Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 463

This Twitter thread by Richard Wittstock of Domus Homes (developer out in Vancouver) is a timely follow-on to yesterday's post about housing supply, land-use regulations, and specific policies such as inclusionary zoning. What Richard clearly describes in his thread is the economic impact of a Community Amenity Contribution (CAC) that requires developers to provide 20% social housing.

https://twitter.com/rwittstock/status/1581061030540873728?s=20&t=EGty0SC2Fk6AYt3qk3IE5g

The thread will walk you through all of the specific numbers, but I think there are three important takeaways:

1. Everything has a cost. It is entirely disingenuous for anyone to refer to inclusionary zoning or other similar policies as a mechanism for " no-cost " affordable housing. Even if you believe it is the right public policy approach, there is still a cost. Social housing doesn't just appear out of thin air.

2. In Richard's thread, the remaining market rate condominiums end up needing to be sold for $1,750 psf in order for the entire project to pencil. This is a significant number. But in this case, it is a result of these homes needing to shoulder the cost of the social housing. It is basically saying "housing is too expensive, so let's make it more expensive so that we can use some of the incremental proceeds to finance less expensive housing."

3. If the math doesn't work, developers will not build new housing.

P.S. Thank you Volodya Gusak for pointing out Richard's thread to me.

Here is a housing study that looked at housing supply -- in the US from 2000 to 2020 -- relative to median housing values. And here is the key takeaway:

What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn't work.

However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.

But something interesting happens in the highest-value cities -- housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.

Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn't change. This has the effect of both limiting supply and enshrining values.

So when it comes to housing supply, what you don't want are low-cost areas. But you also don't want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.

Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn't do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing -- let's call it the 110 to 130% band -- to deliver more affordable housing.

It's a neat trick that sounds pretty cool, but it is not at no cost .

So here's the thing.

Given the option, and assuming the weather is favorable, I think that most people would rather eat outside than inside. I know that I certainly would. And that is why one of the great silver linings of the pandemic has been the allocation of more public space toward outdoor dining. Here in Toronto that initiative is called CaféTO, and the impact has been significant :

Researchers for an association of local business improvement areas  estimated that customers spent $181-million  in the repurposed parking spaces in the summer of 2021. The same spaces would have generated $3.7-million in parking revenue,  according to the local parking authority , and even that modest figure assumed prepandemic levels of demand.

The above figure is based on the 940 restaurants that participated in the CaféTO program in the summer of 2021. And the estimate is that they served some 4.9 million customers on repurposed parking spaces in the 13 weeks that officially make up summer.

What I'm not able to figure out from the report, though, is how much of this $181 million is truly incremental. If you look at the breakdown of restaurant sales in the report , participating restaurants saw 36% of sales from CaféTO, 26% from indoor dining, 25% from permanent patios, and 13% from takeout/delivery.

It generally makes sense that CaféTO would make up the largest share of sales. It was summer. And outside is where people want to be. But again, to what extent did CaféTO drive additional revenue for restaurants? Did it induce more people to dine out? And if these patios weren't there, how much of the above 36% would have just shifted to indoor dining?

I don't know exactly. We would need to see historic sales. But I'm sure it has been a boon to restaurants. There is no doubt in my mind that CaféTO is a great benefit to the city and that it should be a permanent fixture for as long as there are humans who both need to eat and who enjoy being outside in the summer.

Photo by  Udara  on  Unsplash