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.
It has been well documented that Tokyo tends to build a lot of housing. And the argument goes that this has helped to maintain a certain level of housing affordability. The city is constantly building and rebuilding. It also has different views about housing. Now, we could, of course, debate how much of its relative affordability is a direct result of supply but, regardless, there seems to be a lot of it. In 2014, the city of Tokyo saw 142,417 housing starts, according to this recent FT article. This is compared to ~5,000 units across the Bay Area (2015 data), 83,657 units for the state of California, and 137,010 units for all of England.
If you’re wondering how Toronto is doing, here are the latest numbers:
# of units included in BPs issued (housing starts) for Toronto: 18,737 in 2019; 19,239 YTD in 2020 (Note: given multi year construction period, Toronto in the last few years has had about 45k units under construction at any one time)
That is the argument that Joshua Gordon, who is an assistant professor in the Simon Fraser University School of Public Policy, recently made in this opinion piece in the Globe and Mail. In his view, there’s no evidence to suggest that housing supply can actually help housing affordability. It’s just something that developers throw around to “stymie action on the demand-side” and to help with their rezoning efforts. Really, the housing problem is due to intense demand from foreign buyers, investors, and from “high rental demand.”
Now, as many of you know, I am a developer, and not a professor. So you can take this post however you would like. But I do have a few thoughts.
One, I think it’s an oversimplification to argue that there have been no regulatory changes over the last decade that have meaningfully and negatively impacted the supply of new housing. To give you one example, this fall, development levies in Toronto will complete a phase-in that has seen them double over the last couple of years. Almost a quarter of the price of a new residential condominium now goes to pay government fees and taxes. This has an impact on supply, even if the “regulatory environment” hasn’t necessarily changed.
Two, I don’t buy the argument that, “surrounding cities have also seen rapid price appreciation and it’s easier to build there, so housing supply mustn’t be the problem.” Building outside of cities like Toronto and Vancouver isn’t necessarily easier. In fact, in some cases it can be more difficult if they’re not accustomed to more progressive urban infill-type developments.
Three, it’s important to keep in mind that we have a financing structure in place that biases the types of homes (specifically residential condominiums) that get built. This approach is designed to mitigate financial risk, but it also means that investors serve an important function in the delivery of new housing. I’m not saying that the system is perfect; but I am saying that things are maybe not as simple as they may seem.
Four, just because there are cities with lots of single-detached homes and relatively affordable housing, I don’t think we can safely assume that single-family land use policies have no impact on supply and pricing in cities like Toronto and Vancouver. In fact, I would argue the opposite. This probably goes to show you the importance of an elastic housing supply. Indeed, some of the most affordable housing markets are dominated by low-rise houses precisely because it is a typology that is quicker and cheaper to build than most urban infill housing.
Finally, I’m not sure why anyone would consider high rental demand and a strong labor market to be symptomatic of a problem. Isn’t that what you usually want out of cities? You want there to be an abundance of good jobs that pay people money so that they can, you know, have a life and consume things like housing. But maybe that’s just the way that I look at things. I am a developer after all.
My super scientific Twitter balcony survey has revealed that most people seem to like balconies and terraces. Out of the 257 people that voted (not a huge number), 77.4% said that if they were in the market to buy or rent a new place, they would probably want a balcony or terrace. I realize now that my wording could have been more precise. Either way, the results seem to suggest a clear preference.
But there are all sorts of reasons for why you might want to avoid building balconies: energy performance, upfront costs, long-term maintenance, usability at high elevations, overall aesthetics, and so on. In fact, I once had an architect turn down a job because they don’t typically work on residential buildings and, when they do, they refuse to work on ones that have balconies. He told me that they don’t want the liability.
But then what inevitably happens is that the sales and marketing team joins the design meeting and says, “yeah, we hear what you’re saying, but people like outdoor spaces.” And then the great debate starts. Okay, so what percentage of the suites should have an outdoor space? What about a sliding glass well? I think so-and-so is doing it on their project. Yeah, but they’re real expensive and they leak air.
The reality is that there are many buildings without private outdoor spaces and there are many cities where it is common not to build them. Moreover, my Twitter survey doesn’t really tell you exactly how people might behave when they’re about to make a purchasing decision. What you really want are data points and things like A/B tests.
Let’s take for example two typical/identical 600 square foot suites, with the only difference being that one has a balcony and the other doesn’t. Now let’s say that the one with a balcony is selling for $1,400 psf or $840,000 and the one without a balcony is selling for $1,350 psf or $810,000. Will some of the 77.4% that voted balcony/terrace possibly buy the $810,000 suite? Of course. Because it’s less expensive.
