Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1320

Today I’m getting laser eye surgery. (If you’re reading this via email subscription, it already happened!)

This is something I’ve been thinking about doing for many many years. My original plan was to get it done after I finished my MBA. But that time came and went, and so it was about time I took action.

I’ve always been a bit nervous about doing it, which is why I’ve been procrastinating. I’m an early adopter when it comes to most things in life, but not when it comes to this. Not when it comes to my eyes.

The major impetus for getting it done is sports. I love lifting weights. I love cycling. I love snowboarding. And I love swimming. All of these things are easier to do when you don’t have to fuss around with contacts. I’m quite nearsighted.

In any case, I’m going to be taking the weekend off from blogging. I have never done that in the over 2 years that I’ve been writing Architect This City, but this time is different. I need to give my eyes a rest. Doctors orders.

For this reason, yesterday’s post on affordable housing was a bit longer than usual. And if you’re looking for more to read, you can also check out this list of most popular posts .

Regular scheduled programming will resume on Monday, which means that if you’re a daily email subscriber, you won’t receive another email from me until Tuesday morning at 6am Toronto time.

I hope you have a great weekend. See you on Monday :)

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In most big cities around the world, there is a pressing need for more affordable housing. We know that inclusive cities make for better cities. But from San Francisco to Hong Kong, you always hear people talking about how expensive housing is.

So why is this such a difficult problem to solve?

Part of the problem, I think, is that many people don’t understand the economics behind building a new building. Oftentimes I hear people say that because developers make so much money, they should just build more affordable housing. Done. Simple.

But things are not that simple.

To illustrate my point, let’s walk through the thought process for developing a new rental apartment building.

In its simplest form, developers are concerned with: revenue - costs = profit. And since many of the costs associated with building a new building just are what they are, it all starts with revenue, which in our case would be rents.

To build a new rental tower in Toronto, your rents typically need to be at least in the high $2′s per square foot per month. Otherwise the economics don’t work. But to make the math simple, let’s say you need $3 per square foot in rent. That means a 1,000 sf apartment would rent for $3,000 per month.

That’s not cheap. There are only so many people who can afford these kinds of rents and only so many areas where you can command these kinds of rents, which means there are only so many areas in Toronto where new rental apartments will be built by the private sector.

If the rents instead happen to be $2 psf – meaning that same 1,000 sf apartment now rents for $2,000 per month – then for-profit developers will not build (barring any unique deal circumstances). Even at $2.50 psf / $2,500 per month, it would be difficult to make the numbers work here.

And by the numbers, I am talking about tight returns that really only start to make sense in our environment of record low interest rates. Which means that when interest rates start to rise (pushing cap rates up), it may not even make sense to build rental apartments when the rents are in the high $2′s per square foot. This is particularly true if you’re competing against condo developers to buy the land. They can afford to pay more. 

In this scenario (of rising interest rates), many real estate firms might simply opt to buy existing assets instead of taking on the risk of building anything new. Now all of a sudden your supply of new market rate apartments (not to mention affordable apartments) has dried up. Remember, it’s been decades since Toronto built rental apartments at any sort of meaningful scale.

It’s for reasons like this that Vancouver launched a program called  Rental 100 . In a nutshell, it helps to reduce the “costs” variable in the equation mentioned above so that developers are able to meet minimum project returns and build more rental buildings. They do that through things such as reduced parking requirements, additional density, development charge waivers, and so on.

In some ways, these items are subsidies. The city is giving up revenue that it could have otherwise collected from a developer building, say, a condo. But in other ways, they are freebies. The city could be unlocking development sites that may have otherwise not been developed. In which case it’s not really forgone revenue.

Vancouver’s Rental 100 program is a market rental housing policy. But there’s no reason that similar thinking couldn’t be applied to create an affordable rental housing policy. It has been done and is being done in many cities.

This evening I participated in a roundtable discussion at WORKshop here in Toronto. It was part of an exhibition that they currently have on called, Toronto 2020: Where Will We Live? They are located in the concourse level of 80 Bloor Street West, so go check them out.

The discussion this evening was all about the dramatic change in Toronto’s urban form over the last decade. In other words, the condo boom. We covered everything from the life cycle of buildings and urban design to demographics and policy. It was a lot of fun and I am certain the group could have continued talking all night.

But one thing that I was reminded of this evening is how important it is for great city building to be cross-disciplinary.

Take, for example, architects and (real estate) developers. 

The stereotypical developer is greedy and only concerned with money. They don’t care about the impact that their buildings have on the built environment. On the other hand, the stereotypical architect is only concerned with design and not with the economic feasibility of projects. (I’m exaggerating here for effect.)

The point is that neither of these participants in isolation could build a great city. A beautiful design doesn’t have much value if it can’t be financed and built. And a highly financeable project could end up contributing nothing to the city. In some cases it could actually detract from the built environment.

So if we really want to build truly great cities, I believe it needs to be a collaborative effort. We need to bridge the divides in thinking and leverage each other’s strengths. 

I have felt very strongly about this since I first started studying architecture as an undergraduate student, which is how I ended up taking business and real estate classes. I felt and continue to feel that the greatest opportunities exist at the intersection of different ways of thinking.