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.
I don’t know if any of you have had a chance to play with ChatGPT yet, but it is pretty incredible. Here is something that my friend David Fitzpatrick, who is a planner, tweeted out:
There is really no way of telling that AI produced this. It sounds natural and, in this particular case, it also feels like it understands that this is an ongoing debate: “the by-law may not provide enough flexibility to allow for…”
It’s a good thing I don’t write for a living.
North American cities have long had a problem with apartment buildings.
One the one hand, they were viewed as an important requirement for world-class status. Regardless of whether there was an economic imperative to build in this way, you needed grand buildings to communicate that you were an important and sophisticated city.
But on the other hand, apartments were viewed as clearly inferior to low-rise houses. Apartments were too dense; they were thought to morally corrupt people (infidelity meant just walking down the hall); and by definition — until the rise of condominiums — they were filled with renters.
I recently stumbled upon this 1989 research paper by Richard Dennis (through Bob Georgiou’s blog) and it is a fascinating account of Toronto’s first apartment-house boom from 1900 to 1920:
One of the first apartment houses to be completed in the city was the Alexandra Palace Apartments (pictured above) on University Avenue near Elm Street:
The next building to be completed, the Alexandra, on University Avenue, was on an even grander scale. It was promoted by the Union Trust Company, but subsequently owned by the specially constituted Alexandra Palace Co. Ltd., and opened in 1904. The building, of stone, brick and steel construction, comprised 72 suites on seven floors; it also included dining rooms. In 1905 more than a quarter of its suites were vacant, mainly on the upper floors (although the very top floor was fully occupied); its tenants included a leading judge, two barristers, a professor, a doctor and a prominent real estate agent, but otherwise its social standing did not quite match that of St George Mansions. In 1915 occupants included Professor James Mavor. There were more tenants aged in their thirties than in St George Mansions, but overall the average age of 42 and household size of 2.6 was not dissimilar.
But perhaps the most interesting part of the paper is Toronto’s reaction to this apartment boom. We moved to stop it:
Nonetheless, it is clear that the attempted invasion of high-status single- family areas in Parkdale and, more especially, Rosedale and Avenue-St Clair, provided the catalyst to action. For all the moral outrage and sanitary evidence, there was little concern as long as apartments stayed downtown or in lower-status neighbourhoods. This becomes even more apparent when we examine what happened in the months following the passage of the by-laws.
Toronto’s housing stock has changed dramatically over the last 100 years or so, and we are now nearly 50% apartments/condominiums over 5 storeys. But at the same time, some things seem to never change.
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
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
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.
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.
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.
This short video by City Beautiful makes the case for multi-way boulevards. The way to generally think about a multi-way boulevard is that it is a really big street that has been subdivided into areas that move cars relatively quickly and into areas that are a bit more conducive to calmer traffic and doing things like cycling and walking. More specifically, they are streets that have local access lanes on either side.
And in this video, it is proposed as a possible fix for two kinds of situations: (1) as a solution for what to do when you take down an elevated highway and (2) as a solution for retrofitting suburban arterial roads. I thought this would be a good video to share given that I can think of an elevated highway that should come down and because I have written before about how challenging it can be to change streets after they’ve been built. They tend to be pretty sticky.
But beyond this, it’s also a good primer on how suburban transportation approaches are highly effective at making cities that you can’t walk around in.
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?
I have been reading Fred Wilson’s blog for over a decade now (and he has been blogging for almost two decades). A lot of the time it is about venture capital and tech, but similar to what I do here, it can be about almost anything. Today he wrote about the two weeks that he just spent in Paris with his wife (the Gotham Gal). And the post covers everything from real estate to relationship advice. But here are two points that will be particularly relevant to what we usually talk about around here:
If any of you have more insight into the real estate market in Paris, I would love to hear from you in the comment section below.
This is an excellent video that I would encourage all of you to watch. It provides a visual look at city finances and explains how car-dependent suburbs are usually heavily subsidized by productive urban places. These are the kinds of analyses that all cities should be doing and, among many other things, I think it could go a long way to positively influencing how we plan our cities. Want to keep densities low and new development to a minimum in your community? Well then you should expect to see a commensurate increase in property taxes. If that doesn’t make sense to you right now, it will once you watch the video.
