Subscribe
Share
Share
Embed
Ray and Marlon take on Toronto’s inclusionary zoning policy with John Galluzzo, Senior Director Altus Group’s land valuation practice. In this episode Ray, Marlon and John discuss inclusionary zoning’s impact in the short and mid-term, lessons that could be learned from other municipalities, and potential ways forward with inclusionary zoning that could help more than hinder future housing development.
Welcome to Altus Insights Podcast Series. This podcast brings together some of our leading brainiacs at Altus Group to discuss, debate, and on occasion complain about the evolving state of Canada's residential and commercial real estate. Join Ray Wong, Marlon Bray, and Avi Zelver for monthly podcasts covering the latest market and construction cost trends across major markets in Canada.
Welcome to Altus insights podcast series with Ray and Marlon hosted by me Avi. This podcast will cover monthly market updates and construction cost impacts across major markets in Canada. Welcome to another really interesting podcast. You may have noticed it each time I have to wear a different T shirt, which is inspired by Johannes in our marketing department. He basically acts as the Secret Service marketing person, making sure you don't see anything too controversial and get us in trouble. And all our texts and teams messages are deleted afterwards. So today's topic is interesting, somewhat controversial, and it's an oxymoron. Inclusionary zoning and affordable housing in Toronto. So inclusionary zoning, what is it on the city website? These basically say, I'm going to read this. The city of Toronto has adopted an inclusionary zoning policy that will create new residential developments to include affordable housing units creating mixed income housing. Our city is growing and we want to make sure New housing is affordable for all those who call Toronto home. So this version by IZ basically pushes the cost of affordable housing onto the market side of it. That seems to be the way it's going, but we'll discuss that in a moment. So I think we should start questioning the city of in any form of credibility or intent around making housing affordable. So why is it that in essence, it's a phased in approach with any application for SBA after up to 18th this year starts off painful for condo from day one, and then by January 1st, 2026, we start to make purposeful rent less feasible. It's already not looking great. By 2030, we basically have little or no development left if we carry on in this process. So each step adds a percentage of affordable requirement. Even rent ownership gives nothing back. In return, zero incentives starts at 10% On the ownership side, it eventually hits 22%, and for rental it goes at about 5% At the top end. There are different areas of zones one, two and three, and each of them has a slightly different requirement based on the base level of affordability in the first place. The good news is, though, inclusionary zoning is likely to help construction costs that are likely to come under control in that once inclusionary zoning starts have an impact in the market, we're going to have nothing left to build. But news is price attempts are likely to go up. Honestly, I think at this point, which is probably about introduction because we sort of indicating what we're going to talk about. I think Monty Python has struggled to write a sketch as good as the approach to inclusionary zoning. It's run or if they actually put effort into it. So as I said, today's topics are a little controversial. To help us along the way, we have ray, who's basically taking a break from his world tour and professional golf circuit. And there's a rumor LIV Golf offered in $10 to move over and he turned it down. So he likes doing the podcast too much and we have the more sensible guests this week. Is the guys looking nice and comfortable? No, because they made too many inappropriate jokes. And that's the myth, and the Legend in the GTA when it comes to all things residential land. We got John Galluzzo with us. So John, do you want to say hello? Give a quick introduction to yourself as this is your first podcast. Sure and thank you for having me, Marlon and Ray. I'm glad to be here. Yes so I've been with Altus since 2015 and manage the land valuation practice here. We've had a phenomenal ride thus far in terms of both land valuation activity and project valuation activity. Up until late with the most recent increases to leases, the ISD coming around the corner. And of course, interest rates having a major impact on our industry. It'll be interesting to see the net result over the next 6 to 12 months in terms of actual impact to the land development industry in Toronto. So in the introduction, obviously I gave my view on inclusionary zoning. You may have got the hint I'm not overly a fan of inclusionary zoning with nothing actually being given back to inspire it or enabling it. What do you think the impact on inclusionary zoning is going to be in the overall development market in the city of Toronto? I think there's going to be very little impact in the sense that we're not going to see any units for at least five or six years. And the reason for that was the astute developers already started getting their chess pieces in order in 2021 and even earlier in terms of pushing forward their development applications and SyteLine applications on Line Holdings that they had in inventory and effectively have grandfathered themselves, thereby not requiring to provide any type of affordable housing or isid defined housing