Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 133

"Rent control is the second-best way to destroy a city, after bombing." — Lawrence H. Summers

Zohran Mamdani, the Democratic nominee for the mayor of New York City, clearly ran a good campaign. He used social media and short-form videos to find his audience and win with the message that the city has become unattainable to most.

But it is also clear that the stock market really does not like his message . Shares of firms with exposure to New York City's real estate market reacted immediately: Vornado Realty Trust, SL Green, Equity Residential, Empire State Realty Trust, LXP Industrial Trust, and others, were all down. At the same time, the wealthy vowed to leave New York for places like Florida, as they so often do these days.

One of reasons for this negative reaction was Mamdani's commitment to not just cap rent increases, but freeze rents in rent-stabilized units for the entire duration of his term. We've spoken a lot about rent control over the years ( here , here , here , and other places) but, at a high level, the problem with rent controls is that they create a strong disincentive for landlords to invest and maintain their homes and for developers to build new homes. So what ultimately happens is that you get a more rapidly aging inventory of existing homes and a reduced amount of new supply.

A full-out rent freeze takes this even further. A rent freeze does not mean that utility costs will also be frozen, that insurance and taxes will be frozen, that interest rates will be capped, and that all other landlord operating expenses will be restricted from inflating. (If this were the case, we really wouldn't have market economy.) So what a rent freeze does is ensure that, in real dollars, a landlord is able to collect less money from tenants, while operating costs continue to increase under the line.

The same is true in condominiums and other ownership structures. Whenever somebody talks about frozen maintenance or common element fees, I immediately remind them that this is a bad thing, not a feature. It means the condominium corporation is on an unsustainable path and will eventually run out of money. Something is being sacrificed in order to keep up with rising operating and capital expenses. At the very least, you need to keep up with inflation.

I can appreciate that rents are too high. As a developer, I would love to be able to build to lower rents. It reduces absorption risk and it's better for the city. But rather than just freeze rents, a more productive and sustainable approach would be to attack the underlying root causes for the problem. A rent freeze is a short-term political fix that will have second and third-order consequences. Problems for a different day and for a different mayor, perhaps. But problems nonetheless.

Cover photo by Daryan Shamkhali on Unsplash

Nationwide across the US, transit ridership is only at about 70% of where it was in 2019 before the pandemic. But this is not the case in all cities around the world. According to this recent Bloomberg article , Madrid, Hong Kong, and Paris are all above their 2019 ridership levels. Seoul and Shanghai are also close at just over 90%, and London is at 85%.

So this problem of fewer people riding transit seems to be a North and South American phenomenon. Rio de Janeiro is at 73%, Mexico City is at 70%, and San Francisco is somewhere near or at the bottom at 44%. The obvious explanations for this are that Europe and Asia are generally denser and less car-oriented, their return-to-office patterns have been much stronger (less WFH), and their governments probably care more about transit (and spend more money on it).

Broadly speaking, I think this is all true, but I'd love to know more precisely what's driving these differences. Because it's not exactly obvious. Consider, for example, Paris and London. Paris is at 103% of its 2019 levels, whereas London is only at 85%. Why is that? Both cities share a lot of similarities. They have a river that weaves through the middle, they're dense, they have lots of trains, and both are alpha global cities.

So why the delta? What exactly is Paris doing that is encouraging more transit usage?

Charts via Bloomberg

This week, Toronto once again demonstrated that there are two cities within our city: There's Old Toronto and then there's the rest of Toronto. The former generally corresponds to the boundaries of Toronto prior to amalgamation in 1998. It represents a city that was built around streetcars and subways and is therefore embedded with certain urban sensibilities. Then there's the rest of Toronto. This part of the city ranges from being reluctantly urban to overly hostile toward it. And it shows up in many areas, from its modal split to its voting patterns.

This week it showed up in a debate to permit multiplexes with up to six homes (sixplexes) in all residential neighborhoods city-wide. It is also important to note that adopting this zoning change is a prerequisite to the city accessing $471.1 million in funding from the federal government. But this is not how City Council voted this week. Instead, a " compromise motion " had to be put forward that isolated sixplexes to Toronto and East York District, and Ward 23 in Scarborough. In other words, we are not that far off from splitting Toronto between Old and the rest.

I'm glad that something, instead of nothing, got done. But it's disappointing that Mayor Olivia Chow did not stand up and show any leadership on this recommendation from planning staff.