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There is a major deficit in purpose-built rentals in Toronto at the moment and today on the Sync or Swim Podcast, we are chatting about this issue with Jonathan and Gabriel Diamond from Well-Grounded Real Estate. Tuning in, you’ll hear about their focus in the real estate world right now, why this deficit is happening, differences between apartment development and contrast condos, and how these problems can be solved. We discuss what is effective in terms of innovation before talking about integrated product delivery. Finally, our guests tell us about their incredible 1925 Victoria Park building. To hear all this and more, press play now!
Key Points From This Episode:
[0:00:22.1] ANNOUNCER: Hello, and welcome to Sync or Swim, a weekly podcast, brought to you by Rentsync, where we take a deep dive into the PropTech, multi-family, and rental housing industry. In each episode, we uncover the technologies and strategies used to help overcome operational challenges and increase the value of your multi-family investments. So, let’s get into our conversation today.
[0:00:46.1] NS: Welcome back to Sync or Swim, the podcast where we take a deep dive into the PropTech, multi-family and rental housing industry. I’m your host, Giacomo Ladas and I’m joined by Matt Hildebrand, as always. Matt, how are we doing?
[0:00:57.7] MH: Doing well, thanks Giacomo.
[0:00:59.8] NS: All right, and today, we are joined by Jonathan and Gabriel Diamond from Well Grounded Real Estate. Jonathan, Gabriel, welcome to the show. Thanks for being here.
[0:01:06.9] JD: Thanks for having us.
[0:01:07.9] GD: Thanks a lot guys, looking forward.
[0:01:09.8] GL: Absolutely. So, I think a good way to start off the show is if you guys could provide our listeners with a little bit of an overview of Well Grounded, for those who might not be familiar with your organization, and kind of what you guys do and where you see yourselves going.
[0:01:19.8] GD: For sure. So Well Grounded Real Estate is a private real estate investment and development company. We started in the 1950s, learned to building apartment buildings in Toronto, and later on began developing and acquiring shopping centers throughout Southern Ontario and some secondary markets, Airy, Cambridge, Sarnia and fast-forward to today, we’re still largely involved in the same asset classes.
Our portfolio has grown to focus a little bit more in the multi-family sector with apartment buildings both in the GTA as well as the Kitchener or Waterloo area and while we’ve been mostly fueled by acquisition in the last five years, sort of the next five to 10 years of our business is going to be focused on more in-fill development and some other development projects as well.
[0:02:08.9] MH: That’s awesome, I appreciate the overview there. So, the reason we wanted to have you both on today was to discuss a topic that we’ve been talking a lot about recently and a topic I think we’ll be talking about for the foreseeable future and that’s the supply issue that we’re facing right now in Canada and GTA.
So, you both are well versed on this topic. So, we wanted to just kind of start off and kind of get your opinions on why you think we’re in the situation we are right now, and maybe explain why there’s such a significant deficit of purpose-built rental apartments in Toronto.
[0:02:45.8] GD: I think in terms, specifically in terms of purpose-built rental, you know as with any complex system, it’s a combination of a lot of factors. I’m sure we’ll go into more detail and touch on some of them a little bit later and you know, you always hear about rent control, the cost of land, you know, specifically in the GTA, rising cost of construction and all of that play a major role.
But I think you can really sum it up in terms of focusing on where investors can get returns and how you allocate capital and to be frank, condo development has historically been a fantastic business. You know, you have exits in five to seven years, you can generate sizeable double-digit returns, there was easy access to capital. Toronto had rising rents from the perspective of investors that are looking to fund these projects and use them to rent out.
You know, when you contrast that with the business model, for purpose-built rental, from an investor standpoint, I mean, there’s a clear preference there and there’s major differences in economics of condo development versus purpose-built rental and there’s a reason why capital has been allocated there and I think Jonathan can touch on some of those differences in those models, a little more specifically.
But again, ultimately, as a developer, if you have the choice, historically between building condo versus building rental, you know in a lot of ways, it was an easy decision.
[0:04:23.3] GL: That’s interesting. Okay, could you maybe summarize some of these key differences of these economic features between the two types of projects as we get like a little deeper dive into what exactly those are between the condo development and purpose-built rentals?