since they've made it in time prior to the September 18 cutoff of this year. And if you ask any planning consultant in the city, they've all been working overtime for the last two years, pushing forward these development applications and site plan applications. And if you look at the number of units that have been effectively submitted in terms of complete development applications, there are thousands and thousands of units. Now that have been grandfathered. So effectively, if we could say that in the Toronto market, the best years we can build out 25,000 apartment suites, we effectively have enough supply for the next 5% to 7. Years at least, if not more, in terms of drilling applications. So the earliest in might this is just a gut feeling that I have. Unless we were able to increase the productivity level of constructing these units, which I haven't seen thus far, we're not going to see any units for at least 8 to 10 years. And effectively, unfortunately, that's going to hurt supply, not help supply. So in essence, the unprecedented number of applications just means all the inclusionary zoning did was inspire every person to throw in applications as quickly as humanly possible, which actually is likely to result in no affordable units in the mid to short term. And then in the long term it's damaging because then it impacts the development market in the longer term in that it makes it less viable in theory. Correct so right now, then, if I said it's probably not the biggest issue in the market, what would you say is the biggest issue right now in terms of the mid-term is it's probably interest rates versus, say, existing DCS and stuff. Remarkable when you say the interest rates is the bigger impact right now or bigger concern in the short mid term? Without a doubt. Without a doubt. We're seeing it. Investors have gone into hiding. Condo investors have gone into hiding because the numbers don't pencil out. Purpose built rental projects have been cancelled, partly because construction costs have gone through the roof. Not not solely interest rates. The institutional funds are not as impacted by higher interest rates as, call it high net worth families that may have an existing apartment portfolio and are looking to expand that by building new product out. So I think the interest rates is definitely the biggest impact to land development in the city over and above the impact from asset. Is interesting with John McCallum as regards to the investors and with the recent increase with the Bank of Canada agree that there is anytime you see that type of change in the marketplace, you see a bit of a pause for people to what does this mean with the existing portfolio? What does it mean on with pending transactions or things to look at? So the challenge, what we have and John alluded to this is that we really haven't seen the impact on values yet because of some of the transactions that haven't taken place yet. But there's definitely a bit of a hesitation from an investor standpoint based on these changes and based on the future profitability on some of the sites. So right off the bat, with any new projects without an application in place, we'll have a bit of a discount to it just because of the current realize certain based on the price of land, certain returns that they're expecting on projects. So the challenge, what we're going to have here and and I'm on the same line as John that is going to cause that pause in the marketplace. Even though the prior to this, there was quite a bit of activity, especially with some of the office buildings that we're going to be redeveloped into residential condo or multi purpose multifamily rentals. So we are seeing a pause in all those areas and definitely that. And typically with land developers like the land bank down the road. But the challenge with the z is that it creates a certain amount of uncertainty on returns down the road. So it's basically creating a risk environment. But the short term impact is more likely to be the interest rates. And I know the theory in the background reports are all eventually this will all correct itself. Our land prices might correct in theory to do it. But realistically, I think the general consensus seems to be basically the market homes are going to be paying for the inclusionary zoning ultimately, especially if this is a mid to long term issue versus short term. So isn't it kind of the opposite effect of what the policy intended in the 95% or 90% of the people have to pay for everyone else's affordable housing in theory, or is am I misunderstanding it? Yeah, I'll take that one. And effectively today, if you're going to run a proforma, the value of the density that's apportioned to the inclusionary zoning would likely be a negative number. But given the lack of recent transactions that we know will be impacted by ised, we haven't had third party market support to justify what that impact would be. So for now, the a-z density has a zero value effectively, and in that assumption we're assuming that the market density will absorb any of the shortfall that will be taken, that the developers will take from that 7% to 10% of z, because the developers have the opportunity to choose the tenure of the z, i.e. tenure being ownership or rental. The city is providing incentives for rental because the percentage allocation for rental tenure is lower. So I would believe that the astute developers in the city would elect to do the rental tenure and they can sell off those units to investors to a third party investor after Marlon. But to answer your