Monday, December 3, 2018

So why are developers so keen to build unaffordable condos along the Broadway Corridor? I hope this helps explain why.

Today Patrick Condon (a friend and colleague whose passion I admire) wrote a column in the Tyee. A media outlet I admire. He writes about a book by John Gray, a local writer I also admire.

In his column, Patrick criticizes the expensive condos that are going to be built along the Broadway Corridor.

"The one thing we know with certainty is that these potential 15 million square feet of new condos will not sell for less than $1,200 a square foot.
You can just barely get a tiny two-bedroom unit into 700 square feet. That means it will cost you $840,000 to get into that baby"

Why does new housing so often cost $1200 psf. Or more?  Let's analyze what it costs to build a condominium.

What do you think is the current construction cost for a new concrete building meeting Vancouver's Building code? (Yes, Vancouver has its own Building Code which makes it more expensive to build here than say Burnaby or Richmond).
Is it $200 a foot? $250? $300? $350?

Based on my recent experience, it costs more than $400 a foot for a fairly standard product. Rental or condo. The estimated cost for a 6-storey concrete building on the West Side of Vancouver with which I am familiar is closer to $500 psf.

Now, what do you think the 'soft costs' are? These include consultant fees (on most projects there will be 15 different consultants), permits, DCLs, Metro DCLs, other municipal fees, taxes, Homeowner Protection Office fees, legal, insurance, development management. Guess! Did you say 10% of the construction costs? You're low.

Now let's talk marketing. The bank requires most developers to pre-sell at least 50% of the value of the project. In addition to sales commissions (3-4%), marketing costs are usually another 2-5% depending on size, location, etc.

Now there's financing. In addition to interest costs, how much do you think you must pay mortgage brokers and lenders to arrange a $50 million loan? $100,000? $250,000? $350,000? Guess again.
Now you must remember that although you buy land and pay construction and soft costs to build 100,000 sq ft, you can probably only sell 85,000 sq. ft. Why, you can't sell the corridors, stairwells, elevator, lobby, etc.

Meanwhile, we haven't even considered land cost or municipal Community Amenity Contributions. On June 20, 2018, Council approved new Broadway Corridor CACs of $330 to $425 psf. Really. I'm not making this up!

Now, let's turn to developer's profit. Most financial institutions want to see an estimated profit equal to at least 15% of the costs, recognizing that projects may well take 4 to 5 years from conception to completion. 17.5% is probably an industry norm these days.

So what's my point? Developers don't set out to build luxury projects. But when you add up the costs, you're at luxury prices. Those who recently purchased sites in Vancouver at $450 a foot or more need at least $1500 a foot to make a project viable. And right now, it looks to me like many won't get it.

Yes, you could replace the granite countertops and frameless shower stalls and stainless steel appliances with something a bit more modest, but the savings are bubkes. (https://www.thefreedictionary.com/bubkes)

So to Patrick and others, before criticising developers who only seem to want to build luxury housing, I suggest you study in detail a 2018 real estate proforma. Then you might better understand why those Broadway condos will cost $1200 a foot or more.

To see how we might reduce some of these costs, check out my 2017 SFU Affordable Housing Lecture. https://www.youtube.com/watch?v=mRexc_XABqw

I hope this is helpful. Comments?

4 comments:

  1. Well put Michael. you will note that I dont say that developers are usurious, only that the system is broken (as I have said before). Thanks for the honour of your comments. As my dad used to say, any publicity is good publicity.

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  2. Thank you for breaking this down. I think a lot of people simply don't understand what drives up housing prices. The system in Vancouver simply doesn't allow for affordable housing. Developers, like anyone else are running a business. Everyone's willing to pay 2-3x the price it is for a bottle of wine or food cost at restaurants but when it comes to real estate, they say developers are greedy. We should really be looking at Council to address this. Long permit times, multiple fees, etc. Another side of the coin is we're also one of the lowest paying city in Canada. Also contributing to the unaffordability issue. How do we spread this message across?

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  3. This is all true, but you need to think about the land costs.

    If demand is reduced (e.g. by higher interest rates, lower immigration, B20 stress test, demographics, airbnb crackdown, whatever), then selling prices will fall. Development profits will shrink so developers will pay less for the land, which will allow them to still make a profit.

    The land cost is the element that floats up and down to align supply and demand. If there was no demand for luxury properties, the land value would fall so that cheaper properties could be built at a profit.

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  4. You are right. Land values will have to drop as sales prices drop. But once they drop below their value for the current use...often 1 or 2 storey commercial, the site won't be redeveloped. That's what will soon begin to happen.

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