[0:04:35.7] GD: For sure. I’ll let Jonathan touch on that. He did a recent post on LinkedIn and created an infographic with one of our lenders to really try to popularize and make it a little bit more digestible for maybe the average person that’s not involved in the industry or not involved in development per se but I’ll let Jonathan speak to it and then touch on a few things as well.
[0:04:59.3] JD: Sure, yeah. I mean, it’s a big problem in the city of Toronto. You have this deficit and then Gabe sort of said this is a multi-faceted issue in economics being a significant partner. So, basically, what we did with – in consultation with Oakbank Capital, our debt advisors for a couple of projects we have on the go, we want to just sort of compare and contrast condos versus apartment development, and the reason being is because people always say, “The numbers don’t work, the numbers don’t work.”
The question is, “Well, why and what does that mean?” So really, what this means, what this can – it really all boils down to how these two asset classes generate revenues. So on one hand, we have condos, which generate revenues all at once and that would be at the closing of the condo sales when people purchase their units and apartments, it’s, you don’t have that exit. You basically – of course, you could sell the entire asset but the individual units don’t get sold.
So the revenues come sort of slow and steady over time as people are paying their rents monthly and so what this translates to is a completely different model for funding and again, this isn’t the better or worse, it’s just the way it is and if we were a lender, we would also do things exactly the same way but at the end of the day, what this translates down to is apartment buildings require far more equity than condos do.
The reason being that condos can reduce their equity requirement or their cash requirement I could say, through pre-sales. So some of the money is to sort of complete this project will come from pre-sales and a portion is also not required until after the condo is closed, which is sort of the category of deferred cost, they say. Whereas, apartment buildings have none of that and so this translates to you know, a 30 to 40% equity requirement for the apartment buildings and that’s exasperated by low-rank areas because the debt that an apartment requires is based on the cash flow that the apartment generates at the back end.
So that’s what you have to sell them, that’s what you have to sort of focus on, and so this creates very difficult hurdles for what – for creating what Toronto needs most, which is sort of mid-market, lower income doling’s. So this is why you see the apartments that do get built are on the high rent areas, you know, charging five, six, seven bucks per square foot instead of two and a half or three that we really need.
[0:07:17.2] GD: Yeah, just elaborate on that and put that another way. You could have the exact same building, one located at a very high rent area, young and bluer and then one area that’s a lot more west or a lot more east, you know, not essential. Exact same building, same project cost and one of them will be significantly less feasible because you’re not able to generate the rents and if you can’t generate the rents to form the basis of your takeout financing, then you’re not going to be able to service your construction loan.
So, and in a lot of ways, it’s sort of a double-edged sword because some of these areas are the ones that in fact require more rental, family-oriented rental, bigger units where for a whole variety of other reasons, home ownership has become out of reach. So you know, on the one hand, you actually need this rental but just based on the structure and how they model out, it’s actually a lot more difficult to build the exact same building in an area that’s not going to command the highest rents.
[0:08:19.0] GL: That’s interesting. There’s a recent article, I think it came out today or maybe yesterday, that highlighted the fact that there’s a lot of condo projects being delayed as developers await a better market for launch. What is your kind of take on the fact that even though condos are maybe a more attractive option, to market those still kind of not getting them to market, and if the market doesn’t really improve, could you see a bit more of a shift back towards rental?
[0:08:48.6] JD: Yeah, I mean, there’s forces that are – that would affect both asset classes equally. So planning times, planning uncertainty, interest rates, of course. So both building an apartment building or condominium require financing and financing is based on the prevailing rates and so interest rates have a huge impact. The other component is construction cost, which are more or less the same between the two and so these projects have to get developed and rising construction costs, shortages of labour, all affect these projects from getting developed.
So, I think the reason why you hear this in the condo world is because most projects are condos. So by definition, the sort of discussions of the condo almost capture the market. So, whether there’s going to be a shift towards purpose-built rental, maybe, but again, it’s difficult to know whether that’s the reason where it’s because there’s going, hopefully, shift some legislation and the demand is just getting so high that people start to shift their businesses but time will tell.
[0:09:45.0] GD: Yeah, but what we are also seeing though, right? Condos relying on investors or end users but you know, you’re relying on investors to buy these units and what you’re seeing now with rising interest rates is that you’re seeing a huge flooding of resale units. You know, condos that were built five, 10 years ago, maybe these people investors bought these units in a low-interest rate environment and they’re going for a refi now and they’re finding they’re under water every month.