question, I think in certain neighborhoods, high profile neighborhoods, Midtown neighborhoods, where you don't have a substantial supply issue, I think the market will absorb that. Delta yeah, because in effect, again, one key factor is z is not impacted to smaller boutique buildings. So anything less than 100 suites, I think it's 99 suites or less is not impacted by it. So what you're going tab is where a developer could have a mid-rise building in midtown, 120 to 150 suites, smaller, medium sized. They're going to end up building 99 large suites for the downsize community so they can massage it to try and avoid the whole z impact where possible, of course. But again, they'll smaller projects. We all know the cost to developers is much, much greater on a per square foot basis, as opposed to a 200 unit or 200,000 square foot project. Yeah, and I we run some pro formas where we were looking. If you went down the Affordable rental route and you looked at the differential in value between the assets at the end of the condo that the developer could sell both those is what the rental in theory would be worth. In essence, each of those market condo purchasers have to pick up about 27 to $35,000 each as an offset to maintain the same profitability. And I think I agree with you in the large number of the areas. This is going to target, either the main a-z, one area they are looking at that's going to be the developer takes is basically increase the market housing which again goes back to I think the point we made is, is that was never the intent of this policy. When you look at this policy and obviously it's the old unintended consequences, I think we all agree inclusionary zoning is actually a good idea. We need more affordable housing. It's how they put it together. There's no bonus density, there's no offset. And what have you guys seen in other areas or other parts of the country where they've done inclusionary zoning? So I think Vancouver maybe has get density bonuses and whatnot to offset it. And would that solves the problem with the inclusionary zoning is just that other side of the scale may be an incentive to help the developer make the Pro forma make sense. I wouldn't say incentive. It sort of offsets those additional costs, which anything like that helps. And with Toronto being void of that, I think there's a certain disadvantage. And I just want to go back a little bit to some of the other comments on the early interest rates that we were already heading down, that sort of slowdown on the Cardinal Res market prices remain high. And again, it's also based on the offset of the material cost. But the other issue that we're running into is that there was already a bit of a slowdown in the marketplace and the interest rates are really impacted. Do more of the users or the more of the end users of the kernel. So they basically dropped off from affordability. But from a investor standpoint, activity compared to last year is still up, but it's heading downwards or spiral. So with all those other factors that developers are dealing with right now in the Toronto marketplace by having some type of offset or an incentive to create the housing costs are again. Well, I totally agree with you that it's in concept is good, but having the proper tools in place available to the developers to help them get through all these other changes that they're seeing now, not including that, but as well as the interest rates and the higher material and labor costs and as well as that based on a bit of a slower demand for from the buyer activity standpoint. Yeah, and we've spoken a lot about condos, but to me this does make inclusionary zoning on purpose for rental. Considering the challenges, where does that make any sense at all? Because couldn't you argue perhaps rental already needs some sort of cost offset to make work? And we know municipalities are trying to push purpose built rental and they're not really making a whole lot of headway. We had the peak out and now we seem to be dropping rapidly in places like Toronto in particular and even Vancouver level in some of the Montreal rental seems to be going in the opposite direction, less supply. Yeah, and it's also reflective in the rental rates across the country with less, less support. So supply is sort of the catch up. Rents based on the rents negotiated sort of pre-pandemic have gone up. So whether or not do you think the market is going to sort of correct that based on the short supply and the increased cost to justify some of that development and create a little bit higher returns. But again, over the last couple of years, especially with the owners of multifamily, is a bit of a catch up in the way of revenue lost or in the last two years. Yeah and that's the concern I have is I don't understand the logic behind inclusionary zoning on purpose rental at all. They it seems even odder than on the condo side of things in the rentals already struggling as well. So in 2026, I know there's a moratorium on that coming until 2026, but even then in 2026, is that not just automatically render all yields really, really bad and without any offset whatsoever? And obviously right now we're in a unique environment. Interest rates are going up, cap rates are likely going to change slightly, which I think is the bigger concern. But I don't understand how this all is muffle work. And I know when we had the previous question as we were talking a lot about the CMHC numbers as well, so CMHC came out with their report and for anyone that hasn't seen it and basically they looked across Canada, we're