Brandon Donnelly

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.

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Tag: affordable housing

  • Who should pay for affordable housing?

    Deeply affordable housing is mostly infeasible to build.

    This is why you don’t see the market naturally building this kind of housing on its own. It, for the most part, doesn’t make any economic sense to do so. So this is also why the US has fabricated things like low-income housing tax credits. They are a way to make up the economic shortfall that exists with low-income rental housing and get the private sector building this kind of housing.

    We sometimes try to convince ourselves — or maybe it is a way of shirking responsibility — that there can be such a thing as no-cost affordable housing through things like inclusionary zoning. But I think we all know that there’s no such thing as a free lunch. Somebody is ultimately going to need to pay. The big question, of course, is who should that be?

    By definition, we acknowledge that the people who will ultimately live in these affordable homes cannot afford to pay market rates. So by default, the subsidies will need come from somewhere else. But again, from where and from who? Should it be specific people who pay or should it be mostly everyone who pays?

    If we return to the Toronto building industry’s favorite topic right now — development charges — you’ll see that under the current rates, every new 2 bedroom or larger apartment that is constructed must pay $3,727 toward affordable housing. Under the proposed rates, this will increase to $12,545 for every new large apartment. It’s by far the largest proposed percentage increase (237%) and also one of the largest service items.

    This raises two interesting philosophical questions.

    One, should the buyers of new housing be responsible for contributing to affordable housing in this way? Because what we are in effect saying to these people is, “Hey, you can afford to buy a new market rate home, so we’re going to collect some additional money from you — $12,545 to be exact — so that we can try and help those that aren’t in the same position as you. We’re also going to mandate additional affordable homes within your building and we’d like you to subsidize those too.” This is one way to redistribute wealth.

    But if the goal is to try and create more broad-based affordability, an alternative approach might be, “Hey, you already own a home and it has gone up a lot in value, so we’re going to collect some additional money from you over time so that we can try and help those that aren’t in the same position as you.” This would be the property tax approach. It’s probably not perfect, but might it be a more fair and equitable way to redistribute wealth?

    The second interesting philosophical question has to do with whether this is consistent with the dogma that growth should pay for growth. The idea behind development charges (also known as impact fees in some parts of the world) is that they should pay for the cost of new development. This makes complete sense. When you build new housing you certainly need some additional stuff — everything from additional school capacity to emergency services.

    But the question here is whether the construction of new housing in and of itself creates a direct need for more affordable housing, and therefore should be charged for it. Asked in the opposite way, if you weren’t building this new housing, would you then no longer need this affordable housing, just like you no longer need that additional school capacity?

    This is definitely not the case. In fact, I would argue that the opposite is true. If you don’t build any new housing in a growing city, you actually exacerbate the problem of affordability. So here’s a provocative thought. Rather than a charge, should this affordable housing line item actually be a credit towards each new project given that it benefits affordability?

    While it may not make any economic sense to build affordable housing, I think that many of us would agree that it makes a lot of social sense to build affordable housing. We know that our cities are at their best when they are both diverse and inclusive. The problem is that we can’t agree on who should pay for it.

  • Micro-housing experiment in San Diego’s Little Italy

    San Diego-based Jonathan Segal is a unique kind of builder in that his firm doesn’t have any clients. They act as both the architect and developer for all of their projects. This gives them a lot of control over the building process, but also more freedom to experiment.

    ULI recently interviewed Segal about his micro-housing project on 320 West Cedar Street in San Diego’s Little Italy (called The Continental). And I think it’s a pretty interesting case study for us to discuss here on the blog.

    It’s a 5,000 sf corner site, and Segal developed it with 42 micro units (5 of which are priced at 65% of AMR), two retail spaces at grade, and a separate “single-family townhouse” for his son that sits on top of the retail space at the corner.

    The idea was to create relatively affordable “workforce” housing, which is why there’s also minimal parking. The 37 market-rate units are currently priced between $1,595 and $1,995 per month, and the affordable ones are about $900 per month.

    Segal is forthright in the interview in saying that leasing velocity was slow following completion in December 2019. It was hard to rent these kinds of units in San Diego without any parking. But he viewed the project as an experiment and eventually he did find product-market fit.

    The mix of housing types here is also noteworthy. Presumably his son could have just gone out and built a more typical grade-related home. But why do that when you can build on top of an urban retail space and add 42 other homes to the lot?

  • The great housing supply debate continues

    The great housing debate continues: Are we building enough housing, or are we not?

    Right now the media is talking about a new report from the Union of B.C. Municipalities, which is claiming that cities in British Columbia are actually building enough housing to keep pace with population demand.

    Between 2016 and 2021, the province’s population grew by 7.6% and the number of new dwellings grew by 7.2%, according to the report. So supply appears to be lining up with demand.

