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.
One of the debates that is happening in cities all around the world right now is about whether or not it makes sense to redistribute public space in order to help with current social distancing measures. We are all being told to stay at home as much as possible, but as we venture out for food and/or sanity walks, many have started noticing that a lot of our sidewalks are in fact too small if you’re trying to stay 2m away from other humans. So with vehicular traffic way down, the question becomes: Should we start borrowing some of that space for pedestrians?
Here in Toronto the official position is no. Closing down streets and lanes to car traffic is usually referred to as creating an “open street.” And the intent of these open streets is typically to bring people together for public life, which, of course, is the exact opposite of what we’re trying to do right now. What this implies, however, is that there’s a belief that additional space for pedestrians would induce demand, similar to what is believed to happen when you add additional lanes on a highway.
Lewis Mumford probably had it best when he allegedly said, “Adding highway lanes to deal with traffic congestion is like loosening your belt to cure obesity.” So on the one hand, if you believe that more lanes doesn’t solve traffic congestion, you might also be inclined to believe that more and bigger sidewalks isn’t going to dampen the anxiety we currently feel when other humans get anywhere near us. The additional space would simply get filled with more bodies.
But maybe you could argue that this is a little bit of a different situation. We’re in a global pandemic for God’s sake and most of us have the better sense to stay home unless it’s absolutely necessary. Perhaps in this case, demand would not increase and the greater supply would simply better serve the demand that is already there. Perhaps. I don’t have a strong stance on this, but I’m fairly certain that technology could help with this decision.
Very few of us have a mental model for the macro conditions that we are living through right now. We have been through economic downturns, but most of us haven’t lived through a pandemic. I am an optimist and I know that we will get through this and normalcy will return. But one of the questions that we’re all asking ourselves right now is: What will “normalcy” look like on the backend?
Here is an interesting piece of evidence for the current shutdown:
The shutdown is essentially complete. * Mar 8, avg bookings of 32 cities -3%. * Mar 18, -98%
All -100% except: Honolulu -75% Tampa -84% Scottsdale -90% Orlando -90% Atlanta -96% Phoenix -99%
Last update, back when the restart begins and we can track the return to "normal." pic.twitter.com/HzwE1jImL5
When I see pictures of our cities, like these from Italy, I can’t help but think of the life that normally plays out in the streets. The conversations. The chance encounters. And even the smells. Some of that activity has moved to every single balcony in Italy and that is a beautiful thing. But it’s no substitute for true street life. Thankfully, we know that public life will both return and prevail.
Along the way there will be changes. There are going to be winners and losers. Some companies are going to go bankrupt. And there will be adjustments that we have made that will invariably stick. Are we all going to video conference more? (The obvious one.) Will we all travel less? Will this macro event accelerate our transition to a knowledge-based digital economy? I’m sure it will. Also consider all of the new companies that are being started right at this very moment.
But as I said on Twitter today, we are social beings. That is one of the reasons why we choose to live in cities. And I am certain that isn’t going away.
Harvard economist Edward Glaeser has a new paper out talking about “urbanization and its discontents.” In it, he argues that while cities today are working remarkably well for highly skilled people, they don’t seem to be delivering the same upward mobility to lower skilled people. The “urban wage premium” for this segment of the population has seemingly disappeared.
The posited causes of this discontent will likely resonate with many of you:
Urban resurgence represents private sector success, and the public sector typically only catches up to urban change with a considerable lag. Moreover, as urban machines have been replaced by governments that are more accountable to empowered residents, urban governments do more to protect insiders and less to enable growth. The power of insiders can be seen in the regulatory limits on new construction and new businesses, the slow pace of school reform and the unwillingness to embrace congestion pricing.
Unfortunately, this paper isn’t available for free online. If you’re interested, you’ll need to purchase a copy, here.
Yesterday I made a comment on Twitter about most people not understanding to what extent government bureaucracy inhibits the delivery of new housing in this city. It received a number of responses, including remarks about how development charges have also recently doubled and how this statement applies to pretty much every city out there. But there was also a comment about developers not being transparent and not properly explaining the impact to the public. In other words: please demystify the development pro forma. I thought that was a fair remark, and so this post is going to be a response to that comment.
