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

  • The numerical impacts of inclusionary zoning

    Our cost consultant, Finnegan Marshall, gave our team a presentation today on what’s happening with construction costs in Toronto and across Canada. I’ve said this before, but hard costs are no joke right now.

    One of the areas that they focused on was the impact that inclusionary zoning is likely to have on development economics here in Toronto. To illustrate the point, a sample high-rise condominium pro forma was used. Think something in the 30-35 storey range.

    Assuming a requirement of 10% affordable (the policy details are still TBD), there is going to be a real cost to development pro formas that will need to be somehow paid for.

    One school of thought is that land prices will simply adjust downward. In this case, the landowner would be the one paying. I don’t think this will be the case (land prices tend to be sticky), but if they were to adjust downward, it would need to drop by $44 per square foot buildable to maintain the project’s margins in this example. (That’s $13.2 million on a 300,000 sf project.)

    If, on the other hand, the price of the remaining market rate condominium suites were to increase to offset the cost of the affordable component, they would need to increase by $91 per square foot. This translates, in the above example, into a sticker price increase of approximately $60,000 per suite.

    These numbers are, of course, not exact. That is not the point of this post. Every project is different. But hopefully it gives you an idea of some of the levers that will invariably need to be pulled when inclusionary zoning comes into force.

    My sense is that this latter scenario is more likely to happen. I have yet to see land prices adjust downward in the face of rising costs. So all of this is likely to be bad for broad-based affordability, but good if you want to be bullish on market rate home prices.

  • Ray: Architecturally-inspired homes at the intersection of art, culture, and community

    Back in 2008, Dasha Zhukova and Roman Abramovich hired starchitect Rem Koolhaas and founded a new contemporary art museum in Moscow called the Garage Museum. Supposedly this was the first philanthropic institution in Russia dedicated solely to contemporary art. (Here’s a short video in case you’re curious what it looks like.) After it opened, the founders apparently had a realization about the way people like to consume art. Yes, people like to look at art and ponder deep things. But it turns out that people also like just being around art and other art-like things. People started coming to the Garage Museum not only to view the various exhibitions, but also to just hang out.

    This insight is now being used to inform a new real estate development company, also by Dasha, called Ray. The mission of the company is to create “architecturally-inspired homes at the intersection of art, culture, and community.” Their first two projects are in Harlem and Fishtown, Philadelphia, but apparently they have something cooking in Miami as well. What Ray hopes to do is integrate art and culture in a more meaningful way through cultural programming, exhibitions in their buildings, artist studio spaces, and other creative ideas.

    There’s also an affordable housing angle. According to the WSJ, Ray’s Harlem project is a joint venture with L+M Development Partners. I don’t know any of the specifics of this deal, but I know L+M, because one of their founding partners, Ron Moelis, was a professor of mine in graduate school. L+M is focused on affordable and mixed-income housing and uses tools like the Low-Income Housing Tax Credit (LIHTC) to make these sorts of projects financially feasible. They aren’t, otherwise. I learned all about them in school and I always found it to be a great way to get the private sector building affordable housing.

    “Art and culture, community, and accessible pricing.”

  • There is no such thing as a free lunch

    Inclusionary zoning has been on my mind this week and so I thought I would revisit some of my old posts on the topic. I wrote about it here, here, here, here, here, and probably in a bunch of other places that I am forgetting right now. A number of these posts go as far back as 2015-2016.

    As well-intended as inclusionary zoning may be, I have never been able to get my head around it. There are lots of cities with inclusionary zoning polices in place and what history generally tells us is that it tends to reduce overall housing supply and increase market rents/prices.

    This makes intuitive sense when you consider that inclusionary zoning is in effect a tax on new development. And one of the only things I remember from my economics classes is that it’s generally good practice to tax the things we want less of. You know, things like cigarettes and carbon.

    This is why I have also been a strong supporter of road pricing over the years on this blog. Traffic congestion is bad (demand also happens to be relatively inelastic). So tax it and redirect the funds toward transit.

    Housing supply, on the other hand, isn’t bad. It’s pretty good and fairly useful. So in my simple mind, I don’t know why we would want to apply a tax to it instead of figuring out way to simultaneously encourage and incent the supply of new affordable housing. Here’s one idea.

  • Where people are moving in the US

    Another day, another set of announcements about large companies and rich people moving to lower cost US states. Yesterday it was announced that Oracle will move its corporate headquarters from Silicon Valley to Austin, Texas. (If you remember, Elon Musk also recently announced that he had moved himself to Austin from California.) The company has said that the move puts Oracle in the best position to grow and to give its employees greater flexibility about where and how they work.

    While these sorts of moves are making headlines right now, it’s important to keep in mind that this is not necessarily a new phenomenon. In fact, depending on how you look at it, you could argue that these headlines are a lagging indicator for trends that have been underway for some time. Below is a chart from New Geography showing the top 50 state-to-state moves last year. Number one is the move from California to Texas with 45,172 net movers. And number two is the move from New York to Florida with 38,512 net movers.

