not able to buy and sell with the same kind of rapidity:
But in the house business you can’t generally buy a house in the morning and sell it in the afternoon. You sign a contract to buy a house in the morning, then you do an inspection and title search and stuff, then a few weeks later you close on the house and deliver the money, then you spruce up the house a bit, then you wait for a buyer to come in — which takes, not seconds as it does in the stock market, but days or weeks or months — then you show the house to the buyer, then you sign a contract to sell it, then they do an inspection and title search and stuff, then you wait around for them to get a mortgage, then a few months later you close on the sale.
This is an important distinction. And so he argues that what we’re actually talking about is the business of trading homes, which means that you have to have a view (and hopefully some conviction) on where home prices are going to go in the future. Sometimes you will be wrong. But that’s okay, as long as you’re right more often than you’re wrong.
Some of you may be aware that Globizen is working on a new project in Park City, Utah right now called the Parkview Mountain House.
It was first announced on the Globizen Journal back in the summer and then a later announcement was made appointing New York-based Mattaforma as the project architect. It’s kind of a great story because Mattaforma is a relatively new firm that was formed by two architects who used to be at Studio Gang. So we have a long history of working together.
The vision for the project is a creative retreat in the mountains. A place to unplug, be active, and hopefully a place to foster creative expression, whatever that may be for you. It was inspired by the trip that I have been making to the mountains each year where we try and do exactly this. It’s one of my favorite times of the year and one that I look forward to the minute the last one is over.
The team has just finished the schematic design phase for the house (see above axonometric). And we are now working through some of the structural and geotechnical issues that come with building in the mountains on very steep terrain.
To give you all one example, we had initially contemplated large multi-storey retaining walls to hold back the earth and embed the house into the side of the mountain. But that is now being changed to a stepped foundation that minimizes the amount of excavation and reduces each retaining wall to no more than a single storey. This move will also result in more wood and less concrete. It has been a fun learning process.
The creative retreat concept has also been evolving and we recently decided to make digital NFT art an integral part of the experience. We have a few collections that we have been stocking up on, but if any of you have any recommendations we are, of course, all ears.
Once the floor plans have been finalized, they’ll be posted up on the Globizen Journal. So make sure to e-mail subscribe and follow along on Instagram at @parkviewhousepc.
Toronto’s new inclusionary zoning policy went to Planning and Housing Committee this week. Agenda item, here. The recommendations were approved, which means that the item will move onto City Council next month for final approval.
Here’s a summary of some what is being proposed (though keep in mind that I am not a planner and you should probably do your own due diligence if you’re looking to buy land and/or develop here):
IZ to come into force next year in 2022.
IZ to only apply on projects with 100 or more residential units.
Three distinct market areas across the City with differing set aside rates (see below charts). This strategy acknowledges the fact that you generally need submarkets with expensive housing and rising prices to be able to absorb the financial burden of the affordable housing units. I’ve written a lot about this dynamic on the blog. Relevant posts, here.
It’s in the chart, but it’s perhaps worth repeating: Purpose-built rental projects will not be required to deliver any affordable housing units at the outset of this policy. This is important to note because the margins on purpose-built rentals are razor thin.
The set aside rates are planned to increase to 8-22% by 2030.
The affordable units will need to remain affordable for 99 years. And the rents and prices are to be geared toward low and moderate income households, which are currently defined as those earning between $32,000 and $92,000.
Clear transition period for the development industry.
Ongoing monitoring of the policy to make sure it doesn’t suck.
If you’re interested, the full staff recommendation report can be found here and the draft OPA and zoning by-law can be found here and here.