Before I begin, it’s important to keep in mind that most developers have investors. These investors put up most of the money required for a project and in turn they take most of the profits. However, there is typically a “promote” in place, which is just an incentive structure that pays the developer more of the profits (disproportionate to the cash they invested in the project) if they perform and hit certain return benchmarks. All of this is to say that developers aren’t usually the ones holding all of the cash (which is what a lot of the public seems to think) and they are accountable to their investors to do what they said they would do.
Now let’s run through the costs that make up a “typical” development pro forma. For this example, I am going to assume that we’re talking about a 100,000 square foot mid-rise building; the kind that you might build and find along any one of Toronto’s Avenues. If we were doing this in real life, we would get more precise with the areas and consider gross construction area, gross floor area (city definition), and the net saleable/rentable areas. But to keep the math simple, we will ignore these differences. That’s the approach I’m going to take overall in the post. What you need to know, though, is that you have to pay to build the entire building, but you only get to collect revenue on a portion of it. That’s why the “efficiency” of a building matters.
Land
The value of development land is a function of what you can build and the revenue you can ultimately collect. So location matters a great deal. Based on the latest high-density land report from Bullpen and Batory, the average price of an unzoned mid-rise site in the City of Toronto is about $231 psf. So let’s assume a land cost for our project of $23.1 million. Assuming we can get land financing at 60% of the value of the land (loan-to-value), that would mean we’re putting up $9.24 million of cash (plus a loan guarantee!) and borrowing $13.86 million to start our project. At 5.25% per annum (interest-only loan), our annual interest charges would be about $727,650. From now on forward, we’re going to pay ~$60k in additional interest charges for every month that our project is delayed. Buckle up.
You should now begin to see why time is so valuable and why government bureaucracy can be so frustrating. As a developer, you’re heavily incentivized to move things forward, whereas it can often feel like everyone around you is trying to deliberately erect roadblocks in order to slow you down and make your project more expensive to build. Oftentimes, it is because it is less risky for them to punt things down the road and not make a decision. That is not the case for us and our project.
Hard Costs
Onto construction (or hard) costs. As many of you know, these have risen dramatically over the last 4 to 5 years. On some of our projects, we have added over $100 psf in hard costs alone. Part of this has to do with a busy construction market and part of this has to do with new building requirements: watertight undergrounds, new Green Standards, and so on. For our project, which is on the small side, let’s assume $360 psf for a total of $36 million. This would include our direct construction costs and our construction manager’s overhead (general conditions). We should also prepare for some of the trades to decline to bid on our project because it is too small and not worth their time.
Soft Costs
Soft costs include everything from consultant costs and interest charges to government levies and management fees. Like everything in your pro forma, these absolutely need to be broken out line by line. Don’t be lazy here. But for the purposes of this simplistic example, we’re going to use 75% of hard costs, which works out to be $27 million (or $270 psf). When I first started out in the development business, the rule of thumb was closer to 25% of hard costs. But times have changed. Government fees, alone, can make up about 1/4 of the price of a new condo in Toronto.
Adding up all of these costs, we’re at $861 psf or $86.1 million in costs. It’s now time to consider the revenue side. $1,000 psf seems like a nice round number, so let’s start there and assume we’re going to sell our condos for that. Typically in Toronto, the price you pay is inclusive of HST, so that liability will need to be deducted from our revenue line. It’s not a straight 13% because of the new home rebate, but the rebate also hasn’t been properly indexed since it was introduced and so the liability could still be upwards of 10%. (This is worthy of a separate blog post.) The result is $900 psf in revenue and a margin on costs that is less than 5%. No sensible developer would want to do this project. One misstep (or development charge increase) and you’re dead.
