July 30, 2021

The Costs of Inclusionary Zoning in Toronto

It’s curious that there hasn’t been more coverage of the Inclusive Zoning (IZ) initiative happening in Toronto.  In December 2019, the City of Toronto adopted the HousingTO 2020 -2030 Action Plan – one action of which would be to ensure new housing opportunities are targeted to low and moderate-income households and affordability (those earning roughly between $32,000 and $90,000 a year depending household size).

It’s more complicated than a simple city-wide rezoning – details here – but that’s basically the idea.

In the last year, there’s been a lot of consultation.  And this is what they found.

If any reader is familiar with the politics of all this, your comments would be appreciated.  But  we do have some analysis from Brandon Donnelly who always provides some insider insights from a development perspective.  Here’s his take on the impact that inclusionary zoning is likely to have on development economics in Toronto.

Our cost consultant, Finnegan Marshall, gave our team a presentation today on what’s happening with construction costs in Toronto and across Canada. I’ve said this before, but hard costs are no joke right now.  One of the areas that they focused on was the impact that inclusionary zoning is likely to have on development economics here in Toronto.

To illustrate the point, a sample high-rise condominium pro forma was used. Think something in the 30-35 storey range.

Assuming a requirement of 10% affordable (the policy details are still TBD), there is going to be a real cost to development pro formas that will need to be somehow paid for.

One school of thought is that land prices will simply adjust downward. In this case, the landowner would be the one paying. I don’t think this will be the case (land prices tend to be sticky), but if they were to adjust downward, it would need to drop by $44 per square foot buildable to maintain the project’s margins in this example. (That’s $13.2 million on a 300,000 sf project.)

If, on the other hand, the price of the remaining market rate condominium suites were to increase to offset the cost of the affordable component, they would need to increase by $91 per square foot. This translates, in the above example, into a sticker price increase of approximately $60,000 per suite.

These numbers are, of course, not exact. That is not the point of this post. Every project is different. But hopefully it gives you an idea of some of the levers that will invariably need to be pulled when inclusionary zoning comes into force.

My sense is that this latter scenario is more likely to happen. I have yet to see land prices adjust downward in the face of rising costs. So all of this is likely to be bad for broad-based affordability, but good if you want to be bullish on market rate home prices.

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