And every year, every month, you know, that sort of goes by here, you’re seeing more and more condos go on the resale market and that’s going to have an impact on new developments as well. You know, I think developers, assuming you’re saying, “Hey, you know what? This is kind of a soft market for some of our end users.” You know, if they can’t get the sales, if we can’t get over a thousand dollars per square foot selling it, you know, suddenly, it changes our underwriting. It’s not as feasible to develop.
[0:10:45.0] GL: Yeah, that’s great guys, and I think, it’s important to kind of delve a little bit more into that with like, “Yes, we know the challenges with interest rates that change the landscape” You know, population growth changes landscape, there’s a lot of factors that have affected this market across the country. You guys do a really good job, especially your LinkedIn post you’re talking about, about showing these challenges associated with purpose-built rentals, the equity requirements needed.
But can you guys highlight a little bit of some of these policy changes that maybe we can try to encourage apartment production? Anything that you guys have mentioned before, anything you guys are seeing now in the landscape, like, what actually has to change policy-wise before we start sewing significant change?
[0:11:17.9] JD: So the way I’d frame this is you need to start with the objective, right? So it’s very easy to jump into policy but the question is, what are you trying to achieve? And I would argue that it’s – you need to take away the barriers to construction in generally and you need to take away any biases that the market has towards condo construction. So there’s two key elements in this. One is or I’d say, one key element is HST.
So, HST in the condo world is owed on the completion of the building whereas – and you don’t have the sale of the asset to sort of fund that tax liability, whereas, you do in the condo world. So policy changes that would help to defer those costs to an actual sale for example would go a long way and one project that we have, this is you know, about 10% of our total project cost, which is huge and as we said before, due to the limitations of the debt coverage, this is all cash.
So that’s a really, really big policy change. There’s other policy changes related to code and related to zoning that would go a long way but basically, any adjustment that you can make to reduce the cost of building and reduce the timeline of building would go a long way and so that would be the lens that these decisions have to be filtered by because right now, these things are just too expensive and they’re too time-consuming and the majority of your cost is construction.
But you’ve got a whole chunk of the project that is not within the developer’s control. So this would be anything that is sort of policy-related and that’s really what the legislatures have a duty to focus on and aligning the development process to facilitate the production of the types of buildings that we need.
[0:13:07.0] GD: I’ll just elaborate on that a little bit. I think Jonathan is certainly – yeah, he’s absolutely correct in terms of fees, the cost of producing housing, you know, the impact that HST has on purpose-built rental, which is immense, as well as development charges and we sort of take a step back and view this a little bit more conceptually, although, you know, it’s all, it is all numbers based but again, it’s about incentives and capital allocation.
As an investor, as a developer, you have the freedom to choose how you allocate your capital. You can build multi-family apartment buildings in the GTA or you can build multi-family apartments in Dallas or Florida or Denver or you can build a completely different asset class. You can build industrial in Ontario or if you say, “You know what? I’m, quite frankly, I don’t like the risk involved here. I’m going to put my money in public equity markets or debt markets or anywhere where I’m comfortable with that risk-return profile.”
So in terms of government regulation, whether it’s at provincial, federal level, municipal is more in terms of zoning and DCs but you know, when you’re looking at it at a provincial or federal level, you have to think about, what are you trying to incentivize, what do you want? How do you want to stimulate your economy? And if you’re looking at it and we’re in the middle of a major housing crisis and housing shortage.
You know, there’s certain levers that you can pull that are going to incentivize investment towards where you want it to be. You know, you sometimes see this in the manufacturing sector, you know, these enormous subsidies. “Oh, we want a battery plant or electric cars” and you know, you’re putting tons of money towards that and that helps to get that built and bring companies and incentivize companies to operate in Ontario or in Canada and it’s the same with housing, you know?
If you have these levers, if you can – for HST as an example. If you can change it, in terms of purpose-built rental to defer that HST requirement until the time that you sell that building, which may not be for 20, 30, 40 years, and you’re reducing those soft costs by up to 10%, that’s going to have some developers and investors redoing their proforma, taking a look at the underwriting and say, “Okay, you know what? This is starting to pencil a little bit better.”