    According to New Geography, California saw a net domestic migration loss of 912,000 people from 2010 to 2019. And the most popular receiving states are what you would expect: Florida (1,230,000 people) and Texas (1,146,000 people). A big part of this story obviously has to do with housing affordability and the search for an overall lower cost of living. As well, since companies are always in need of young and smart talent, it makes since for them to locate in places where young and smart people want to live.

    But urbanists like Richard Florida have also pointed out at this relocation of companies could be a leading indicator for something else: the decline of innovation in America. Here, he argues that in the nascent stages of a new invention, there tends to be a tight clustering phenomenon. Think steel in Pittsburgh, cars in Detroit, and computing in Silicon Valley. However, as the industry matures, the tendency to centralize seems to decline and companies then start moving around.

    I’m not yet convinced that this is what’s happening. Because there seems to be a pile on happening in specific cities like Austin (which, by the way, I hear is terrific). Even before this pandemic, there was a growing sense (from the outside, mind you) that the Bay Area had simply gotten too expensive, both for individuals and for companies. It would seem that when you greatly restrict the supply of new housing and make it unattainable for many, people go find housing somewhere else. Sometimes in other states.

    Photo by Tomek Baginski on Unsplash

  • Is that delay really necessary?

    The big news this week in Toronto planning & development is the province’s decision to approve three downtown development projects using a tool known as a “ministerial zoning order.” The impetus for doing this was to speed up the approval and delivery of about 1,000 affordable housing units (along with about 2,000 market-rate units).

    The province has made it clear that it wants to do what it can to reduce red tape and unnecessary delays when it comes to building new affordable housing. But this, not surprisingly, upset a number of local councillors who feel the province is overstepping and not allowing the city to govern its own city building affairs.

    Alex Bozikovic’s view in the Globe and Mail this week was: hey, maybe that’s not so bad. The planning process is painfully slow (and political). And Toronto is going to need a lot more housing over the coming years and decades. So why not speed up its delivery? Especially when there’s an affordable housing component and the architecture is exemplary.

    The reality is that our housing delivery system is rife with tensions. A big part of the process is predicated on local voters, who already live in a particular place, opining on their own interests and on the interests of people who don’t yet live there. The incentives in place are anything but aligned.

    We can debate which level of government should have more power and what might be considered an unnecessary delay, but what is clear to me is that it should not take 2-5 years to get new housing approved in this city.

  • Housing supply in the Bay Area


    Back in March, SPUR Regional Strategy published a report called: “What It Will Really Take to Create an Affordable Bay Area.” Much of its focus is on all of the housing that the San Francisco Bay Area should have been building over the years and all of the housing that it will need to start building in order to prevent things from getting worse.

    Here are a few stats to put things into perspective. Since 2000, the Bay Area has added about 1 million people (about a 15% increase). From 2011 to 2017, the Bay Area also added some 658,000 jobs, but only created about 140,000 new housing units. That’s 4.7 jobs for every new house built. SPUR further estimates that over the last 20 years, there has been a shortfall of almost 700,000 new housing units.

    If you look at the above chart showing residential building permits issued between 1980 and 2018, you can see that the Bay Area was actually more prolific in the 1980s — peaking at nearly 50,000 units per year. Those levels have yet to happen again, despite the region growing in population. (If you looked at new housing units per capita or some other normalized metric, the supply decline would be even more pronounced.)

    Part of the reason for this is that the supply of housing in the 1980s had a higher percentage of low-rise single-family homes. We could get into a discussion about sustainability, but that’s not the topic of today’s post. The reality is that this housing typology was easier, faster, and cheaper to build as compared to today’s urban infill housing. We have made it very difficult to build.

    To download a copy of the SPUR report, click here.

  • A question of land value

    Let’s say that we have a piece of development land worth $100. That is the market value of the land based on its highest and best use at this particular point in time. Now let’s assume that the land was just encumbered with a new burden: inclusionary zoning. All of a sudden there is now a requirement to make available X% of any residential units built at 50% of average market rents for the area.

    Technically, the land is now worth less than $100. And there is a school of thought out there that, in instances like this one, the price of all land should automatically reset downward to offset and account for the inclusionary zoning burden. But as I have argued before on the blog, land prices tend to be fairly sticky, unless the owner is distressed and really needs to sell.

    So what can often happen is that the land owner will stubbornly cling to the original $100 number. The thinking being, “I was once told that my land is worth $100 and so that’s the minimum price I’m willing to accept.” In this scenario, you may need a broad increase in rents in order for a transaction to occur. This way the market rate units might be able to fully subsidize these new affordable units, preserving any margins and justifying the original $100 number.