    One problem with this robust analysis is that many people, including the Housing Minister, don’t agree. Here’s an excerpt from the Globe and Mail:

    “The overly naive analysis comparing housing to population growth to declare the adequacy of our housing supply fails to understand that housing and population growth are intimately related,” said statistics analyst Jens von Bergmann, a regular decoder of housing statistics for Vancouver and Canada. “It’s a slap in the face of those who have been pushed out, or those who failed to move here, because of the unavailability of housing.”

    And on a related note, here is a recent piece by Shawn Micallef (Toronto Star) talking about why the left can’t get Toronto’s housing right.

  • Density bonus as inclusionary zoning offset

    Somebody on Twitter responded to my recent post about inclusionary zoning and asked: Aren’t all the upzonings that the City is already doing a kind of density bonus? In other words, and this is me elaborating here, why is there an economic “shortfall?” Why does there need to be any other sort of subsidy in order to mitigate the economic impacts of inclusionary zoning?

    A density bonus can mean and can be used in a number of different contexts. Sometimes it is used as an incentive with landowners, whereby they get a bonus on top of their sale price if the developer manages to achieve a certain amount of density on the site. But in this particular case — IZ subsidies — we’re talking about something else.

    We’re talking about density above and beyond what you might normally achieve on a particular site in order to directly offset — maybe partially or maybe entirely — the economic shortfall brought about by inclusionary zoning. The fact that upzonings are happening all over the city doesn’t necessarily qualify them as bonuses. In the case of Toronto, the market is just responding to out-of-date zoning.

    Here’s a specific example.

    Let’s say you have a development site with in-place zoning that would allow you to build 20,000 sf of density. This is the as-of-right or by-right density. No need to rezone the site. Just file your building permits and you’re off making things. If this is the most you could build, then the market would value the land based on this density. As we have talked about before, land is the residual claimant in a development pro forma.

    However, if the zoning was out of date and it was fairly clear that one could rezone the site and build up to 100,000 sf, then the market would no longer value the site based on its in-place zoning. It would instead value it based on its future expected density. Again, because land is the residual claimant, more density = higher land value.

    In this second scenario, the additional 80,000 sf is, in my view, not a density bonus. Give or take a bit here and there, it is the density that everyone is generally expecting. The market has already priced it in. A true bonus / subsidy, would be something above and beyond the base of 100,000 sf. Something that is only available to developers if they do X — which could be build affordable housing.

    Maybe the bonus is perfectly tuned to exactly offset the economic drag of doing X, or maybe the bonus is designed to serve as an incentive to do X. In this latter case, the bonus would more than offset the drag and be accretive to the pro forma, which would mean that every sensible developer would now want to do X. More carrot, less stick.

    One of the challenges with this hypothetical scenario is that, for such a bonus structure to work, you need to know the baseline that you’re bonusing against and you need to ensure that nobody gets the bonus unless they do the thing — the X. Using the above example, that means that the 100,000 sf needs to be fairly firm and that anything above that number only happens with the delivery of affordable housing.

  • San Francisco’s “Monster on Sixth Street” rejected by Board of Supervisors

    So, this seems dumb.

    San Francisco’s Board of Supervisors recently voted 8-3 in favor of rejecting a new 495-unit residential project at 469 Stevenson Street in SoMa. The property is currently a parking lot used by Nordstrom.

    Of the project’s 495 units, 73 were to be offered at affordable rents (about 14% of the project). In addition, the developer was prepared to donate a nearby parcel for additional off-site affordable housing. This would have brought the total count up to 118 units (or about 1/4 of the project).

    Apparently gentrification was a serious concern with this project:

    “It’s very clear to me that this will have a very significant displacement and social-economic impact on the Sixth Street corridor, on the Filipino community, and the broader low-income community here,” said District 10 Supervisor Shamann Walton.

    The mayor seems to get it though:

    “This project met all the criteria for approval, and it would have created 500 new homes on what is currently a parking lot surrounded by tall buildings, located near transit,” Breed told the Chronicle. “We can’t keep rejecting new housing and then wondering why rents keep rising.”

  • Toronto green-lights new inclusionary zoning policy

    Toronto’s new inclusionary zoning policy went to Planning and Housing Committee this week. Agenda item, here. The recommendations were approved, which means that the item will move onto City Council next month for final approval.