definitely short on homes. We looked in Ontario. And this is a specific one. They basically said that we needed for 1.8 million homes by 2030 to have any chance of affordability in the province on top of the 600,000 or so we're already building. So basically, we'd have to double, triple the number of homes and the construction. So how does the federal government saying we have a housing shortage? Obviously, the province has got the task force trying to deal with this and now we've got the municipality constraining through inclusionary zoning. Surely there's a massive disconnect here between what each level is doing. And again, I think that's always been the challenges with some of the new policies. The intention is. On the positive side, but a way, in a practical sense and in a way of the impact to the developers and how these projects are built, it doesn't make sense. And it is causing a bit of a havoc on the housing side, especially with that CMHC report. We're already going to have some challenges in delivering what we're sort of missing. And I think this pushes that delay even longer in a way of it's going to slow down the overall building process. Never mind. Again, it's almost like a perfect storm when we get back into the cost, the labour, the interest rates and on the price point. And now with the increase in immigration coming in Canada, it'll be interesting to see where people actually live or where is that shift? Is is a shift more into going back to your extreme of tents? But if extreme of so, are there secondary and tertiary markets that people have to consider or buy for immigrants is a little bit more challenging because the lack of jobs in some of those smaller communities. Yeah and housing is affordable in Manitoba, nothing against Manitoba, but it still is relatively affordable housing compared to Toronto. So John, if we go through what we've spoken about today by inclusionary zoning and then we've just concluded, we know CMHC wants to ramp up housing the provinces. If we're going to ramp up housing construction, won't that have the opposite impact on land prices? In theory, if the demand goes through the roof and there's only so many sites, wouldn't that then if you own a piece of land, it probably looks good in the mid to long term, even with inclusionary zoning, doesn't it? Again, theoretically, because I know when you do your stuff you have to be sort of impartial towards that sort of stuff, right? And this is why I get asked often by clients, where do I see land values in the short term, in the long term? And because of all these development and I'm just talking about the Toronto market for the time being, but because of all these loan applications that have been pushed through with the intent of being grandfathered, there's more than enough entitled land supply in the condo format. This is not an issue for low rise housing. We definitely have a shortage of service lots in the greater Golden Horseshoe. Those land values are likely more protected than high density land values because we have ample supply, in my opinion. And when I say ample supply, although we have the immigration coming, if that immigration if there's a good percentage of that immigration coming in the next five years are going to enter the trades and help increase the physical ability to complete these projects and increase supply. Then that might offset somewhat. But I think there's going to be a major disconnect from land owners today and land purchasers tomorrow. The land purchasers tomorrow want a discount to account for z construction costs, higher interest rates. And the landowners today say I have no pressure to sell. Why would I sell today? Just because interest rates have increased? I'm just going to defer my divestiture from this holding for another couple of years when things when the dust settles. And guess what? Immigration will be back. Land values will be up again. And we're going to be we're going to be a bit more like Vancouver, where the land values for high density land in Vancouver are way higher than they are in Toronto. And it was a head shake a couple of years ago. How do you how do you guys make it work? How do the developers work? They find a way to make it work. And effectively the only way that it works is the market. Housing has to absorb the increased costs that the developers have to incur. And again, the developers don't make their 15 to 20 percentage points in profit. They're not going to bother developing. So I still remember when we had the first $200 a square foot land transaction and we had the specific rest. How can you guys underwrite this? And we had to do a lot of extra work. And nowadays, if you look back at $200 a square foot for that land, they'd have their arm ripped off if they put that bucket right now. So exactly. From an intern. Yeah sorry to interrupt you, but from an international perspective, Paris, new York, Miami, London, we're still affordable. Yeah, we are still considered affordable. We're just not affordable for local Torontonians that are in the service sector that don't earn more than $200,000 a year. So that's really the challenge. So I think as a city and developers do want to help, they do want to provide more housing. I think we need the governments to say no DCS, no, no CBC and try and give some real incentives to the developers to encourage, not discourage. Unfortunately, in my opinion, that is a discouraging bylaw, unfortunately. And hopefully, who knows, hopefully with the new mayor, they may get modified in the future or new council. It may get modified