So let’s increase our condo prices to $1,100 psf. Maybe that will work. In doing that, we get to a margin on costs that is nearly 15%. Okay, now we’re in the range. But let’s say we just got delayed by 6 months (boom, interest charges) and our hard costs turned out to be off by $15. They’re actually working out to be $375 psf because of some new tariff and because the formworkers in the city are all tied up on bigger projects and couldn’t give a shit about our cute little infill project. Now we’re offside again in terms of our margin on costs. No problem, let’s try and push condo prices a bit more. Is $1,150 achievable? Perhaps. But ideally, given the above, we would want to be at $1,200 psf just to be safe.
This is an overly simplistic example of the math that goes into a development pro forma. But hopefully it begins to show you (1) just how many moving parts there are in a development project and (2) the kind of pricing that is required in today’s cost environment. Developers are reacting to the costs that they are being thrown and it is creating upward pressure on home prices. (See related post: Cost-plus pricing.) So far there has been enough elasticity in the market to absorb these price increases, but that may not always be the case. If you have questions about this post or disagree with any of my assumptions, feel free to leave a searing comment below.
In the fall of 2016, Lucas Manuel (Partner at Slate) and I traveled to Chicago in order to meet with Jeanne Gang and the rest of the studio. Our objective was simple: We were looking to find an architecture firm that we could partner with and do something very special with at Yonge + St. Clair. We wanted to start from first principles and rethink what a tall building could be in Toronto.
During our meeting and studio tour, Jeanne and her team asked a number of poignant questions about our vision for the area, our goals for the project, and our commitment to sustainable design. So much so that when Lucas and I left the meeting we both looked at each other and said: “That wasn’t us interviewing them. That was them interviewing us.”
It was obvious that they were committed to high quality architecture, environmental sustainability, and overall community building. And it was equally obvious that if we, Slate, weren’t committed to the same, then we weren’t the client and partner for them.
It has turned out to be a great partnership. Over the last three plus years, the team has remained committed to living up to the promises we made to each other in that first meeting in Chicago. And on many occasions, that has meant taking the more difficult path and fighting for what we believe is great design and great city building.
Since 2016, we have held and/or participated in multiple community visioning sessions with Councillor Josh Matlow and key stakeholders from the community. Two pre-application meetings with City Planning. Two big and public community meetings. A design charrette for the Yonge + St. Clair area. And five meetings with a local “community working group” that was formed following the bigger community meetings. Our application was also before the City of Toronto’s Design Review Panel (DRP) at the end of 2018, where it was unanimously supported (though with some constructive feedback).
It has been a long road working to create Studio Gang’s first project in Canada. One that I like to think started in a jazz bar in downtown Chicago (it actually started much earlier). And so I am thrilled to announce that City Planning, City of Toronto, are now recommending approval of One Delisle! Their report is public and the project will be considered by Toronto and East York Community Council this Thursday, March 12, 2020.
If you would like to speak at or submit a comment to Community Council — ideally in support of the project — please email the City Clerk at teycc@toronto.ca. Myself and the team hope to see many of you at City Hall this Thursday morning at 10:00AM.
For those of you who aren’t familiar with the project, here is a summary from City Planning:
This application proposes to amend the Official Plan and Zoning By-law to permit a 44-storey (143 metres plus a 7-metre mechanical penthouse) mixed use building with 293 dwelling units and 159 parking spaces within a 4-level below ground garage at 1-11 Delisle Avenue and 1496-1510 Yonge Street. A 2,506 square metre public park will be secured off-site on the rear portions of 30 and 40 St. Clair Avenue West. The Official Plan Amendment also redesignates a portion of the subject site from Apartment Neighbourhoods to Mixed Use Areas.
The proposed development is consistent with the Provincial Policy Statement (2014), conforms with the Growth Plan for the Greater Golden Horseshoe (2019), conforms with the applicable policies of the Official Plan and the Yonge-St. Clair Secondary Plan, and is consistent with the Yonge-St. Clair Planning Framework and Tall Building Guidelines. The proposal also meets a number of significant public realm and built form objectives, some of which are outlined in the Yonge-St. Clair Planning Framework, including: securing a 2,506 square metre public park in close proximity to the Yonge-St. Clair intersection; wider sidewalks along both Yonge Street and Delisle Avenue; enhanced street landscaping; restoration and relocation of an existing Art Deco façade; a pedestrian scale base building in keeping with the main street character of Yonge Street; a north/south midblock connection between St. Clair Avenue West and Delisle Avenue; high quality architecture; and consolidated access and servicing for the block.
