Dylan Reid recently wrote an interesting article about, what he calls, high low-rise infill buildings along Toronto’s main streets.
He describes the typology in this way: “These are generally 4-storey mixed-use buildings built quickly on one or two lots, replacing smaller previous buildings. They are often inserted beside existing, attached buildings.“
Now, Reid acknowledges that this a challenging scale to develop at. He links to one of my articles in Urban Capital’s Site Magazine where I talk about exactly that: the diseconomies of scale associated with building small. (Though, I was talking about mid-rise, not high low-rise.)
Reid addresses these challenges with a number of potential cost savings, including no parking minimums and no rezoning process. He also suggests that these projects may be better suited to existing landowners (who may own the land free and clear of a mortgage).
Getting rid of parking minimums and streamlining approvals would certainly help, though I remain doubtful about overall feasibility. But what I wanted to comment on today was the last point about these projects being better suited to existing landowners.
One problem with this line of thinking is that if we’re talking about land on a street where greater densities such as mid-rise are also permissible, the land is going to get valued based on mid-rise and not high low-rise.
So when a prudent landowner thinks about developing their land, they may also consider the opportunity cost of simply selling their land based on its highest and best use.
That thought process might go something like this. I own a piece of land. If I were to sell this land today and take on no development risk, I could make $X. If I were to instead develop this land, I could make $Y.
If $Y is less than $X, then I’m obviously not going to develop. But if the spread between $Y and $X isn’t enough to compensate me for the risk of developing (and there’s lots of risk in developing), then I’m also not going to do it. (Developers run a similar test by marking the land cost in their pro forma to market.)
And if $X is based on greater densities than $Y ($X is based on mid-rise densities and $Y is based on high low-rise densities) and if $Y is also being challenged by further diseconomies of scale, then I’m sure you can start to see how the math may not pencil.
I say all of this not to shit on Reid’s article. It’s a good article. You should go read it. And we should all continue to think about ways to increase the supply of housing in this city and in others.
Recently we’ve been talking about California’s Proposition 13 and how it may be creating a disincentive for longtime homeowners to move. They’re enjoying below market property taxes, and so they stay put, even if they may have too much house.
But this concept of “overhousing” isn’t unique to California. The Globe and Mail just ran a piece talking about how Toronto’s designated “Neighborhoods” are losing people as the nests empty out, seniors remain put, and the broader city booms.
The rate of depopulation that created the spare bedrooms in Toronto’s low-rise neighbourhoods is stark: “Since 2001, about 52 per cent of the land mass of Toronto has reduced in density of population by about 201,000 people,” Mr. Smetanin says. “Other parts of Toronto have grown by 492,000.”
The irony of this phenomenon is that the city’s Official Plan considers these Neighborhoods to be “physically stable”, as well as “one of the keys to Toronto’s success.” However, things are clearly changing behind that physical stability.
CIBC World Markets recently published this report by Benjamin Tal talking about the Toronto and Vancouver housing markets. Here is an excerpt:
“But when the fog clears it will become evident that the long-term trajectory of the market will show even tighter conditions. The supply issues facing centres such as Toronto and Vancouver will worsen and demand is routinely understated. Short of a significant change in housing policies and preferences, there is nothing in the pipeline to alleviate the pressure.”
It’s a good read. Worth your time.
One stat that stood out and directly relates to some of the topics that we frequently talk about on this blog is the shift in Toronto from low-rise to high-rise housing.
In the report there’s a chart showing the “change in [housing unit] completions” in 2016 as compared to 2000. The switch from low-rise to high-rise is almost 1:1 in Toronto. In other words, we substituted high-rise housing for low-rise housing.
I think this speaks volumes about the fundamentals underpinning the Toronto condo/apartment market. We are continuing to build up because it is the future of housing in this city.