    Of course, the impact of inclusionary zoning is a hotly debated topic and there are a number of variables to consider. And so I will leave it at that for today. The real purpose of this post is to consider another permutation. Let’s once again say that we have a piece of development land worth $100. But instead of being owned by 13 siblings — and 3 cousins that live abroad and can’t be reached other than by fax — it’s owned by the government.

    In this case, the government wants to sell the land and is considering two options. It can either (1) sell it for $100 and maximize immediate taxpayer revenue or (2) it can sell it for $80 with the condition that the buyer agree to deliver X% of affordable units (and a bunch of other goodies and positive externalities). I would also add that this fictitious town is experiencing what some might call a housing crisis.

    If you were a private sector actor, you would probably choose option 1. You would take the additional $20 and retire to Florida (I’m off by a few zeros). But this is the government we’re talking about and presumably the government is thinking about the broader public good. Which option do you think is better at maximizing that?

  • A dumpster fire in San Francisco

    This past week, San Francisco’s Proposition E was approved by 55% of voters. The measure works by limiting new office development if (or when) the city falls short of its affordable housing target for the year.

    If the city only builds 25% of its housing target (currently set at 2,042 affordable units per year), then only 25% of its annual allocation of office space can be built the following year. (I just learned that large scale office development in San Francisco has been limited to 875,000 sf per year as a result of a Proposition dating back to 1986.)

    San Francisco currently skews heavily in favor of jobs. The city creates about 8.5 jobs for every unit of new housing. And over the last decade, SF has only averaged about 712 affordable housing units per year and has never once met its target.

    So at the moment, San Francisco looks destined to start building a lot less office space. And considering that new office space actually helps to fund affordable housing, I am struggling to understand why the goal seems to be to constrain job growth.

    California State Senator Scott Wiener called Prop E a dumpster fire:

    Call me old fashioned, but I tend to think that if the goal is to build more affordable housing, you should do things that, you know, encourage the actual construction of affordable housing.

    Photo by Eduardo Santos on Unsplash

  • Berlin apartment rent freeze has frozen capital expenditures

    Last year, the city of Berlin agreed to a five year rent freeze for some 1.5 million flats constructed before 2014. The way it was initially approved is that it would freeze rents at mid-2019 levels and allow for only 1.3% inflationary increases. All of this is being challenged in the courts, but the Financial Times is suggesting that it could still come into force by March 2020. Here is an excerpt from a recent article. (Guy Chazan isn’t holding back about the kind of people that he believes Berlin attracts.)

    The legislation, which should come into force by March this year, is City Hall’s response to a lingering housing crisis that shows no sign of easing. Packed out with Brexit refugees, international party people and wannabe tech entrepreneurs, Berlin is in expansion mode, its population growing by 40,000 a year. Yet affordable housing remains scarce. Rents have doubled over the past decade, as new residential construction fails to keep up with soaring demand.

    As I mentioned before on the blog, these policies are not intended to apply to new buildings. That would surely choke off new construction, which would only exacerbate the underlying supply issue that Berlin is facing. But not surprisingly, this move has also put a freeze on capital expenditures, according to the same FT article. Local trades are complaining that, “It’s as if someone’s just turned out the lights.”

    Photo by Gilly on Unsplash

  • These 3 things happened after Portland enacted inclusionary zoning

    On February 1, 2017, an inclusionary zoning ordinance came into effect in Portland, mandating that all new residential projects with 20 or more units dedicate a portion of the building to affordable housing.

    For the first year, the requirement was 8% of all units for households earning 60% of the Area Median Income or 16% of all units for households earning 80% of the AMI. I’m not sure if it was or is possible to do a blend of the two income levels.

    After the first year, the requirement was supposed to step up to 10% and 20% of all units, respectively. But that step up was never enacted, which had many industry analysts arguing that it was a clear signal the ordinance was not performing as intended.

    According to Joe Cortright of City Observatory (which is based in Portland), the new ordinance largely resulted in 3 things happening:

    (1) Developers rushed to get new applications in during the transition period so that they would not be subjected to the new IZ rules; (2) applications increased for projects with less than 20 units (avoid the rules by building smaller); and (3), following the initial transition surge, building permit applications, as a whole, dropped off.

    This last point is what usually comes up in debates around inclusionary zoning. Does the requirement to build affordable housing actually reduce overall housing supply?

    I’ve written about this before, but the math is pretty simple. Inclusionary zoning policies are a drag on revenue and a direct cost to the project. What that means is that something else will need to give in order for the numbers to balance.

    That could come in the form of lower costs (such as an impact fee abatement) or in higher rents on the balance of the units. But this latter approach is easier said than done. Sometimes you need to wait for the market to “catch up”, which could be what some developers in Portland are doing.

    They’re waiting for housing to get more expensive — overall — so they can then offset the pro forma drag from the affordable units.