This report reviews and recommends approval of the application to amend the Official Plan and Zoning By-law.
Images: Design by Studio Gang. Renderings by Norm Li.
Bullpen Consulting and Batory Management published their Q4-2019 land insights report for the Greater Toronto Area today. According to the report, there were 36 high-density apartment land transactions in Q4-2019. The average sale price was about $111 per buildable square foot and Bullpen estimates that these future projects — assuming they go condo — will sell for just under $1,000 psf on average.
But that’s blended across the entire GTA.
Looking at the core of Toronto (former City of Toronto boundaries), the average price per buildable square foot was about $187, which represents a year-over-year increase of 28%. There’s also a premium for mid-rise sites. Bullpen pegs the average price of a mid-rise site in the City — unzoned but with an active development application — at about $231 pbsf. These numbers will obviously translate into much higher condo/apartment prices.
If you’d like to download a copy of the report, click here.
There’s a lot of data/speculation out there about the impact of ride-hailing apps. Many dense urban centers are claiming that they have increased traffic (slowed average speeds) and pulled people away from public transit. The University of Toronto published this study last year. And the WSJ recently published this chart for Chicago:
To be honest, I’m not sure how much of the above is a result of ride-hailing apps, overall urban growth, e-commerce deliveries, public transit disinvestment, or other factors. But what is clear is that ride-hailing is pretty convenient and most (if not all) cities are seeing massive growth in this space.
But all of this feels to me like a bit of a red herring. People will obviously choose what is most convenient and relatively affordable. And congestion was a problem well before people started using these apps (demand > road supply). The only solution I have seen work is to price congestion/roads.
The Information estimates that around $16 billion has been spent over the last few years on developing autonomous vehicles. This is across some 30 companies. But about half of this spending has come from just three companies: Waymo (Alphabet), Cruise (GM), and Uber.
Waymo has been working on AVs for about a decade and the industry seems to believe that they are the furthest ahead. Still, the technology is not yet there and their AVs — which are operating in Phoenix — require lots of human supervision.
The sentiment right now is that self-driving cars are going to take much longer than initially anticipated and many more billions in R&D spending. Last year, Waymo was looking for financing from outside investors. Morgan Stanley said the business was worth about $105 billion.
Aaron Renn’s latest article in the Manhattan Institute is about how America’s top cities can “grow to new heights.” Usually when we talk about urban problems, it is because of failures. But in this case, it is about problems of success (though I suppose you could argue these are still failures).
Cities such as New York and San Francisco have, in his view, stopped thinking like growth cities and that is leading to high home prices and overburdened infrastructure. But we all know that these problems are not unique to only “superstar cities.”
Not surprisingly, Aaron argues that we need to stop implementing land use policies that only exacerbate our housing supply problems. Things like rent control and inclusionary zoning. And in some cases, it may be time for states to start intervening in local planning decisions.
I have a fascination with “small” Japanese homes. Many, or perhaps most of them, would be illegal to build in a place like Toronto. This one here in Tokyo, called Jewel, is only 1.4m wide on its narrowest elevation. See above photo. Designed by Apollo Architects & Associates, the ~80m2 home was built on a “flagpole” site. Narrow approach. More site area in the back. Here is a plan of the ground floor (via Dezeen) to give you a better sense of what I’m talking about:
According to Dezeen, the client is a fan of minimal design and, in particular, the work of John Pawson. His work was a source of inspiration for the project. But if you read the article closely, you may notice that he is referred to as the “British architectural designer Pawson.” I learned last week, following this post, that John Pawson is not a licensed architect. Hence the carefully chosen language. I guess there’s hope for those of us who are not architects.