Maybe we have some concerns about condo, we’re interested in generating cash flow, maybe it’s a generational thing and suddenly, the numbers start, you know, as Jonathan said, equalize a little bit so that you can actually make a decision that’s based on the market not simply based on, “Okay, what can I actually build?” because one of these models is simply not possible.
So I always think about this in terms of incentives and I think right now, there’s a major misalignment between what Ontario and Canada, the framework that they’ve created, and why our entire housing industry and system has selected for small, bachelor, one-bedroom condos in high rises, in extremely dense buildings as opposed to whether it’s low or mid-rise, purpose-built rental or just other forms of housing.
We’ve created a system that is selected for what is most financially feasible and what’s going to earn the highest return and that’s contributed to where we are today.
[0:16:47.0] GL: You also mentioned both of you really, planning and zoning reform as a potential solution. How can you see that also making an impact in the development of purpose-built rentals and how we can possibly make it a little bit more feasible?
[0:17:01.8] JD: Well, it’s a huge time and money suck and the way that we do zoning and site plan is very archaic. You’ve got an application that goes in and you need to get shuttled out to different departments, different departments comment it. Some of the comments are one department says, “Move the building north four meters” and the other department says, “Move it south four meters” and it’s an issue.
So there needs to be a restructuring within the City of Toronto to move these projects forward. The problem is the City of Toronto is seen as a barrier to housing production, not a facilitator and that’s completely incongruent with what they say. So this is a huge issue. We have one example on our Victoria Park project, where the city of Toronto is asking us now to review the civil work, the sewer systems, and basically, pay for the repair.
I mean, as far as we’re concerned, this kind of thing is completely unacceptable. These projects are already difficult to be built and the developers can’t foot the bill for problems that the city has gotten itself finished into. You know, we’re not denying that there are problems but the question is, this is an unreasonable request of developers when amidst the housing crisis, especially groups like us that are trying to build innovative projects that the city requires.
And so we need to completely rethink zoning so that these projects get approved and we need to again, have an overall vision of what are these controls designed to do, right? And I would say safety is one of them. We want buildings that are structurally sound, we want buildings that interface with the city’s infrastructure appropriately, and all of these things.
But there’s a lot of fat in this legislation that can be removed and some of it counterintuitively actually prevents the types of sustainable typologies that we need to build, right? So, a massive overhaul of zoning and site plan and code, to include only what is necessary to produce safe buildings and if you have anything there that mitigates the production of amazing buildings, you remove it. This goes for code as well.
So I mean, some specific examples are fire code that prevents us from doing these high efficiencies, single-stair buildings that are popular everywhere else in the world. There’s angular planes, the number of units that have been lost in the city of Toronto due to angular planes has been immense. Setbacks, we have setback requirements on an infill site we have. That is from our property line to the property lines like next to a valley, there’s no building there.
The whole intent of the rule was to have separation between buildings. So this kind of stuff has to get completely overhauled. Now, the city has to be a collaborator and a partner in this, not just a, you know, effectively a toll booth.
[0:19:44.4] GD: I think that’s a great point. I mean, Jonathan, you know, to angular planes and setbacks. I think to his point, fire code is a major aspect in that. To be clear, it’s not about being unsafe or putting any sort of tenant or owner at any risk but we’re at a conference once and somebody was discussing this and they put up a slide and I think the initial slide was “Does fire burn differently in different countries throughout the world?”
And of course, the answer is no but there’s areas in Europe, whether it’s Germany, Denmark, some of these places where you know, their fire code allows for point access block, single staircase, different forms of housing that would be smaller typologies that we talk about things like missing middle for example, that Toronto, Ontario, Canada desperately need that currently don’t allow for that.
We actually have a – on one of our projects, we have some consultants in Europe and they were sort of joking that from their perspective in North America, I mean, it’s not just Toronto, it’s in the US as well but they’re kind of joking about the fire marshal as being the God and that’s sort of the biggest thing here. It’s like you can’t. There’s so many things that you can’t actually do because our fire code seems to be outdated in a lot of ways.
But I have a couple other anecdotes as well. I mean, we’re developing a mixed-use project that Jonathan’s referenced earlier at 1925 Victoria Park and you know, you’re dealing with these different divisions in the city and we’re getting feedback about our façade colour and design. I don’t think that’s a good use of city resources, you know? Unless you’re façade is highly offensive for some reason.
