Construction should always be the bottleneck
Not rezoning and permitting.
(Image by Smurrayinchester on Wikipedia)
When rents and prices in Vancouver are so high, people want more housing, and other people want to build it and sell it to them. So why does it take so long? Where are the bottlenecks in supplying more housing?
Economic viability - land, density, capital
City council - hesitates in the face of neighbourhood opposition to rezoning
City staff (following rules set by council) - rezoning and permitting take a long time
Construction - skilled trades, materials
Step #4 is where the bottleneck should be. Ryan Petersen, discussing port operations:
According to the MacPhail Report on housing supply in BC, there's bottlenecks at steps #2 and #3. Municipal councils also have an impact on #1, since they set the maximum density / height, which affects economic viability.
A positive example: In the city of Vancouver, the approval of the Streamlining Rental Plan means that rezoning approval by city council is no longer a bottleneck for six-storey rental buildings near local shopping areas.
A negative example: Frances Bula reports that non-market housing projects approved by council are still stuck in the rezoning and permitting steps.
The basic business case is that a builder has to look at the expected selling price of the final product (selling price for a condo building, future rental income for a rental building), subtract construction costs (including labour, materials, cost of loans, profit margin, development charges), and figure out how much they're able to pay for the land. If the project requires rezoning for higher density and there’s an increase in land value, during the rezoning process the city negotiates to take about 70-80% of the increase (“land value capture”), in the form of development charges or in-kind benefits (such as below-market rentals).
So an existing property (e.g. a single-family home or an older low-rise rental building) will only get redeveloped if there's a significant increase in land value (final value minus construction costs) from building something new. If there’s no significant increase, the landowner won’t sell.
For non-market housing projects or for co-ops, it's basically the same kind of calculation. There's no profit margin, and there may be some public contributions (government-owned land, capital contributions, or ongoing subsidy), but the basic business-case calculations are the same. (For some reason in the industry it's called a "pro forma," and if the project is viable, people say it “pencils out.”)
Some key points to keep in mind:
A project becomes more viable with higher density (Michael Mortensen calls it “Vitamin D”), and less viable with lower density. Higher density means that the project is able to pay more for the land, outbidding other uses.
In BC, people are willing to pay more for condos than for market rentals. For example, in New West: “The real estate board’s benchmark price of a New Westminster condo apartment is currently $532,900, but the average per-suite price for a rental apartment building in the city is $324,900.” So a rental project needs higher density to outbid a condo project: a four-storey condo project can always outbid a four-storey rental project.
Higher construction costs make a project less viable.
Higher rents make a rental project more viable. So if the allowed density is too low, the builder can try to wait until rents increase enough to make the project work.
Conversely, if below-market rentals are required, reducing the total rental income, that will decrease the viability of the project. That doesn’t mean below-market rentals shouldn’t be required, but it may be necessary to allow more density.
For a detailed example of this kind of calculation, see Appendix 2 of this 2017 report from Coriolis, a consulting firm: Analysis of the Financial Viability of New Purpose-Built Rental Housing at Transit-Oriented Locations in Metro Vancouver.
What would help?
The most obvious way to make more projects economically viable is to increase height limits.
For below-market rental housing projects, more public contributions of land or capital (capital contributions or long-term low-cost loans) would also help.
Another suggestion is mixed-income projects, with the market rentals cross-subsidizing the below-market rentals. 20% below-market rentals at 80% of the average market rent is pretty typical.
A more indirect proposal is for non-profits to buy and operate older, cheaper rental buildings, to keep them from being redeveloped. It’s probably more cost-effective to keep older, cheaper rentals than to make brand-new rentals affordable.
City council - rezoning
I think Nolan Gray describes the situation pretty well:
Many U.S. cities force every development proposal to go through a long and costly discretionary review process. This is often done by making land-use regulations so restrictive that any development must pursue a discretionary action like a rezoning or a special permit. In practice, this submits all proposed development to months of negotiating and public review, in which locals can shout a project down to their preferred size (which is often a vacant lot) or extract large concessions from the developer.
It’s not surprising that a local government would hesitate when faced with loud opposition.
Or as the MacPhail Report puts it:
We recommend a stronger role for housing needs estimates and citywide official plans, which guide how entire communities are expected to grow. We also recommend reduced reliance on site-by-site public hearings and council approvals that delay homebuilding and amplify the voices of groups opposing new housing at the expense of citywide objectives and affordability.
What would help?
Relaxing zoning by-laws so that more projects can be built without a rezoning. The Streamlining Rental Plan is a good example: it allows six-storey rental apartment buildings in local shopping areas (where four-storey condo buildings were already allowed), without a rezoning.
BC recently made a change to allow local governments to skip the public hearing for a rezoning that's consistent with an official community plan. This doesn't apply to the city of Vancouver, which has its own charter.
City staff - rezoning and permitting
The rezoning process, which requires city council to make a decision, is very visible. The permitting process, which requires city staff to issue a permit, is less visible. City staff are required to execute the rules laid out by city council, but those rules accumulate over time, and it’s probably not clear to council exactly what’s in the current set of rules at any time.
A development manager for a non-profit housing developer describes the city of Vancouver rezoning and permitting process like this.
Rezoning application to staff
Rezoning public hearing at council
CAC negotiation with staff (to capture 70-80% of the increase in land value)
DP (development permit) application to staff
Staff respond with DP conditions, applicant meets conditions, DP is released
BP (building permit) application to staff
Engineering comes up with surprise requirements they were supposed to disclose back at the DP stage, panic/extra cost to applicant, BP is released
Another development manager at a non-profit:
Each of these steps can take numerous resubmissions. Staff always say this may not be all the comments, and they reserve the right to give more at a future date.
What are the problems at each stage?
At the rezoning stage, internally inconsistent policy statements are a problem.
At the DP stage, overly prescriptive and constrained design parameters are a problem.
At the BP stage, the Vancouver Building By-Law is like the U.S. tax code, but instead of accountants, it's city engineers and project-side engineers arguing over interpretations and acceptable design methods to achieve life safety.
Delays in rezoning and permitting also cause problems for economic viability:
I can't get a steady pipeline of financing for affordable projects because subsidized projects won't fund if rezoning is involved.
Unreliable permitting process and reviews cause construction costs to balloon. Requiring the project to raise more subsidies ... back to square one.
What would help?
Make policy statements and the Vancouver Building By-Law clear and consistent. It may be helpful to make the objectives for policies explicit, e.g. life and safety, earthquake preparedness, light and airflow, energy efficiency, streetscape and aesthetics.
Relax design requirements, so that city staff aren’t micro-managing the design.
Consider prioritizing requirements (A/B/C). During Covid, there was a surge in applications at the same time as reduced staff capacity, which led to growing backlogs. It’d be helpful to identify up front which requirements must always be checked (A), which can be dropped if there’s a surge (C), and those in between (B).
Consider providing more discretion to city staff, so that they’re not required to rigidly execute rules laid down by city council in a context where they don’t make sense.
Joseph Heath, A Defense of Administrative Discretion:
Administrative rules seldom have independent deontic significance; they are instead aimed at achieving some objective. This is usually articulated in terms of the rules having a “point.” And yet there will often be ways of applying the rules that defeats their point (e.g. by being overly literal, or insensitive to circumstances, or by ignoring the interaction with other rules). In some cases, applying the rules too literally can actually work to defeat the point. This sort of formalism – an insistence on following the rules even when doing so does not serve their objective – is the quality of bureaucracy that is most often described as “Kafkaesque.”