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: development

  • 2017 year in review

    I just finished going through my list of 2017 goals. I didn’t accomplish everything I wanted to, but I did manage to check off a number of professional and personal goals.

    Some of the remaining goals have been pushed to 2018. But there are also items that I have since realized aren’t worth pursuing and so I have dropped them from the list.

    All that said, it was a great year. Here is a rapid-fire summary of 2017 told through posts from this blog.

    Thanks for reading. Onward my friends.

  • The impact of inclusionary zoning on development feasibility

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    After my recent post on inclusionary zoning in Ontario, I was asked to provide my comments on the draft regulation and on how inclusionary zoning could and will impact development feasibility. So I will endeavor to do that today.

    It’s important to first understand the costs and inputs that go into a development pro forma and how overall project feasibility is determined. For simplicity, let’s breakdown the costs as follows:

    – Land

    – Soft Costs

    – Financing Costs

    – Municipal Fees/Charges

    – Hard Costs

    All of these costs buckets are significant. For a project to be feasible, you obviously need the revenues of the project to be greater than the above costs. There also needs to be a remaining profit margin that is commensurate with the risk profile of the project and that meets your investor’s return expectations. Most developers rely on outside equity and debt to finance their projects.

    One of the misconceptions that I often hear is that people seem to think that the profit margin on projects is so great that developers could simply build affordable housing (or do many other things) if they weren’t so greedy. The reality is that development happens on the margin. It’s not easy to find sites and projects that make any sort of financial sense. More often than not they don’t.

    The other reality is that in a growing market all of the above costs are also continually increasing. If revenue (i.e. rents and condo prices) is also growing, as has been the case here in Toronto for many many years, then developers can generally absorb reasonable increases and continue building. But if revenue stops growing, grows at a slower pace or, worse, shrinks, then feasibility could disappear and development would stop.

    Now let’s talk specifically about inclusionary zoning. IZ is typically an incentivized or mandated requirement to provide a certain number of below-market housing units as part of new developments. Affordable housing is important. That’s why a number of cities already have inclusionary zoning policies – though it remains a fairly controversial tool.

    From a development feasibility standpoint, a mandatory inclusionary zoning requirement represents a decrease in revenue. There’s now a percentage of the units that can no longer be rented or sold at market prices. And so to maintain the project’s feasibility – because remember development happens on the margin – something has got to change.

    There are a few options.

    Option One: You could simply try and pay less for the land. As we have talked about many times on this blog, land is supposed to be the residual claimant. Work backwards from revenues and your other costs to determine what can be paid for the land. The problem with this option is that land prices tend to be sticky.

    Many or most landowners don’t give a shit about your development pro forma. They often have a number in mind and if you try and tell them that development charges just went up and you can’t pay as much for their land, they’ll simply sit on it and wait for someone else – even if that means waiting for the market to catch up (i.e. waiting for rents to go up).

    Option Two: Charge more for the remaining market units. If the market is sufficiently robust, perhaps this is an option. This is one of the reasons why inclusionary zoning often produces more units in markets where there’s already strong demand for new housing.

    But it’s also one of the reasons why IZ is controversial. You’re asking the other renters/buyers in the project to effectively subsidize the below market units. And there is research out there (previously posted on this blog) suggesting that in some instances IZ policies have created additional upward pressure on market rents and home prices.

    Option Three: Incentives are provided by the municipality to offset some or all of the additional burden placed on the project. This could come in the form of a density bonus, financial contribution, a waiving of other municipal charges/fees, and so on.

    Though I have questions about the details, this is something that was proposed in Ontario’s draft regulation (albeit not to the extent that the industry wanted). Now you know why I said and why I believe that these offsets are important to the industry and to overall housing affordability.

    My hope with this post was to provide the developer’s perspective, but also take a very matter of fact approach to inclusionary zoning. Most people recognize the importance of affordable and accessible housing. The question is how best to execute.

    Photo by Toa Heftiba on Unsplash

  • Inclusionary zoning is coming to Ontario

    On Monday the province of Ontario posted a draft regulation intended to establish a framework for inclusionary zoning. It builds on a bill that passed last year allowing municipalities – should they choose – to require affordable housing in new developments and redevelopments.

    Below are some, but not all, of the things that are being considered in the draft regulation. Some of these items were recommendations made by the development industry through the Ontario Home Builders’ Association (OHBA) and the Building Industry and Land Development Association (BILD).

    – The total number of affordable units or gross floor area dedicated to affordable housing units would not exceed 5% of the total units or 5% of the total gross floor area (excluding common areas). This number increase to 10% in high density transit station areas.

    – The affordable period would be a minimum of 20 years but no greater than 30 years.

    – There may be opportunities to provide the inclusionary zoning units off-site.

    – The policies would only apply to developments / redevelopments with 20 or more units.

