Tag: housing supply

• Cost-plus price floor

  Oftentimes, it feels like there is a perception that developers price new housing with the fattest of margins. Meaning, if only developers were less greedy, housing could be more affordable. But as we have spoken about many times before, real estate development is a competitive industry; therefore, projects happen on the margin.

  Ordinarily, the prices you see are the result of a cost-plus pricing strategy. Developers figure out what it will cost to build and develop, they add on a margin that they think their investors will accept, and then they determine what sticker prices they need to make the project financially feasible.

  I’ve been writing about this approach for many years, but today it’s even more obvious. According to Urbanation’s Q1-2024 condominium report, new unsold condominium inventory in the GTA is currently sitting at approximately 23,815 units. This is up 30% YoY and is equal to about 23 months of supply. Two years ago in Q1-2022, this number had reached an 18-quarter low of 8,726 units.

  Developers are highly motivated to sell and move their projects forward. Time is a killer, especially today. So the logical explanation for this rising inventory is simply that they can’t sell it. Their cost-plus pricing doesn’t overlap with what most buyers in the market are willing to pay. Like I said, development happens on the margin.

  In theory, there is always a price where buyers would be willing to transact. If I listed a beautiful condominium for $100k today, many people would want to buy it. Supply would quickly run out. The problem is that no developer can build for this. There is always a very real price floor and, right now, that floor doesn’t seem to be low enough for many buyers.

  2024.05.12

• Toward more rental housing

  The Greater Toronto and Hamilton Area is expected to see 6,821 new rental homes completed this year. This is a “multi-decade high”, according to Urbanation’s latest rental report. Indeed, you need to go back to the 1970s to get rental supply figures of this magnitude.

  A big part of this has to do with the fact that we are now taxing rental housing less. Toward the end of last year, the federal government removed their portion of the HST on new rental housing and, then in November, the province of Ontario followed with theirs.

  This was “a big first step” for the industry, according to leading apartment developers like Fitzrovia.

  But there’s another reason that many developers are now looking to purpose-built rentals: fewer people are buying new condominiums. And if you can’t presell condos, well then you’re going to need to find another path forward for your land.

  However, flipping over to rental is not necessarily a panacea. The margins are generally razor thin (+/- 50 bps). It requires more and different capital (typically). And you need to believe in some fairly non-consensus assumptions (high rent growth, low cap rates, etc.).

  It’ll be interesting to see how many developers are able to successfully flip over to rental and how sustained this rental supply number will be.

  2024.04.30

• Housing follows money

  One argument that you might be able to make is that home prices follow urban density. New York City, for example, is dense. And homes in New York City tend to be more expensive than those in, oh I don’t know, rural Canada. So with this, you might conclude that development and density are bad — it makes housing more expensive. But then there’s places like San Jose, California. It’s not very dense, and yet it has some of if not the most expensive housing in the US.

  Well, it turns out that housing density and median housing values don’t actually exhibit a particularly strong correlation. A better and much stronger relationship can be found in what Kasey Klimes explains, here, in this excellent post, which is that home prices more accurately follow incomes. In other words, the more high paying jobs that exist in a market, the more likely that housing will be expensive.

  Here is what that looks like for US metros over 1 million people:

  

  The above chart compares median home value to aggregate income per unit of housing. And here, Kasey discovers an r-value of 0.9, which suggests that “over 81% of median home values in large metros can be attributed to aggregate income per unit of housing.” This explains why San Jose, and San Francisco, are such outliers. They have very high incomes for every unit of available housing, despite the former being not all that dense.

  Okay, so now that we know this, how do we make housing more affordable? One option is to just make people poorer. If you reduce incomes per unit of housing, then home prices will, almost certainly, go down. And this is why poorer cities tend to have more affordable housing. But this is obviously suboptimal. The better option is to keep people wealthy and simply increase the denominator in “aggregate income per unit of housing.”

  Meaning: build more housing!

  Chart: Kasey Klimes

  2024.04.12

• San Francisco is highly proficient at making housing more expensive

  

  If you’re looking to block new development, drive up the cost of housing, and appear “progressive” all at the same time, one generally effective technique is to do it under the guise of historic preservation. San Francisco is really good at this, as are many other cities. And it works because, who doesn’t think that history is important?

  This exact thing just transpired in San Francisco, where earlier this year Supervisor Aaron Peskin passed an ordinance enacting new density controls for most development in the Northeast Waterfront Historic District, the Jackson Square Historic District, and the Jackson Square Historic District Extension (solid neighborhood names).

