Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 711

Who needs to travel when you have, this ? This, is a site called Drive & Listen , which allows you to drive around cities -- well, watch vides of people driving around cities -- while listening to local radio stations. It's oddly fascinating in an I-spend-hours-on-Google-street-view kind of way. (It's okay if you do that too.) A colleague sent out the link this morning and I thought it was a pretty clever idea, particularly right now, when many/most of us are yearning to travel, but can't. The first cities I visited were Buenos Aires, Tokyo, Sao Paulo, Lisbon, Berlin, and, of course, Toronto.

Photo by Sasha • Stories on Unsplash

A new report was just published by Urbanation and the Federation of Rental-Housing Providers of Ontario (FRPO) arguing that the Greater Toronto Area is undersupplying rental housing to the tune of about 20,000 units per year. This number considers both purpose-built rental housing and condominiums that are purchased by investors and later rented out. (Shane Dingman also covered the report in this recent Globe and Mail article .)

These findings probably won't come as a surprise to a lot of you. It is pretty common for most big/growing cities to operate with a perpetual housing supply deficit. With all of the barriers to development, it's often impossible to keep pace with demand. This naturally creates upward pressure on pricing. But the other factor that cannot be ignored is development costs. How much does it cost to actually deliver new supply?

Here's an excerpt from the report that speaks to this consideration:

While the results of the infill development potential exercise are encouraging, the economics
of intensifying these sites may be too difficult for owners to ultimately move them forward in many cases even with a zero land cost , as achievable rents outside of Central Toronto are
often not high enough to offset development and operating costs.

It's also something that we've talked about many times before on the blog . Even with free land, there are going to be countless sites and neighborhoods where it does not make economic sense to build anything new: development costs > potential revenues. And so to build, somebody is going to have to pay. Either the costs need to be subsidized or the revenues needs to be topped up somehow. Otherwise, supply = 0.

If you're facing a deficit of 20,000 units per year, this seems like something you may want to consider. How might we increase supply? And how might we increase the supply of affordable housing? Many, including some of the folks interviewed in Shane's Globe and Mail article, believe that inclusionary zoning is one such solution. Force new developments to deliver a certain percentage of affordable units (kind of like forcing restaurants to offer up 5-10% of their tables at a loss).

But again, I think it's important to remember that whenever costs exceed revenues, somebody is going to have to pay for that shortfall, otherwise supply = 0. Something has to give, whether that be reduced costs, greater density, or higher rents on the remaining market rate units. I think part of the allure of inclusionary zoning is that it creates the allusion of a free lunch. But here's the thing: everything has a cost .

Back in 2008, I was living in the United States. And at that time, during the financial crisis, I remember people positing that the US wouldn't be able to build another commercial office building for at least the next twenty years. That's how bad things felt. People were panicking. But of course, that never happened. Yes, it took some time for real estate values to recover and for people to deleverage, but ultimately things did recover. New buildings were built and new ideas flourished.

In fact, I'll never forget what a close friend of mine said to me a few years after that moment in 2008. He said to me, "you know what Brandon, the crisis was probably one of the best things to happen to me. It meant that I couldn't find a job and I was forced to start my own company. I probably wouldn't have done that otherwise."

Today, we're living through a different kind of crisis with its own set of uncertainties. Some, or perhaps many, seem to think it could lead to the demise of cities, similar to how our last crisis was supposed to lead to the demise of new office buildings (at least for a period of time). It's easy to get caught up in narratives and headlines at times like this. And there are always ways to convince ourselves that this time might be different. Sure, we've had pandemics before, but previous generations didn't have the tech that we have, right? Perhaps.

The challenge is that we're all trying to decode how much of what's happening today is related to (1) short-term dislocation, (2) trends that were already happening and just got accelerated, or (3) durable and long-term structural changes. My own view is that the post-mortems will reveal more of (1) and (2), as opposed to (3). And that will mean that some of us have maybe been making long-term decisions (flee the city) based on short-term dislocation (a 1-2 year health crisis).

Of course, I could be wrong. But it's what I believe and what I have conviction around.

Headlines are designed to target what Seth Godin and others refer to as our " lizard brain ." That being the primitive part of our brain that tells us when we're, among other things, scared, hungry, fearful, and horny. What excites the lizard brain is not a headline saying that everything will probably be just fine. What excites the lizard brain is a headline saying that everything is utterly broken and a new paradigm is now upon us -- pay attention or perish.

It's for this reason that I think it can be helpful to pause and ask yourself: "What is it that I truly believe?"