The City of Burnaby recently passed an amendment to its inclusionary rental requirements. It has now been removed from the southeast portion of the city, which, according to Burnaby Now, has one of the lowest median incomes in the city.

Here's an excerpt from the staff recommendation report that was approved in early October:

The analysis explored the impacts of increasing the density of developments in the Edmonds Town Centre area to try and improve revenues. However, the results showed that at current values, additional density is not able to offset the costs of providing the non-market housing, and that the equity needed to pursue large developments became prohibitive. As such, it is recommended that inclusionary rental requirements apply city-wide, with a delayed effective date for the Southeast Burnaby CMHC rental zone (the “SE Burnaby CMHC Zone”), until such time that inclusionary rental requirements become financially viable.

What's noteworthy about this amendment is that it acknowledges the real costs associated with non-market housing and shows how important high market rents are to subsidizing them. There's no such thing as no-cost affordable housing. In the end, somebody always has to pay.

Yesterday, the City of Toronto announced that it would be "unlocking" 7,000 new rental homes -- including 1,400 deeply affordable homes -- by doing two key things:

• Waiving development charges on rentals

• Providing a 15% reduction on property taxes

And by their estimates, the value of these benefits would be roughly $58k per new rental home:

Great news, right?

But wait, there's a catch. If you read the details, you'll see that in order for a project to be approved under this program, there is also a requirement to deliver at least 20% of the homes as affordable rentals.

So let's look at what this could mean.

Here is a chart comparing a market rental suite at $3,000 per month to a more affordable one at $1,500 per month:

Both are assumed to be 600 square feet. In the case of the market suite, the per square foot (PSF) value is estimated at $933 psf, and the affordable suite is estimated at $467 psf. This represents a halving of the value (which makes sense because I halved the rents).

On a per unit basis (again, we're assuming 600 sf), this is a loss in value of about $280k. But since only 20% of the units would need to be "affordable", I multiplied this number by 0.2. The result is a per unit loss of approximately $56k.

What this means is that we're basically doing a whole bunch of stuff to get right back to the same place. Like, hey, we're not building enough rental housing and we're certainly not building enough affordable housing -- because the development margins are so dangerously thin -- so here's a credit of $58k per unit. But at the same time, here's a bill for $56k per unit.

What's the point, besides making it sound like we're doing something to create more housing? This program will do absolutely nothing to spur the creation of new rental housing.

I had lunch today with a friend (from school) who runs a multifamily development company in South Florida. His business is very similar to the apartment strategy that we are now working on in Toronto, in that he builds a repeatable apartment product (garden style apartments). In fact, he was telling me that he now has a dedicated design & QA/QC team within the company. Their job is to focus on continuous optimization and on reducing construction inefficiencies.

This is the way!

But each market is obviously unique. His rents are in the US$3 - 3.25 psf range (call it ~C$4.15 - 4.50 psf), whereas in Toronto you need something closer to C$5 psf to have a feasible project. Our yields are also lower on average. It's hard work to get to an untrended yield-to-cost of 5% here. But for him, he can't raise capital with anything less than 6.5%, which represents a development spread of at least 150 bps over where multifamily cap rates are today in his market (~5%).

Juicy by comparison.