  Of course, sometimes you can run into resistance when you’re trying to push through new anti-housing policies. And in this case, San Francisco Mayor London Breed actually vetoed Peskin’s bill. In a letter dated March 14, 2024, she wrote:

  Restricting new housing runs counter to the goals of our Housing Element, which the Board of Supervisors unanimously approved just over a year ago. It also runs counter to what we need to do to make this City a place that creates opportunities for new homes for the people who need them today and for future generations growing up in San Francisco.

  This ordinance passes off anti-housing policy in the guise of historic protections. Existing rules already protect against impacts to historic resources. I believe we can add new homes while also supporting and improving the vibrancy of our unique neighborhoods. Many areas of San Francisco, including eastern neighborhoods like the South of Market, Potrero Hill, and the Mission, have also already removed density limits to encourage new housing.

  However, her veto was ultimately overridden by the Board of Supervisors and so, as far as I understand it, the above density controls stand.

  What’s particularly frustrating about this outcome — sarcasm now firmly off — is that it so obviously reeks of NIMBY selfishness. Here’s an elaborate infographic created by Max Dubler explaining what many in San Francisco believe is the real reason behind this downzoning:

  

  Here is also a street view image from the area, along The Embarcadero:

  

  But like I said, San Francisco seems to be really adept at this sort of maneuvering.

  2024.03.30

• Toronto wants small-scale apartments on its major streets

  This week we speak about the problem of not enough density next to transit stations. More specifically, we spoke about Toronto’s low-rise residential neighborhoods, which are colored yellow in the city’s Official Plan. Well, as many of you know, the city is, in fact, working to “expand housing options” in these neighhorhoods through their EHON program. One component of the program covers laneway and garden suites, another covers multiplexes (up to fourplexes), and another hopes to allow 6-story apartment buildings on all major streets.

  Here are the city’s major streets:

  

  And here’s what these “small-scale apartments” might look like:

  

  

  The setbacks are intended to be 6m in the front (to be consistent with existing neighborhood setbacks); 1.8m on the sides (so there’s rear access and so that these elevations only get fenestration for secondary rooms); and 7.5m in the back (which is consistent with the current mid-rise guidelines). Now, directionally, and without referring to any of the specific details, this is good. Toronto’s major streets are, in most cases, painfully underdeveloped; the existing built form feels generally entirely out of place. But the important question remains: Will developers actually build these at scale?

  Bloor Street and Danforth Avenue, for example, already allow mid-rise buildings that, for the most part, are bigger than what is being proposed here as part of the EHON program. But again, they remain underdeveloped. And there’s a subway running underneath these streets! So why will it be any different on our other major streets? One key difference is that these small-scale apartments are expected to be fully as-of-right. Meaning, no rezoning process and no community meetings. This will save a lot of time and money.

  Still, this is almost certainly going to require some iterative finessing to get it right. I think you’ll see developers looking to do little to no parking, no basements, no dedicated loading areas (certainly no type “G” spaces), slab-on-grade construction, and standardized and repeatable designs. And even then, this may not be enough. Rental replacement policies are yet another major barrier to consider. It’s going to have to be all about speed and efficiency, which is why it will likely also create a greater push to rethink some building code items, such as the requirement for two means of egress.

  At the end of the day, I want something like this to happen. It would increase housing supply, and make Toronto far more vibrant and far more conducive to non-driving forms of mobility. It’s, no doubt, a really positive thing. But for this to become a reality, it needs to work at scale. Meaning, the development pro formas need to work at scale, and with sufficient margin that developers won’t just automatically look to other opportunities. If the development community can make money building this housing typology, they will look for every opportunity to build it. But if they can’t make money, they won’t. It’s as simple as that.

  Images: City of Toronto

  2024.03.02

• New York City’s vacancy rate is the lowest since 1968

  Some four years ago, people were talking about the possibility of New York City being dead. But of course that was nonsense. Last week, New York City published the initial findings of its housing and vacancy survey and the key takeaway is that the city’s vacancy rate dropped to 1.41% last year (2023). This is a drop from 4.54% just two years ago and the lowest measurement since 1968. It’s also even worse at more affordable rent levels:

  

  The problem, as described by the city, is a supply-demand imbalance. Over the last two years, the city’s net housing stock grew by about 60,000 homes (~2%). This is, apparently, pretty good compared to recent years/decades; but it wasn’t nearly enough given that the city added 275,000 new households. This is the opposite of dead, and it’s not going to be addressed by just doing things like restricting short-term rentals.

  We have a structural delivery problem and New York City is not alone in facing it.

  2024.02.14

• Why are construction starts down?