    – The affordable component could not be used to determine community benefits under Section 37. Section 37 would also not apply if the proposed development (with IZ) is in a location where a development / community planning permit is used.

    – Municipalities would be required to offer incentives to help offset the IZ cost burden, but only if the development is not subject to a development / community planning permit. The incentives could include a waiver or reduction in application fees, parkland dedication fees, development charges, and so on. These offsets are very important to the industry and the affordability of the market rate units. But interestingly enough, increases in height and/or density are not being contemplated as a possible incentive or financial contribution.

    – The financial contribution would be based on the following formula: (A – B) x 0.4. A is the total sum of the average market price for all of the affordable housing units and B is the total sum of the affordable price for all of the IZ housing units. In other words, the intent is that municipalities would be required to offset 40% of the costs associated with providing the affordable units.

    Click here for the rest of the draft regulation. The OHBA also published this media release following the draft. They like the “partnership model” but were advocating for a 50/50 public/private cost share on all government-mandated units.

    If you’re looking for more reading on inclusionary zoning, check here, here, and here.

    Photo by Omair Khan on Unsplash

  • The Canada mission

    It’s the Christmas and holiday season, which means two very important things. 

    One, it’s time for the latest rendition of Urban Capital’s annual Naughty or Nice party. That was last week and it was #7. Here are the obligatory photo booth snaps to prove it happened.

    And two, the latest issue of Site Magazine (from Urban Capital) is now out. 

    This year I wrote a piece called “The Canada mission”. It’s all about Urban Capital’s pan-Canadian mission to build from coast to coast. How it happened. The challenges. What’s driving it. And what have been the results.

    The article includes case studies from Urban Capital’s two newest markets: Saskatoon and Winnipeg. 

    One of the things that I didn’t fully appreciate until I started researching for the article was just how pioneering these projects were. At the time, there were no proof points to suggest that the pro formas would work. And this is a leap of faith that Urban Capital has had to make on many of its projects.

    Click here to download a PDF of the full magazine.

  • We’re hosting a pre-design community meeting in Hamilton

    This fall Slate acquired a retail center in Hamilton called Corktown Plaza. It is the block bounded by John Street South, Young Street, Catharine Street South, and Forest Avenue. It is just south of the Hamilton GO Centre in downtown.

    It is currently a much used single storey retail plaza with a large surface parking lot facing John Street South. It’s still early days, but the long-term plan is to redevelop it into a mixed-use retail and residential complex.

    Before putting pen to paper, the team is hosting a “pre-design community meeting” this Tuesday, December 12, 2017 at 7pm at the Church of Ascension down the street. Address is 64 Forest Avenue (accessible entrance at 258 John Street South).

    Here is the invite (embedded tweet):

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    The purpose of the meeting is to gather feedback from the community before beginning design. We want to know what’s working today, what’s not working today, and what would be ideal for the future. 

    CORE Architects and GSP Group (planning) will be in attendance along with the Slate team. The format will be brief presentations followed by interactive breakout sessions. There will be trace paper on hand so that we can all put pen to paper.

    If you live and/or work in the area or are simply interested in the future of Hamilton, please feel free to join us on Tuesday evening. If you can, send a quick email to rsvp@kga-inc.com letting us know you’ll be coming. But just showing up is also perfectly fine.

  • Land use restrictions and upward mobility

    Throughout US history, economic growth has typically spurred an “enormous reallocation of population.” Here is a graph from a recent New York Times article called: What Happened to the American Boomtown?

    The argument, here, is that restrictions on development have made it so that the most prosperous cities are actually the slowest growing cities in terms of population. Here is a chart, from the same article, comparing population growth to average annual pay:

    And here is an excerpt:

    But these productive places aren’t growing as fast now as economists believe they should — and as they would if they didn’t impose so many obstacles on new development. Since the 1970s, land use restrictions have multiplied in coastal metros, making it harder to build in, say, San Jose, Calif., than in Phoenix. And the politics of development have become tense, too. In the Boston suburbs, the Bay Area, Brooklyn and Washington, people who already live there have balked at new housing for people who don’t.

    We often talk about the impact of land use restrictions on supply and overall housing affordability. But here is an argument that it could also be impacting upward mobility.

  • How’s your PTAL these days?

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    As I was going through the new London Plan yesterday I noticed a number of references to PTAL. I didn’t know what this was, so I obviously had to look it up.

    It stands for Public Transit Accessibility Level. It’s a methodology that was developed in London in the 90′s. And it’s a measure of access to public transit, or of the density of the public transport network at any given location.

    There are 6 levels, though two of the levels are further subdivided into 2 sub-levels for greater precision:

    • 1a and 1b
    • 2
    • 3
    • 4
    • 5
    • 6a and 6b

    1 is bad. 6 is good. 

    What’s captured in this measure are the walking times from a particular location to the nearest transit access points; the reliability of the available services; the number of services available; and the average wait times.

