The escalating cost of housing in major urban centers like Toronto has become a defining challenge of our time. As cities burgeon and economies evolve, the dream of homeownership or even stable rental accommodation slips further out of reach for many. In response, policymakers and urban planners are constantly seeking innovative solutions. One such strategy frequently proposed and debated is inclusionary zoning – a mechanism that mandates the inclusion of affordable housing units within new residential developments.
While conceptually appealing, promising to weave affordability directly into the fabric of growth, the practical implementation of inclusionary zoning is fraught with complexities. Paul Morassutti, executive vice chairman of CBRE Canada, a prominent voice in the real estate sector, recently underscored this nuanced reality during an address at the Land & Development Conference in Toronto. His message was clear: while he supports the principle, “the devil is in the details,” and a simplistic application could inadvertently exacerbate the very problem it seeks to solve.
Unpacking Inclusionary Zoning: A Double-Edged Sword
Inclusionary zoning (IZ) operates on a straightforward premise: developers undertaking new projects must allocate a specified percentage of their units as affordable housing, typically priced below market rates. The intent is noble – to create mixed-income communities, increase the supply of affordable homes, and ensure that the benefits of urban development are shared more equitably across all income brackets. For cities grappling with a severe housing crisis, IZ appears to offer a direct path to addressing the shortfall.
However, as Morassutti highlighted, the challenge extends beyond mere supply. “Supply is not the root cause and inclusionary zoning is not a complete solution,” he stated, pointing to the widening economic chasm in cities like Toronto. As the economy shifts towards a knowledge-based, tech-driven model, the disparity between those who can comfortably afford housing and those who cannot continues to grow. In this landscape, policies like inclusionary zoning, while well-intentioned, must be carefully calibrated to avoid unintended consequences that could make housing even less attainable.
The Economic Realities for Developers
For any development project to proceed, it must be financially viable. Developers operate on intricate pro-formas, balancing a multitude of costs against projected revenues. These costs are ever-increasing, encompassing everything from skyrocketing land acquisition prices and raw materials to labor, regulatory fees, and municipal development charges. When inclusionary zoning mandates the sale or rental of units at below-market rates, it directly impacts the potential revenue stream, thereby reducing the project’s overall profitability and, crucially, the underlying land value.
This economic pressure point is where the “devil in the details” truly resides. If the financial burden on developers becomes too significant, it can act as a disincentive to build. Instead of stimulating the creation of more housing, overly stringent inclusionary zoning policies without adequate offsets could lead to fewer projects being initiated, a slowing of construction, and ultimately, a decrease in the overall housing supply – a counterproductive outcome in a housing crisis.
A Vivid Illustration: The Grenville/Grosvenor Street Sale
Morassutti brought the theoretical impact of inclusionary zoning down to earth with a compelling real-world example: the recent sale of a government-owned site at 26 Grenville St. and 27 Grosvenor St. in Toronto. This prime piece of real estate was acquired by Choice Properties REIT and Greenwin Inc. under specific conditions that perfectly illustrate the profound effect of affordable housing mandates on land valuation.
The sale stipulation required the redevelopment of the site for rental housing, with a significant component dedicated to affordable units – more than 200 of them, or approximately 30 percent of the total, to be offered at 80 percent of CMHC (Canada Mortgage and Housing Corporation) average market rents. This condition, while serving a critical social purpose, drastically altered the site’s financial attractiveness. Morassutti revealed that the property ultimately sold for $53 per square foot buildable. In stark contrast, he estimated that had the site been sold unencumbered, without any affordable housing requirement, it could have commanded closer to $250 per square foot buildable.
The Undeniable Impact on Land Values
This staggering difference – an almost five-fold reduction in buildable land value – powerfully demonstrates the sensitivity of land values to changes in a development’s potential revenue. Land is typically valued based on its highest and best use, which directly correlates to the maximum profitable return it can generate. When a portion of that potential profit is effectively “taxed” by a requirement to provide below-market units, the inherent value of the land for development purposes naturally diminishes.