So how does one go about making the right decision when it comes to designing for outdoor spaces? Well, in some cases, you won’t have a choice. We have had instances where the City has asked us (okay, forced us) to remove all of the balconies on a particular elevation because they didn’t fit with the urban design aesthetic that they wanted for the streetscape. That always pisses me off.
That aside, my view — and this is just my opinion — is that you can’t generalize when trying to make this decision. You need to carefully consider who your customer is or will be. I’ve written before about the divide between investor demand and end-user demand in residential buildings. It impacts design, and outdoor spaces are no different.
If you take for example Junction House, it is a predominately end-user building. That’s who we thought would be buying and that is who bought. When the team was designing the two-storey House Collection, the intent was to create a kind of substitute for low-rise housing. And so these homes had to have outdoor spaces (they have terraces). This was never a question or a debate.
Similarly, one of the reasons why One Delisle looks the way that it does is because the team set out to create unique terraces, as well as varying outdoor spaces, all throughout the tower. The thinking was, “people like terraces in mid-rise buildings, like Junction House, so let’s figure out how to do that in a high-rise building typology.”
At the same time, we have suites with Juliet balconies at Junction House and it is certainly true that the above recipes may not be suitable for every project. Again, there are lots of buildings without private outdoor spaces, including ones that have sold during this pandemic. One of the things that I have also discovered is that common area outdoor spaces and nearby green spaces can have an impact on whether or not people feel they need private outdoor space.
All of this to say that one size does not fit all. Which is probably why this topic remains such a great debate.
Note: I am making a distinction between balconies and terraces. Balconies typically cantilever out from a building and are not insulated. Terraces, on the other hand, are typically a roof condition in that they sit above a conditioned space. This usually means that the concrete slab will need to get “built up” with insulation and paving. A drainage system will also be required.
Urbanation released its Q2-2020 condo market survey results earlier this week. This data represents the first full quarter of sales to be entirely impacted by COVID-19. Not surprisingly, sales activity was way down. But pricing and construction starts actually increased. Here are some of the highlights:
New condo apartment sales totaled 1,385 units across the Greater Toronto Area. This represents an 85% year-over-year decline and the lowest sales activity since Q1-2009. Only six projects launched during this quarter.
Most of the projects that did launch were outside of the core of Toronto. So that skewed pricing downward. In the first quarter of 2020, the average selling price for new launches was $1,159 psf. In Q2, this number was $889 psf — again, reflecting a shift in geography.
But if you control for geography and compare year-over-year launch prices within the same submarkets, prices did in fact increase in Q2 compared to last year. At the same time, the average price for unsold units in Q2 increased by about 9% year-over-year to a record high of $1,087 psf. Unsold inventory also declined by about 19% from last year.
On the construction front, a total of 7,388 units started construction in Q2. This is a 45% increase from Q2-2019. A lot of this growth is coming from the suburbs, where presumably there are fewer supply constraints.
Given the resiliency that the market has been showing, Urbanation expects to see an increase in new project launches in Q3.
Back in March, SPUR Regional Strategy published a report called: “What It Will Really Take to Create an Affordable Bay Area.” Much of its focus is on all of the housing that the San Francisco Bay Area should have been building over the years and all of the housing that it will need to start building in order to prevent things from getting worse.
Here are a few stats to put things into perspective. Since 2000, the Bay Area has added about 1 million people (about a 15% increase). From 2011 to 2017, the Bay Area also added some 658,000 jobs, but only created about 140,000 new housing units. That’s 4.7 jobs for every new house built. SPUR further estimates that over the last 20 years, there has been a shortfall of almost 700,000 new housing units.
If you look at the above chart showing residential building permits issued between 1980 and 2018, you can see that the Bay Area was actually more prolific in the 1980s — peaking at nearly 50,000 units per year. Those levels have yet to happen again, despite the region growing in population. (If you looked at new housing units per capita or some other normalized metric, the supply decline would be even more pronounced.)
Part of the reason for this is that the supply of housing in the 1980s had a higher percentage of low-rise single-family homes. We could get into a discussion about sustainability, but that’s not the topic of today’s post. The reality is that this housing typology was easier, faster, and cheaper to build as compared to today’s urban infill housing. We have made it very difficult to build.
To download a copy of the SPUR report, click here.
I recently discovered and subscribed to Packy McCormick’s “Not Boring” newsletter. So far it’s quite good, and so here I am mentioning it to you all on the blog. In his latest newsletter, he makes the case for why Airbnb and Zillow — the two largest residential real estate tech companies — should merge. Naturally this new company would be called Zillbnb. You can read all about why he thinks this is a good idea over here, but I would like to point out one thing that I found interesting.
