Category: Real Estate

• Implications of new housing supply

  

  There’s a lot of debate within urbanist circles about whether or not supply alone can solve or at least mitigate housing affordability concerns. Richard Florida and others will say that, while beneficial, increasing supply isn’t the be all end all. We need to be building affordable housing.

  Edward Glaeser, Joseph Gyourko, and others have, on the other hand, argued that middle-income housing is a supply problem and that low-income housing is quite simply a demand-side problem, which could be solved through things like a housing voucher program.

  In other words, the cost of housing isn’t necessarily the problem, it’s the low income levels. One of the benefits of supplementing people’s incomes is that it empowers mobility. People can then move to where there are jobs, as opposed to being tied to a specific neighborhood or city.

  But this debate is arguably just about the extent of the supply benefits. Intuitively, it makes sense to try and match new housing supply with demand and economic growth. But how far can that take us, particularly in high demand and high productivity cities?

  Glaeser (Harvard) and Gyourko (Penn) have a relatively recent paper out called, The Economic Implications of Housing Supply, which looks at, among other things, the “implicit tax” imposed on development as a result of land use restrictions and other supply constraints.

  Here are two excerpts:

  We will argue that the rise in housing wealth is concentrated in the major coastal markets that have high prices relative to minimum production costs, and it is concentrated among the richest members of the older cohorts—that is, on those who already owned homes several decades ago, before binding constraints on new housing construction were imposed.

  But in a democratic system where the rules for building and land use are largely determined by existing homeowners, development projects face a considerable disadvantage, especially since many of the potential beneficiaries of a new project do not have a place to live in the jurisdiction when possibilities for reducing regulation and expanding the supply of housing are debated.

  If you’re interested in this topic (and sufficiently nerdy), you can download a PDF copy of the paper here.

  Photo by chuttersnap on Unsplash

  2019.02.27

• Price of a new condominium in Toronto increased 12.5% over the last year

  

  This morning BILD and Altus Group released their January 2019 new home sales figures for the Greater Toronto Area.

  Here are the highlights:

  • 1,362 new homes sold in January 2019 across the GTA. This is up 14% compared to last January.
  • Of these, 942 (~69%) were condominiums (includes low, mid, and high-rise, as well as townhouses). And 420 (~31%) were single-family homes (includes detached, semi-detached, and freehold townhouses).
  • Condominium sales volume is sitting only about 5% below the 10-year average and the benchmark price increased this month to $803,638, which represents a 12.5% year-over-year increase.
  • On the other hand, single-family home sales are down about 53% from the 10-year average and the benchmark price decreased by about 8.1% compared to last year. It is sitting at $1,130,046.

  While there continues to be a bifurcation in the new home market, we are seeing improvements across the board and the data is consistent with Altus’ prediction that 2019 will see an increase in overall sales.

  It is also important to consider how geography might factor into the above numbers. Here are the January sales numbers for the last three years broken down by region within the GTA:

  

  Just under 80% of the new condominiums sold last month took place in Toronto, whereas only about 1.2% of the single-family homes sold last month took place in the city. You can count them on one hand. There were only 5.

  So rather than just look at this in terms of housing type, I think the other way to interpret the data is that it could suggest strong and continued demand for centrally located and transit-oriented communities.

  And that just so happens to translate into a condominium.

  Photo by Eugene Aikimov on Unsplash

  2019.02.26

• Net present value

  Yesterday’s post was about Amazon pulling out of NYC. Today I thought we’d talk about another contentious city building debate that is happening closer to home.

  This week Sidewalk Toronto announced that it would like to expand its development focus beyond Quayside to the entire Port Lands district along the waterfront.

  To pay for all of this, the Alphabet company is looking for a share of the city’s property taxes and development charges (impact fees), and they want to capture some of the increase in land value.

  Not surprisingly, many reacted poorly to this announcement. Some people are already grouchy about what Sidewalk is up to at Quayside and so this was inevitable.

  But sharing revenue and upside is not necessarily a pioneering idea. It is called a partnership. Perhaps the partners have different skill sets. That is usually a good thing. But regardless, the best partnerships are when all parties win.

  What Sidewalk allegedly wants to do is shoulder more risk upfront in exchange for a kicker on the backend. This, too, also has a name. You can call it real estate development.

  I don’t know the specifics of the deal being proposed, but the question that comes to mind is: What is the net present value to the city — both quantitative and qualitative — with and without Sidewalk?

  (No links in today’s post because I’m writing on mobile while standing at the airport.)

  2019.02.15

• A platform for collaborative reasoning

  Perhaps for obvious reasons, I am interested in how important issues get debated. I have written before about how I think the community engagement process for new developments is largely broken. I think it naturally incents certain kinds of feedback.

  Recently, I’ve been playing around with an online platform called Kialo. They call themselves “an easy to use, yet powerful tool to engage in thoughtful discussion, understand different points of view, and help with collaborative decision-making.”

  The site works by trying to create a structured hierarchy of pros and cons around debatable questions. You participate by making claims (supported by links). Duplicate claims are neatly grouped together. And unthoughtful suggestions are moderated out.

  The UI looks like this (top level question shown):

  

  But you can then drill down into specific claim groupings (note the org chart looking graphic at the top):

  

  I’m not yet convinced that it creates the “collaborative reasoning system” that they are after (maybe because I haven’t used it enough). But I do really appreciate the structure and civility that they are trying to introduce to topics that are often vehemently debated.

  Are any of you regular users of Kialo?

  2019.02.13

• Amazon’s economies of density

  According to Amazon’s recent annual 10-K filing, the company leased and owned (most of their space is leased) about 288,419,000 square feet of space around the world at the end of 2018. Of this number, about 80% is used for “fulfillment, data centers, and other.” Amazon doesn’t break out this line item any further, but GeekWire reckons that a good 3/4 of their real estate is dedicated to their fulfillment warehouses.

  Here’s the full summary of their facilities (from the 10-K filing):

  

  Given that fulfillment is such a large share of their properties, I am most interested in understanding the geography of their warehouses and how that impacts their core value proposition, which is largely all about convenience.

  In April 2017, Jean-François Houde (of Cornell), Peter Newberry (of Penn State), and Katja Seim (of UPenn) published a paper on this very topic called, “Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network.” There’s also this Knowledge@Wharton podcast on the paper if you’re looking for a quicker listen or read.

  In the early days of online retail, the decision of where to warehouse had meaningful tax implications. Because (in most cases in the US?) you only had to collect sales tax if you had a physical presence in the same location as your purchasers.

  As that changed, it then made more sense to create a broader distribution network and minimize the distance between fulfillment center and purchaser. By 2016, Bloomberg estimated that nearly 78 million Americans lived in a zip code where Amazon offered free same-dame delivery. That number has obviously increased since.

  And in the paper “Economies of Density”, they discovered the following cost savings as a result of Amazon’s growing fulfillment network:

  We find that Amazon saves between $0.17 and $0.47 for every 100-mile reduction in the distance of shipping goods worth $30. In the context of its distribution network expansion, this estimate implies that Amazon has reduced its total shipping cost by over 50% and increased its profit margin by between 5 and 14% since 2006. Separately, we demonstrate that prices on Amazon have fallen by approximately 40% over the same period, suggesting that a significant share of the cost savings have been passed on to consumers.

  The interesting question for real estate people and city builders — which is brought up in the Knowledge@Wharton podcast but is difficult to answer — is whether there are diminishing returns to this “economies of density” phenomenon. In other words, how dense does Amazon’s fulfillment network want to be?

  2019.02.12