    Historically, this measure has helped to determine how much density could be built on a particular site, how much parking should be provided, and so on. 

    For example, in the new London Plan, PTAL 5 and 6, as well as Inner London PTAL 4, are expected to see development with no residential parking. Once you move to PTAL 3, the parking maximum moves up to 0.25 spaces per unit. 

    In the draft London Plan you’re also supposed to use the highest existing or planned PTAL. So if transit improvements are planned for the area, you factor those into the calculation.

    Seems quite rationale (though it’s probably not a perfect measure of access and connectivity).

    If you’d like to determine the PTAL for a particular address in Greater London, you can do that here. Unfortunately, I don’t have a calculator for you if you happen to live outside of London. But there is one simple check you can do.

    The PTAL methodology assumes an average walking speed of 4.8 kph. The maximum allowable walk time for buses is 8 minutes and the maximum walk time for subway and light rail is 12 minutes. These numbers translate into distances of 640m and 960m, respectively.

    How far do you have to walk to access good transit?

    Photo by Bruno Martins on Unsplash

  • New London Plan released today

    A draft version of the new London Plan was released today for public consultation. It is “the spatial development strategy for Greater London”. And you can download all 524 pages of it, here. A final copy of the Plan is expected to be published by fall 2019.

    Here is what mayor Sadiq Khan had to say about the Plan (quote from The Guardian):

    “I am using all of the powers at my disposal to tackle the housing crisis head on, removing ineffective constraints on homebuilders so we make the most of precious land in our capital.”

    And that tone comes through in the document. Here is an excerpt from the “optimising housing density” policy section:

    “For London to accommodate growth in an inclusive and responsible way every new development needs to make the most efficient use of land. This will mean developing at densities above those of the surrounding area on most sites. The design of the development must optimise housing density.” (Section 3.6.1)

    The Plan also contains a set of clear performance indicators. They cover things like the supply of new homes, the supply of affordable homes, modal share in the capital, and so on.

    The ambition is 66,000 net additional homes each year. And by 2041, the goal is that 80% of all trips in London will be by foot, cycle, or public transport. There simply isn’t road the capacity.

    Which is why the plan also specifies parking maximums, as opposed to parking minimums. The Plan wants the starting point for any development that is well-connected to transit – or to future transit – to be “car-free”.

    If you have a chance, the new London Plan is worth a scan. Maybe you don’t want to print it though.

    Photo by Rob Bye on Unsplash

  • An even longer view on home prices — this time in Amsterdam

    In the comments of my recent post about Manhattan real estate prices during the Great Depression, a regular reader of this blog shared this terrific blog post (and corresponding research paper by Piet Eichholtz) about house prices along the Herengracht canal in Amsterdam from 1628 to 1973. Later it was updated to include up to 2008. It’s a long run house price index.

    Probably the first thing you’ll notice is that the index is highly volatile. Amsterdam enters its Golden Age, creates the world’s first stock exchange, and becomes the wealthiest city in the western world – house prices go way up. The tulip mania bubble pops – house prices go way down. It’s not until after World War II that prices sort of start to stabilize and increase, maybe, more consistently.

    In nominal dollars, the house price index increases 10x over the study period. But in real dollars most of that disappears. The biennial increase (that’s how the study was done) over the same period of time is just 0.5%. That translates into a doubling of house prices, which may seem quite good, except that remember it’s over a 380 year time period.

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    The Herengracht canal is a particularly good study because it was and has remained (or so I’m told) a desirable part of Amsterdam. This is an attempt to control for the variable that maybe some of the volatility could be explained by the area simply falling out of favor. (As a quick sidebar, the Herengracht was one of the first canals laid and dug out around the original city center of medieval Amsterdam during its Golden Age.)

    Generally, this finding is in line with one that economist Robert J. Shiller famously published a number of years ago where he argued that, when you correct for inflation, home prices actually look remarkably stable over long-run forecasts. In one study, he looked at 100 years of US home prices ending in 1990. Real home prices increased about 0.2% a year. What an outstanding hedge against inflation.

  • End of the automotive era

    Bob Lutz is a former vice chairman and head of product development at General Motors. Recently, he had this to say about the future of the auto industry. 

    Here are a couple of powerful snippets:

    It saddens me to say it, but we are approaching the end of the automotive era.

    The auto industry is on an accelerating change curve. For hundreds of years, the horse was the prime mover of humans and for the past 120 years it has been the automobile.

    Now we are approaching the end of the line for the automobile because travel will be in standardized modules.

    Everyone will have five years to get their car off the road or sell it for scrap or trade it on a module.

    Bob is 85 years old. This is somebody who spent his entire life in the auto industry telling us that the old model is now done. 

    It reinforces something that I wrote about here, where the “end of the automotive era” was pegged at around 2021. 

    And it is part of the mental model that I have started relying on today for decision making.

    Photo by Alessio Lin on Unsplash