Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 544

Colliers recently hosted a webinar about inclusionary zoning here in Toronto. On the panel was Jeremiah Shamess (SVP at Colliers / moderator), David Bronskill (partner at Goodmans), Giulio Cescato (senior planner at IBI Group), and Richard Witt (principal at BDP Quadrangle). I wasn't able to attend (either because of a critical meeting or because I was off attending to a gluttonous lunch burrito), but the slides are now available online. I was going through them this morning and I came across this chart from NBLC :

What you are seeing here is a comparison between a typical market development before IZ and a development after IZ. As you can see, soft costs remain the same, hard costs remain the same, and the profit margin remains the same. What changes is the overall revenue. Market revenue goes down because you now have fewer market-rate units and a new IZ revenue is added, which is the revenue generated from the addition of affordable units to the project.

But when you add up the market revenue and the IZ revenue, you don't get back to the same economic equilibrium. In other words, there has been a destruction of value, and so something is going to have to give in order for this project to pencil and remain financeable. Otherwise, no development will take place. This shortfall is the red box area in the above graph that says, "impact of inclusionary zoning."

We have discussed this red box gap a lot on the blog, because how you think this gap gets filled might determine how you think of inclusionary zoning as a policy tool. In this particular instance/graph, the gap is filled by a reduction in the value of the land. Everything else remains static. So what is effectively happening in this model is that the landowner, who has decided to sell their land to the above developer, is now the one who has to indirectly pay for this new affordable housing.

This may seem like a sensible way to go about it. I mean, people who own land must be rich. Let's make them pay. But is this actually what is going to happen in practice and over extended periods of time? Soft costs -- things like development charges -- are always going up. Why aren't land values perpetually declining in order to offset these additional costs? It is largely because market revenues have also been increasing. Housing keeps getting more expensive. And that is what has been keeping the market going.

I suspect that over an extended period of time, the same thing will happen here.

In 2020, Berlin implemented a rent cap that applied city-wide to both new and existing rental housing contracts. The policy was later found to be unconstitutional and so as of April 2021 this is no longer in place. But for a brief period of time, and for better or for worse, Berlin had a blanket rent control policy. Berlin is, of course, not alone when it comes to rent caps. They are seen by some as a solution to rising home prices, gentrification, and displacement. But do they actually work?

This recent working paper argues that the answer is no. And that there are other better tools available. Yes, overall rents do tend to decline. But when you have a city-wide policy, it means that rents also decline for high-income households. And in this paper, the economists argue that this tends to benefit the rich more than the poor. Rent caps also tend to decrease overall housing supply, which, as we all know, is counterproductive when you're trying to make something more affordable/accessible.

But perhaps the key argument is this one here: Rent controls create a misallocation of housing that can actually decrease overall welfare for lower-income households. The reason behind this is that homes stop getting allocated to those who value it and need it the most. Instead, you get people who may be overhoused or underhoused, but who remain firmly put because of what are below-market rents.

There are a number of ways in which this distortion might play out. But it could involve someone with a very large older apartment who now no longer needs a large apartment, but is staying put because of their favorable and irreplaceable rent structure. This in turn precludes someone who desperately needs a large apartment from finding a suitable place. And since overall supply has also decreased because of the controls, the problem is exacerbated.

It can all get a bit complicated, but if you're interested in this topic, here is another technical research paper from Edward Glaeser and Erzo Luttmer that deals specifically with the misallocation of housing under rent controls.

Witold Rybczysnki recently had this to say about the American Institute of Architect's plans to ensure better equity across the profession:

But the architectural profession is not the post office. It depends on the availability and preferences of clients, it depends on the swings of the economy, and success relies on individual drive and talent. Architecture is a zero-sum game, of course: there are a limited number of building commissions at any one time and if one architect gets the job, another doesn’t. Some of the most prominent commissions—the ones that build a reputation—are the result of architectural competitions. In these blind auditions, only the most talented have a chance to shine. And talent is not evenly distributed; “cream rises” as Stewart Brand memorably wrote in the Whole Earth Catalog. Hard to put your thumb on that scale.

When I read this I couldn't help but think of Malcolm Gladwell's account of what happened when orchestras first started conducting blind auditions in the 1980s. I think he talks about this in his book Blink . As soon as selection committees could no longer see the sex of candidates -- and could only hear their musical output -- orchestras immediately started hiring more females.

This is a neat and tidy example that seems to demonstrate that women are perhaps better classical musicians than men, even though the opposite was believed to be true before large screens started obfuscating our inherent biases.

But the selections process for architects isn't always as simple. This makes it a bit more difficult to determine if we truly have a meritocracy or if there are in fact some deep rooted prejudices that we maybe aren't aware of.

Of course, there is also the possibility that we have more or less a meritocracy, but that we have structural issues which are precluding certain people from fully developing their merits in quite the same way.

Whatever the case may be, I agree with Witold that blind design competitions are probably a fairly reasonable way to level the playing field. The problem is that design competitions are not universally used. We have never done one when searching for an architect.

I would like to think that we simply look at their portfolio (in search of both cool and relevant projects), objectively assess their abilities, and then consider their fees. But I also know that us humans are riddled with biases.