in the next term. We do. We do. Have a mystical election coming up. I know it's not easy to overturn these bylaws once they're set, but who knows what's in the card, in the cards in the future? Yeah, we need a second look. A bit more of a collaborative approach with the development industry versus and I said this before the baseball bat to the knees has never, ever worked historically. So it needs a bit more collaboration. And the horrible favor we all worry about is that the government decides to try and solve affordable housing by building it themselves, which again highly likely to be a disaster and cost a hell of a lot more than if we can just solve this problem in a collaborative way and more rational. I find if government stops spending so much time all pointing each of the blame in the next guy up the food chain for everything. And I recognize revenues are tight, but realistically you've got to deal with the overall revenue regime between property taxes and whatnot. Continually hammering development and new housing makes no sense. And I understand it's an election council is going to get elected. He's basically got to keep the existing everyone happy. The NIMBYs and stuff happy doesn't care about the new homes. Then when he gets in he can try and do some stuff. But the whole structure doesn't work right now, which we touched on in our affordability podcast. I think you're right, we need a complete rethink here and a bit more of a collaborative approach. Rather than this. Everyone assumes the developers making a ton of money, but some of these guys are making 10% You go a 10% return. Yeah, it took eight years to get the project through the whole cycle. So divide 10% by 8 years all of a sudden for the level of risk. It doesn't quite look as pretty as some of the places could be. So I think we have some challenges. So it sounds like basically the conclusion I got from this is, is it's more of a mid long term issue unless one correct it. The immediate concern is around the interest rates, but inclusionary zoning needs to move sooner rather than later because it will be an anchor and has the opposite effect of what CMHC is trying to propose right now in the housing supply and obviously the provincial task force. Did you gents have anything else you wanted to conclude with? Well, Yeah. What I was going to say is you had referred to the accrete of additional cost on the market housing. You had run some performance or work to it to 30 or 35,000 a unit. Well, that we can solve that issue right now with giving them credits on the Affordable housing and reduce give them a 10 year reprieve from property taxes or a discount on property taxes on those affordable units. Why are we charging tenants on affordable units at 2% tax rate or 1.25% tax rate? Makes absolutely no sense. So that would be my suggestion. Make it a partnership more so than just an offload to the dual industry. I think the development industry has done a wonderful job over the last 20 years in Toronto and because of that we've grown and we're an international city now, so we should keep it going rather than try and kill it. That's how I'll end off. You got some team ready? And we talked about this in previous calls. This this is something that we've had for a number of years. And we know that is not a quick solution. But I just echo John's comments with collaboration and discussion and more communication between the different levels of government, because it's going to take a number of bold decisions and changes to change the direction with some of the shortage and some of the affordability issues going forward. But again, the challenge with that is that it was the is now is the interest rates and there's other factors that are dealing with it. And we just have to try to face this thing head on. And I think we're just having more and more challenges facing us with housing affordability shortage. Yeah, and I agree and I know I tend to be a little harsh on the city when it comes to this sort of stuff, but that's also a frustration in that it's just one thing after another. And I do recognize the city, the staff, they have the hands tied behind the back in terms of revenue sources and they are trying to cover off budgets. But this wasn't necessarily the solution. And to John's point, I think the collaborative approach and the suggestions John had, that's the way we should have always done business in the first place. This the a-z seems a bit of a disingenuous approach to things that basically was overly heavy handed and ultimately results in the opposite. And again, we know of examples from San Francisco and Portland. This has been done. This isn't just saying it's not going to work, it's been proved. It doesn't work. So hopefully, as John said, some sober heads come around at some point and we see a different version, inclusionary zoning, that sort of gets everybody what they need. So Thanks very much for joining us today. John it was nice to have a sensible person rather than being stuck with me all the time. And it was nice of you to come off the links in Calgary and actually pop into an office to make it look like you do some work and try and I'm trying to sense. My pleasure. Take care. OK, Thanks. So we'll just sign off for the day. The only thing we will mention is obviously we've got an upcoming podcast now. This one is super exciting and it's based on back to the future fee and it's key to cost escalation, volatility, the past, the present and the future. And that's going to be with the most exciting person in escalation. David's unions.