We have a mandate to make sure that we can rent these units or sell these units and surely, you can appreciate that we’re going to come up with a design that we feel achieves that. That shouldn’t be a concern to the city and it’s a waste of time, it’s a waste of resources. The same property in hindsight, we made a little bit of an error but at the same property, one of the things that you know, really delayed the project, not –
Sorry, delayed some of the approvals and really stretched things out is that we have a requirement for a retail component to the building and when we’re looking at this problem, we said, “We want to find a retailer that complements our residents almost to the point of feeling like an amenity” but we want them to compliment it and it’s also very additive to the community. You know, you drive around Toronto sometimes and how many condo buildings do you see for lease signs in all the retail? You know, it’s an afterthought, right?
You’ve sold your units, you’re comfortable with the return and your focus is all on the res side, and the commercial component’s an afterthought, unless you know, you’re able to get a grocery store, your Starbucks, your bank, a couple of perfect tenants for that type of mixed-use property, a lot of times it’s an afterthought. So when we were looking at this we said, “Hey, we wanted something to compliment it.”
We are not looking to do a jewelry store or something or you know, somebody selling widgets like what is something that if I was a tenant in this building, would I wake up every day being like, “You know what? I’m really happy I have this on the ground floor” and of course, you know, something like coffee is an obvious example but the way our building was laid out, we said, “You know what would be perfect here is a daycare.”
So in speaking with our brokers, we went out to the market, we spoke with a whole bunch of operators and we had a lot of interest. This particular area is underserved, we had a lot of interest, which led to a couple of LOIs and eventually, getting a conditional tenant and so we were excited about this. Go back to the city you said, “You know what? This is fantastic, we have a daycare, we’re doing sort of midrange rental, what a wonderful project, right?”
The city government really hung up on this and said, “Well, based on where you want in the building, the location of the daycare, we’re concerned about shadows. It doesn’t make sense on this side. Can you actually move the daycare to the other side of the building?” We said, “Well, you know a daycare they have a mandate for outdoor space. You have to have 50% of your square footage allocated to an outdoor playground.”
They said, “Well, have you considered shifting the building and doing this, this, and this?” and we’re sort of sitting there saying, “Well, the landlord wants the tenant, the tenant likes the space, the tenant knows better than all the parties, what to look for, what would make a great space” and they’ve actually put pen to paper agreed on rent and a whole host of other factors.
They’re comfortable with it and the city is saying, sort of putting up their hand and saying, “Actually, we don’t really want this. Can you relocate it? Can you do this? Can you move it here? Can you move it there?” and it’s kind of like in hindsight, we should have just said, “You know, we’ll find a retailer” and not even been proactive about it and that was an error but we thought surely they’d be thrilled about this.
And it ended up burning time and meetings and it’s just so much went into it and in the end, we’ve sort of been able to get that approval but the amount of time that goes by and getting hung up on things that it’s just not necessary. So I digress but you know, that’s sort of an example of, to Jonathan’s point, what is the highest value, does it relate to safety?
What are the absolute critical things that the municipality should be involved with from a planning or building code or zoning site plan perspective and let’s focus on that and try to trim all the fat elsewhere.
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[0:25:43.7] GL: Yeah, you guys have kind of touched on this a little bit through our conversation there about you know, we’re hitting all these roadblocks and changes we have to do and different ideas. I would like to talk a little bit about the innovation, how that plays an effect in addressing these challenges.
If you guys have any better models or any of the more efficient ways that maybe you have mentioned before or you’ve mentioned in your LinkedIn post or kind of things that you guys find or where we’re going to go in the future, you know, of say construction, prioritization, things like that, I like to learn a little bit more about how do we innovate, how do we get better, how do we see these challenges and then find the ultimate solution?
[0:26:16.8] JD: It’s a great question. I think you need to start on again, sort of what is innovation and why and make sure it’s the right innovation. You know, it is a term that’s thrown around a lot. We would sort of define it as any change to the design construction process that makes buildings better, cheaper, and faster and really, the ultimate goal for any municipality creating housing is how do you do housing at scale and there’s not a good model to accomplish that.
Projects are one-off in nature and they don’t scale well and it’s complicated, which is why they don’t scale well but if anything, construction’s gotten less efficient over time not more efficient. So there is no sort of correlate in the construction world of Moore’s law and technology, where price drops drastically over time and quality gets better, quality/speed, right? So that’s sort of what we’re talking about.