  Last year in the Greater Toronto Area, condominium construction starts fell to a 9-year low of 15,891 homes. And this year, condominium construction starts are forecasted to fall to a 15-year low of 11,500 homes (though new sales are expected to rebound). Both of these figures are from Urbanation’s Q4-2023 market data.

  One possible explanation for this drop in construction starts could be that developers are somehow colluding to keep supply low and prices high. Another one could be that more developers are right now independently speculating that prices will be higher in the future, and so they think it’s better to just wait. But both of these explanations would be wrong.

  The correct answer is that more developers are unable to start construction because the market isn’t there. In the case of Toronto’s condominium market, this means that the pre-sales aren’t there. This might seem obvious, but there seems to always be a contingent of people who believe that developers can choose to build whenever they want.

  It is for this same reason that some people think that zoning approvals should have an expiry date. Call it a use-it-or-lose-it approach. But as I think we can see in the above numbers, developers don’t control the market. And so I would never want to be in a position where I need to start construction by a certain date, or else.

  That’s not entirely within my control. In fact, sometimes it’s completely out of my control.

  2024.02.06

• Thinking about the things we’re used to

  This is a powerful perspective:

  We evolved to be wary of change. Our attention is limited, new things can be a threat and the status quo feels comfortable.

  As a result, we spend a lot of time and energy being afraid (and arguing about) the upcoming changes in our lives, but almost no time at all thinking about the things we’re used to.

  As an example of this tension, check out this “exit interview” with Toronto’s former chief city planner, Gregg Lintern. The underlying theme is change and why it’s desperately needed.

  But of course, that’s not easy.

  The interviewer, Victoria Gibson, mentions this survey stat: nearly half (47%) of all Torontonians think the city is building too little housing, and yet only about a quarter (27%) think their area could handle more.

  We need this, but not here. Probably because we’re used to the way things are.

  But if you read the interview, you’ll see that the answer, or at least one answer, is to make the conversation personal, and ultimately think critically about, you know, the things we’re used to.

  Change starts with not giving the benefit of the doubt to the status quo.

  2024.01.02

• Are short-term rentals really a zero-sum game?

  The prevailing view on short-term rentals right now seems to be this:

  

  That is, it’s viewed as a zero-sum game between residents and tourists. There are only so many homes within a city, and so if any of them are to turn into short-term rentals, then it is a direct reduction in the supply of available long-term homes. This can also happen very quickly given the asset-light nature of Airbnb and the fact that these spaces aren’t usually purpose-built.

  It is for this reason that many cities have enacted strict short-term rental laws that basically only allow you to rent out your principal residence when you’re not around or if you happen to have extra space. In the case of New York, you have to be physically present when the dwelling is being rented, and so the use case is exclusively “I have extra space for you.”

  Either way, the basic idea is to stop people from removing homes from the long-term market. I do, however, find it curious that reductions in housing supply seem to be generally viewed as bad, but that increases in housing supply are often met with skepticism. Doesn’t housing supply work in both directions? Why aren’t more people clamouring for new homes to be built?

  Where my head is at on this issue is that I don’t see it as a zero-sum game. I believe that there should be rules and regulations around short-term rentals, but that they shouldn’t stamp out all use cases other than “here’s an air mattress in my living room.” At the same time, I think we should be viewing this as an opportunity. Clearly we need more homes, more hotels, and more short-term rentals.

  It’s only zero-sum if we make it that way.

  2023.12.22

• Canada is growing a lot

  This week it was announced that Canada’s population grew by approximately 430,000 people over the last quarter (+1.1%). And that it represents the highest population growth rate of any quarter since the second quarter of 1957. Even more impressive, though, is the fact that in the first 9 months of this year we have already added over 1 million people in total. This beats all full-year periods since Confederation in 1867!

  Here’s what all of this starts to look like visually:

  

  The unfortunate side of these records is that it is coming at a time where we’re, perhaps counterintuitively, building a lot less new housing; which is to say that construction starts are declining. In fact, I was on a call this week where people who examine development and construction costs all day were predicting a 5-6% decline in hard costs in the Toronto region next year. And this is a direct result of fewer new projects getting started.

  Broadly speaking, this is how things tend to work in real estate development: there are heavy lags between changes in demand and changes in supply because of how long it takes to build new buildings. But what’s happening right now is more than this. Interest costs are impacting everyone. And investor interest in pre-construction homes has softened significantly, demonstrating how much our industry relies on individual investors. Many projects cannot go.

  What I ultimately think this is going to do is exacerbate our current supply-demand imbalances. Meaning that when the market does come back — and it of course will — it’s going to come back with a vengeance. And that’s because it is going to need to catch up to all of the new demand that is accumulating as we speak.

  2023.12.21