    Here’s a summary of some what is being proposed (though keep in mind that I am not a planner and you should probably do your own due diligence if you’re looking to buy land and/or develop here):

    • IZ to come into force next year in 2022.
    • IZ to only apply on projects with 100 or more residential units.
    • Three distinct market areas across the City with differing set aside rates (see below charts). This strategy acknowledges the fact that you generally need submarkets with expensive housing and rising prices to be able to absorb the financial burden of the affordable housing units. I’ve written a lot about this dynamic on the blog. Relevant posts, here.
    • It’s in the chart, but it’s perhaps worth repeating: Purpose-built rental projects will not be required to deliver any affordable housing units at the outset of this policy. This is important to note because the margins on purpose-built rentals are razor thin.
    • The set aside rates are planned to increase to 8-22% by 2030.
    • The affordable units will need to remain affordable for 99 years. And the rents and prices are to be geared toward low and moderate income households, which are currently defined as those earning between $32,000 and $92,000.
    • Clear transition period for the development industry.
    • Ongoing monitoring of the policy to make sure it doesn’t suck.

    If you’re interested, the full staff recommendation report can be found here and the draft OPA and zoning by-law can be found here and here.

  • No-cost affordable housing in Toronto

    It upsets me when I read things like this (click here if you can’t see the embedded tweet above). I think it creates a false sense of a free lunch and ignores all of the nuances and complexities associated with inclusionary zoning.

    IZ is an obligation to provide a certain number of affordable units in new housing developments. There’s a lot of detail and debate around where this should apply, how much needs to be provided, and at what degree of affordability.

    But at the end of the day, it’s important to keep in mind that at meaningful levels of affordability, these IZ homes are going to be built at steep losses. More info on the economic impacts of IZ can be found here.

    The simple math is that the costs to build these homes are going to be greater than the revenues that they bring in. Which is why developers aren’t out building affordable housing everywhere. There’s no margin.

    In order to build, somebody or something needs to provide a subsidy so that this revenue-expense shortfall can be made up. How this works its way through the market is where I have tried to focus the discussion when writing about IZ. There are complexities. Some lessons from Portland, here.

    But to just assume that these costs will get magically absorbed by housing developers, with no other knock-on effects or distortions to the market, is incorrect.

  • Affordable housing for all?

    Bloomberg CityLab has a new video out talking about how Vienna has seemingly solved the housing unaffordability problem that is impacting most global cities around the world. Each year Vienna builds about 14,000 new housing units and about half of this is supply is “affordable.” Already over 60% of Viennese live in an affordable home. The title of the video suggests that their approach is radical, but is that really the case?

    What was clear to me when I watched the video is that there are perhaps two key differences in terms of how Vienna approaches this problem. One, they quite simply care about delivering high-quality affordable housing to the middle class. They think it’s culturally important and they believe that architecture and design matters. Two, they are willing to invest in it, both up front and over time (maintenance).

    In the video, the former Vice Mayor of Vienna talks about how the City will go out and buy land (or use already owned land) and then make it available (sale or lease) at discounted rates so that it makes economic sense for non-profit housing developers. If the math still doesn’t work for the private sector, then there are other subsidies available.

    I’m certainly not an expert on Vienna’s approach to housing delivery. And I’m not suggesting it’s perfect. My knowledge base comes largely from one 13 minute episode by CityLab. But I think it’s notable that I didn’t pickup anything in the video about inclusionary zoning leading the way (which I have argued before tends to shift the burden to the remaining market rate housing units). Instead, they value it and they invest in it. There’s no such thing as a free lunch.

    Image: CityLab

  • Architect Bjarke Ingels announces new “design living” company

    News has just dropped that architect Bjarke Ingels, Roni Bahar, and Nick Chim are launching a new “design living” company called Nabr. Their website says that it is “coming soon to Silicon Valley” and so presumably there will be tech involved and we should actually be calling it a startup.

    The video embedded at the top of this post (link here) will tell you a little bit about it. But from what I can glean from their website, the focus is on using technology and modular construction to deliver housing that is more personal / adaptable, more sustainable, and more attainable. There is a note on their site about buying with only 1% down.

    We have talked a lot on this blog about the antiquated and slow-moving nature of design, development, and construction. So what it absolutely clear is that there are many problems to be solved here. I am excited to see what the team brings forward.

  • The Netherlands is short 330,000 homes

    The price of an existing home in the Netherlands increased 14.6% in the first 6 months of this year alone, according to this recent FT article. This is in comparison to 6.1% for existing homes across the EU on a year-over-year basis. Some economists estimate that the Netherlands is short about 330,000 homes right now and that it needs to build at least 1 million more over the next decade to better align supply and demand. I know that there is a lot of debate about the extent to which supply alone can solve problems of affordability. And indeed there are other factors at play here, such as low interest rates. But 330,000 is a lot of missing housing and numbers like this are not unique to the Netherlands. Most big cities have a supply of housing that is highly inelastic because of how difficult we make it to build. Most of us recognize this. But it remains a problem.