So there is sort of illusion of innovation where you’ve get these incremental improvements to assist them, which is great because you are improving it but if the system is the wrong system then what you are doing is improving something that is not great and that’s kind of what we’re doing right now. So there’s better ways of managing the trades, there’s some sort of technologies that you can overlay on current practices and it helps to some degree.
But I would argue that we’re on the wrong innovation curve, right? So if you – if anyone knows the example of Dick Fosbury, I believe it was the 1969 Olympics, somebody is going to fact-check me on that but this is a guy who entered the Olympics as a high jumper and he completely changed the biomechanics of how one high jumps and if you look at old videos, it’s sort of hilarious what these athletes look like.
They sort of like ran and jumped over the bar with their feet, their feet went over the bar as if you’re like, you know, jumping over a puddle or something like that and what Dick Fosbury did was sort of arched his back and then reverse over the bar and sort of, it’s a little weird but counterintuitive but biomechanically what happens is that the center of mass travels below the bar, so you don’t actually have to jump as high but you clear a higher bar height.
So this was super weird but it was amazing and he won a gold medal and now every single person that does high jump uses this technique. So this would be what would be referred to as a step change in a technique and that’s precisely what we need to do in the building industry. So the step change would be introducing a new model of design and execution to build buildings faster and cheaper and better.
One of the ways to do that is by creating and investing in a system, not individual buildings. So productizing the buildings so that you have better modelling using them, better software packages that can go direct to manufacturing, cutting out a lot of the fat on the developer’s side that we currently see, reducing change orders to zero, cutting time in half, and having design process that scale to future projects.
So that what you’re doing is you’re investing in a system and you’re improving a system of housing delivery and this is something that we’re very interested in.
[0:29:32.9] GD: I’ll just jump in there on the change orders. Years ago, we had a meeting with one of the large construction companies in the city that builds a lot of condos and apartment buildings and we’re going through and they sort of point out, “You know, here’s our change order department” and it was very, you know, it’s this comment that’s in passing and anybody that’s done any sort of renovation, you know a small renovation at your house, your kitchen.
You know, you do a washer, you know that it’s just kind of the – in a lot of ways, this is the way it is and things are going to go up in price, you are going to open up a wall, you’re going to find a couple of skeletons and you’re going to have to change your scope of work but this comment kind of struct a chord with us, where it’s like this change order department in a lot of ways is a profit center.
Construction companies, it’s not a bad thing. You’re changing things on site, you know there wasn’t a level of detail in planning at the beginning to try to troubleshoot various issues that got brought up once you have all your sub-trades and everybody is there and everyone is on-site in the flesh that you have these issues and it is a source of profit and how do we create, you know to Jonathan’s point, a system that you are – you eliminate those change orders as an example before it happens.
You know, there’s this concept of integrated project delivery, which makes a whole ton of sense. It seems like it’s common sense but it’s not as widely adopted by developers as you may think but the idea of integrated project delivery is to try to have basically a lot of your main trades and in certain consultants, incentivized by the profit that your project can develop by being underbudget.
Working together, getting your key players involved much, much, much earlier in the process to say, “Okay, are there other better ways of doing things? You know, here is how we’re developing it and we have X amount of labour on site but we have all this labour because we have multiple trades all here at the same time and we’re doubling up on supervisors or foremen or whatever the case may be.vOkay, how do we trim the labour a little bit.”
Or storage? You know, there’s so much whether it’s – whatever it is, glazing, other building materials, and we have storage in multiple different locations. Okay, can we consolidate that? Is there a way or just trim the amount of time that we have things in storage or transportation? How do we optimize all of this so that trades and consultants for example are better aligned with being under budget as opposed to the opposite?
That’s so important and prefabrication is part of it and I think Giacomo, you know your question is like why haven’t we done this? It feels like we’ve been hearing about prefab and modular for a long time now. So this is not like a 2023 concept. You’ve heard about it and I think a lot of it is about sort of nobody really wants to be the first mover.
I think if you’re a large developer or a construction company that can successfully deliver start to finish a few buildings that carry this out and you can go to other principles at development companies or heads of construction or whatever the case may be and say, “Here’s your traditional poured in place concrete building, here’s what it would have costs” all these stats.