Packy makes the argument that “easiest-to-book, shortest duration reservations” are a leading indicator for changes in demand. In other words, platforms like Airbnb can start to tell you where people might want to live and platforms like Breather can start to tell you where people might want to work.
To support this argument he uses the example of his Airbnb rental outside of New York City. Sure, demand initially fell off a cliff at the beginning of lockdown, but then it started to surge as New Yorkers sought refuge outside of the city. And while I think that this particular change in demand will likely end up being short-term in nature, a similar trend is being reported around in the world. Did we hear it first on Airbnb?
The latest condo market data from Urbanation is encouraging. As I reported last month, April was a very slow month, which isn’t surprising given that it was the first full month of lockdown. Residential resales across the Greater Toronto Area were down 67% year-over-year.
In May, we have seen resale condominium sales increase by almost 60% compared to April, though they are still down by a wide margin compared to last year. The average sale price also increased by 7.9% compared to April and by 3.4% compared to last year. This puts resale condominium prices in line with what we were seeing in Q4-2019.
The rental condo market (that is, condos being rented out via MLS) also showed signs of stabilizing. Leases increased by 75% compared to April, outpacing the number of new listings (66%). Rental rates remained more or less flat (0.3%) compared to April, but they are down by about 5% compared to their Q3-2019 high.
On the new construction side, we have only really seen a handful of new launches/releases. Units are selling, but it still feels a bit early, at least for me, to really determine where we’re at in terms of pricing and velocity. Nevertheless, I suspect that we will see a significantly stronger fall market come September.
The New York Times is running an opinion series right now called, The America We Need. It is all about how the US might emerge from this crisis “with a fair, resilient society.” This piece by Carol Galante covers many of the topics that we discuss on this blog. Carol is a former city planner and nonprofit housing developer. She is now the faculty director of the Terner Center for Housing Innovation at UC, Berkeley. Here are a couple of excerpts from her article that I think will resonate with many of you:
There are two things we know: The U.S. economy will recover. And the recovery will start in and be strongest in the same cities that were thriving before the pandemic. Economies in places like Seattle, San Francisco, New York and Boston are driven by the innovation, technology and biotech sectors, which are proving to be remarkably resilient to the impacts of Covid-19.
We have an obligation to ignore the short-term reactionary impulse to blame density for the spread of the coronavirus and instead use this opportunity to rethink the policies that impede the construction of new housing, at more price levels, in the places where housing is most needed.
In my subsequent career as a nonprofit housing developer working in prosperous coastal California communities, I spent far too many nights in City Council meetings working to get apartment buildings for lower-income older people and families approved. Underlying the “density” battle was almost always a battle over who has access to the opportunities of a place and who doesn’t, cloaked in arguments about neighborhood character and traffic impacts.
Let’s say that we have a piece of development land worth $100. That is the market value of the land based on its highest and best use at this particular point in time. Now let’s assume that the land was just encumbered with a new burden: inclusionary zoning. All of a sudden there is now a requirement to make available X% of any residential units built at 50% of average market rents for the area.
Technically, the land is now worth less than $100. And there is a school of thought out there that, in instances like this one, the price of all land should automatically reset downward to offset and account for the inclusionary zoning burden. But as I have argued before on the blog, land prices tend to be fairly sticky, unless the owner is distressed and really needs to sell.
So what can often happen is that the land owner will stubbornly cling to the original $100 number. The thinking being, “I was once told that my land is worth $100 and so that’s the minimum price I’m willing to accept.” In this scenario, you may need a broad increase in rents in order for a transaction to occur. This way the market rate units might be able to fully subsidize these new affordable units, preserving any margins and justifying the original $100 number.
Of course, the impact of inclusionary zoning is a hotly debated topic and there are a number of variables to consider. And so I will leave it at that for today. The real purpose of this post is to consider another permutation. Let’s once again say that we have a piece of development land worth $100. But instead of being owned by 13 siblings — and 3 cousins that live abroad and can’t be reached other than by fax — it’s owned by the government.
In this case, the government wants to sell the land and is considering two options. It can either (1) sell it for $100 and maximize immediate taxpayer revenue or (2) it can sell it for $80 with the condition that the buyer agree to deliver X% of affordable units (and a bunch of other goodies and positive externalities). I would also add that this fictitious town is experiencing what some might call a housing crisis.
If you were a private sector actor, you would probably choose option 1. You would take the additional $20 and retire to Florida (I’m off by a few zeros). But this is the government we’re talking about and presumably the government is thinking about the broader public good. Which option do you think is better at maximizing that?
