I had a call with a developer in Paris earlier this week and it was interesting to hear him talk about the new home market over there. It sounded a lot like Toronto. Higher interest rates cooled demand. Individual investors largely disappeared. And now developers are having to rethink their strategies and floor plans (including suite sizes).

But in his view, this isn't necessarily a bad thing. It now means that you actually have to be a reasonably good developer in order to have a chance at succeeding. You have to design thoughtful floor plans and build great housing. It's a return to fundamentals, and I would argue that the same thing is happening here in Toronto.

My other noteworthy takeaway was around social housing. All new developments in the Île-de-France region are subject to inclusionary zoning. I believe the requirement is 30% of the suites. These suites are then purchased by social housing operators, and it is one of the ways that new supply is created in the market.

We talk a lot about IZ on this blog, but what's interesting about this approach is that it becomes a forward sale for the developer. Meaning, it helps to de-risk projects. Before doing anything, you know you've sold 30% of your inventory, and somehow the numbers all work. European social housing math is baffling to me.

I am now wondering if this creates some kind of incentive to keep development costs in check. Because if social housing operators are expected to buy 30% of all new homes, then they too are going to want them to be as cost effective as possible. I'm speculating though; I don't know that this is the case.

If you're a developer or real estate person in Paris, please get in touch. I'd love to learn more about your market and trade notes.

Anyone who has ever worked on a development pro forma will know that the process generally works like this: You start with a bunch of assumptions. You assemble those assumptions in a way that will allow you to determine if the project in question is feasible. And then, you realize that almost everything is more costly than you initially thought and that the project may not actually work. Oh shit.

In fact, a sure-fire way to know that you're on the right track is if the numbers sort of don't work. If the returns look too good to be true, they almost certainly are and you're likely missing something big and meaningful. As we have talked about before on this blog, development happens on the margin. That means that you have to work at it. You have to be creative. And often you have to find ways to increase revenues and cut costs.

The common way to find money is through something known as value engineering, which is just a fancy way of saying, "I need to cut costs, so let's see what I can tolerate losing from this project." That's generally how it works. And we do it on every project. You're trying to find high-cost items with relatively low perceived value.

This process often gets a lot of criticism because people view it as a distasteful cheapening of a project. But the reality is that it is usually an important part of maintaining project feasibility. You may really want to use that fancy material you can only get from Switzerland, but maybe development charges were just increased and now you need to offset those new costs by finding savings somewhere else.

This isn't a perfect analogy, but imagine you were shopping for a new car. You might start out by wanting the fully-loaded version, but then you see the price and realize you can't afford it. So you decide to start trimming features and add-ons until you get to a place where you feel more comfortable. I would imagine this happens with cars, and I'm not sure it's right to point to that person after and say, "oh my god, I can't believe you cheaped out and didn't buy the fully-loaded version."

At the same time, I think it would be perfectly reasonable to argue that you don't need to spend a lot of money to (1) care deeply about the work that you do and (2) have taste. You can't fight the economic realities of the world, but you can care and you can be creative. And I don't think it's too much to advocate for these things.

The big news this week for Toronto city builders is that the city has put forward a proposal to substantially increase development charges. Here's a tweet storm that I published earlier today on the topic, and here's a summary of what the new fees might look like:

To translate this into a specific example, let's assume that you're building a 300 unit apartment building with 180 one bedroom suites and 120 two bedroom suites.

Under these proposed DC rates, this would translate into charges of about $9.6mm for the one bedroom suites and $9.8mm for the two bedroom suites, totaling over $19.4mm in DCs alone. But keep in mind that there would be other charges on top of this for parkland dedication, community benefits, and a bunch of other things.

When our cost consultant ran the numbers back in 2019, the estimate was that about a quarter of the price of a new condominium in Toronto was going to government fees and taxes. But with the above increase and with the introduction of policies like inclusionary zoning, I am sure that the number is higher today.

These are easy fees to hide. Most people don't know they exist. And a lot of people don't seem to like new development and new housing. Property taxes on the other hand are highly visible and highly sensitive. So that tax tends to be left alone, especially by comparison.

But these increases are hugely impactful. It means that developers across the city will now need to start looking at increasing rents and prices in order to try and offset it. If they can't, they won't build. And if they can, it will mean that the housing that does ultimately get built will be that much more expensive.