“Here’s the length of time it would have taken to deliver and here are the hards, here are the softs, and this is what it is, and here’s what we were able to achieve” and you can concretely say is better, cheaper, faster, and “Here’s what it looks like, here’s your IRR to investors, and here is why you should do that,” I think it explodes. Now from there, you have to be able to scale it, right?
So prefab, it’s critical that it’s decentralized. If you have one manufacturer that had a factory and you’re limited by the capacity of that one factory, that’s not scalable, especially at the pace of development today. So it has to be decentralized firstly, you have to have other manufacturers that are capable of carrying this out as opposed to you know, one company.
But I think once you can start to get some of these key players onboard and have very concrete examples as to why this is better for your bottom line and for your investors or public markets or whatever the case may be, then it takes off but to get to that point, whether it’s RND or projects that quite frankly might fail, a lot of people can’t stomach that risk to say, “Hey, you know, we’re going to develop this building. It may or may not work.”
I think a lot of your investors are going to be like, “Ah, I don’t quite have the appetite for that” but you know at some point, some of these larger firms are going to do it and it is going to take off.
[0:34:41.2] GL: What I’m interested in all of this like generally, you said like the feasibility of this innovation like we know we’re in a crisis. CMHC believes we need almost six million homes by 2030, two million of them being rental properties and I mean, the perception that we seem to have is, well, we can’t even get at LinkedIn finish their construction, right? That’s going to be a construction for decades still, I’m sure.
So what is the feasibility of this innovation? Is it, can we expect quick changes, things that could happen in the next two, three, or four years that actually make a dent in this crisis that we’re seeing right now or do we think it’s a little bit, part of it is a pipe dream, part of it actually can happen? These are some things that can happen relatively quickly so that we can really start going ahead of these benchmarks so we can get some real change.
Do you guys have anything that can – give maybe a little hopeful interpretation of things that actually can happen in the next couple of years?
[0:35:29.8] GD: I mean, just to start, I always find some of those figures that politicians trot out there in a press conference and whether it’s the campaign trail or whatever. It’s so funny because you can’t really put any of that in perspective. The dates are so far, the amount of homes are so great, how do you truly – well, I don’t even know what six million homes by 2030 or four and a half million by 2035?
You know, whatever these numbers are, I mean to be quite frank, I think those particular targets in our current regulatory environment in the state of municipal planning departments, I don’t think they’re achievable but what we’ve been talking about today, to Jonathan’s point about step change in the construction industry if you couple that with planning reform and the adoption of scalable decentralized prefab, I think that would accelerate our ability to get those targets immensely.
Can you get through the planning process quicker? Is there more land that as of right you can develop specific densities? Can you replicate buildings you’ve done in other locations and other markets without going through a lot of those, that same design process, and can you build it offsite with significantly quicker onsite assembly? Then we stand a chance and there’s no question things are going to improve.
You know, one of the things Jonathan talks about a lot and I think he’s bang on is that in a lot of ways, Toronto is perfect in terms of a market that should be able to drive innovation. You know like we need housing, we have capital, we have very experienced developers. You know, we have unbelievable skilled labour and trades. We can be that market leader in this innovation but not if we maintain the status quo.
There’s got to be regulatory change and things to incentivize us getting there but there’s no doubt we can but you know, to sit here today and say by 2030 we’re going to build six million houses, I’m unfortunately a little bearish on that.
[0:37:52.8] JD: Well, it’s the context, right? So can the current system do that? No, it can’t. So then the question is, “Well, is there a system that can do that and what does that look like and how do you get there?” This is how these problems need to be formulated but as Gabe said, like at the high level they just get sort of put out there but the problem isn’t particularly well-articulated, which is what you need to do.
[0:38:12.6] GD: I think with some of the regulatory change there’s this sort of obsession. Like I think some of it comes down to communication and there’s this real obsession of sort of landlord versus tenant and developer versus resident and this idea that to the greater public, the idea of a developer profiting or being successful is worse than addressing the housing shortage and how can we make changes that are to the benefit of a developer.
But when you look at our rental stock, I don’t know, whether it’s 90% or 95%, it’s from the private sector. You know, I am not going to say here like I absolutely think governments should develop affordable housing but it’s deeply affordable housing but it’s going to be a lot smaller volume than what the private sector can achieve, and to be clear, we need everything. You know, I think we have been talking a lot about rentals here, which is our business and where we want to invest but we need everything yesterday.
We need more condos, we need more rentals, we need low-rise, we need high-rise, townhomes, deeply affordable units. You know, we – right across the entire gamut that’s what we need and so of course, I am biased here but I think we’re better off focusing on activating the private sector to do what they do best, which is build because they think there is an ability to make a profit.
But when we’re so obsessed with the big bad developer, the big bad landlord, a lot of times some of these solutions get a little bit clouded. You know, you sort of stop focusing on the big picture but people have to be incentivized. If you can make 5% putting your money in a bank, you should be able to generate a return for taking on what is considerable risk. Development is risky and they should be compensated for that.
[0:40:11.8] MH: Yeah, I couldn’t agree more with some of that. Landlords have definitely been demonized over the last little bits, which is completely out of line but going back a little bit, you know we’ve mentioned a few projects here. The Victoria Park project, some innovation like can you name any successful examples or even case studies of purpose-built rental developments that have overcome some of these challenges that we’ve discussed today that can serve as a model to the future?
[0:40:38.0] GD: To be frank in this market, not really from a low and midrise purpose-built rental. I think you can absolutely look to a company like Fitzrovia, which is developing absolute best-in-class high-end rental, best locations, incredible amenity packages to companies that have been successful but again, almost sort of take us full circle right back at the beginning, they’re able to achieve this because they have the best locations and they drive the highest rents and that’s how this whole puzzle comes together.
But to your point, can we think of examples of innovations or overcoming some of these economic challenges at the midrise, low-rise level in midmarkets, midlocations in Toronto? It is hard to think at too many examples but you know, you look at some places in Europe and it’s commonplace. It’s the standard whereas, for a variety of reasons, we’re not really able to achieve that here because a lot of this stuff would be illegal.
[0:41:43.4] MH: Yeah, I think that’s a good point like there may be not examples here but to your point, there are examples in other countries and regions and you mentioned earlier, somebody has just to be first and you know, a lot of people don’t want to be the first to some of these things and risk failure but I think we have – some people have to start thinking outside of North America and look at other models and how we can adopt those over here as well.
[0:42:05.4] GD: Absolutely, and that is one of the things that 1925 Victoria Park, we were, you know it’s a lot of the inspiration for this, looking at things like an exterior or single-loaded corridor with a very large central courtyard, which are sort of key features to our building because we’re looking at life cycle cost and we’re looking at our operations in year five, in year 10, in year 15 in our mechanical systems and our utilities.
Can we create massings that will allow us to operate the building more efficiently into the future? You know, it may cost a little bit more day one but what’s this going to look like? Can we future-proof this building so that we can operate it well into the future? And in a lot of ways, we grab aspects and borrowed aspects from other markets. It’s a very unique building to North America but none of the concepts that we employed were completely novel. They’re being used just not widespread in North America.
[0:43:13.2] GL: Well guys, we really appreciate your time both here. I think this was not only really insightful for people in the industry but those who wanted to just learn a little bit more about the state of the housing market in general. If anyone is curious about like any contact with you guys or your website in general there and you guys want to maybe give a short little plug on where we can find you guys and follow what you guys are up to?
[0:43:31.6] GD: Absolutely. Yeah, we clearly really enjoyed talking about this stuff so feel free to reach out anytime. I think you can find us pretty easily on either LinkedIn or at wellgroundedrealestate.com. There is a phone or an email there, feel free to reach out anytime and we’re always looking to chat further about these things.
[0:43:48.9] GL: Awesome. Well, I think that does it then, guys. Gabriel and Jonathan, Matt, of course, thank you so much for listening and we’ll see you all soon.
[0:43:55.1] GD: Awesome.
[0:43:55.9] JD: Thank you for having us.
[0:43:56.9] MH: I appreciate it, guys.
[END OF INTERVIEW]
[0:43:59.0] ANNOUNCER: You’ve reached the end of another episode of Sync or Swim. Make sure to visit us at rentsync.com/podcast to access show notes, key takeaways, and where you can sign up to our newsletter to receive free bonus content. If you found value in the show, please also remember to rate, review, and subscribe. Don’t forget to join us next week for another episode. Thanks for listening.
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