Developers acquire land with specific financial models in mind. When a mandate like inclusionary zoning significantly alters the revenue side of that model, it recalibrates their willingness to pay for the land. Property owners, knowing their land will fetch a lower price if encumbered by affordable housing mandates, might be less inclined to sell, or may seek to negotiate different terms, potentially stalling projects or diverting investment to jurisdictions with more favorable conditions. This intricate dance between policy, profitability, and land valuation is central to understanding the true cost and effectiveness of inclusionary zoning.
The Indispensable Role of Incentives: Fueling Viable Development
Given the dramatic financial implications, Morassutti’s call for incentives is not merely a suggestion but a critical necessity for making affordable housing development viable in Toronto and similar high-cost markets. “Incentives will be required,” he emphasized, “Otherwise, the risk is that you dissuade development rather than incentivizing it.” This observation is pivotal; without compensatory mechanisms, inclusionary zoning risks becoming an impediment to overall housing creation, rather than a catalyst for affordability.
What kind of incentives could tip the scales towards viability? A range of policy tools can be employed to offset the financial impact of providing affordable units:
- Density Bonuses: Allowing developers to build more units (increased density) than typically permitted by zoning, in exchange for including affordable housing. The increased number of market-rate units can help subsidize the affordable ones.
- Streamlined Approvals and Permitting: Expedited review processes can significantly reduce holding costs and time-to-market, providing valuable savings for developers.
- Reduced Development Charges: Exemptions or reductions in municipal development charges for the affordable component of a project can directly lower upfront costs.
- Property Tax Abatements: Temporary or partial property tax relief for the affordable units can improve long-term financial viability.
- Financial Subsidies and Grants: Direct government funding or low-interest loans can bridge the financial gap, making affordable units feasible without over-burdening developers.
- Land Cost Offsets: In some cases, governments can offer public land at reduced costs, or directly contribute to the land acquisition phase of affordable housing projects.
These incentives are not handouts; they are strategic investments designed to achieve a public good – affordable housing – by fostering a sustainable partnership between the public and private sectors. They acknowledge the economic realities of development while advancing social objectives.
The “Manhattanization” Warning: A Society Divided
The consequences of failing to address housing affordability comprehensively and strategically extend far beyond developer balance sheets. Morassutti’s stark warning about “Manhattanization” paints a vivid picture of a city where essential service providers can no longer afford to live within its boundaries. “We risk becoming Manhattan, where cops, firefighters, nurses, teachers, can’t afford to live in the city. I don’t think any of us want that.”
This scenario, increasingly visible in other global metropolises, has profound societal implications. A city that pushes out its essential workers becomes an unsustainable and inequitable place to live. Such a city loses its vibrancy and diversity, transforming into a homogenous enclave for the wealthy. Longer commutes for service workers lead to increased traffic congestion, higher carbon emissions, and reduced quality of life for those essential personnel. It also strains public services, as recruiting and retaining staff becomes increasingly difficult. The social fabric begins to unravel, leading to a less cohesive and less resilient urban environment.
Preventing such an outcome requires a delicate balance of policy tools, ensuring that growth benefits all residents. Inclusionary zoning, when coupled with appropriate incentives, can play a role in fostering diverse, inclusive communities where people from all walks of life can afford to live and contribute.
Towards a Holistic Approach: Beyond Inclusionary Zoning
While inclusionary zoning is a valuable tool in the affordable housing toolkit, it is by no means a panacea. Addressing a crisis of this magnitude requires a multi-pronged, holistic strategy that encompasses a broader range of interventions. Effective housing policy must look at the entire ecosystem of urban development and affordability.
This includes streamlining outdated zoning regulations that restrict density and diverse housing types; investing significantly in public transit infrastructure to open up more affordable areas; tackling NIMBYism (Not In My Backyard) to allow for more gentle density in existing neighborhoods; and promoting innovative housing models such as co-operative housing, purpose-built rentals, and modular construction. Furthermore, robust federal and provincial funding for non-profit housing providers and supportive housing initiatives is crucial. Policies that explore land value capture – allowing the public to benefit from increased land values generated by public infrastructure investments – could also provide additional funding for affordable housing.
The true solution lies in a collaborative effort involving all levels of government, the private sector, and community organizations. Only through a coordinated and adaptable approach can cities like Toronto hope to build genuinely affordable, sustainable, and inclusive communities for present and future generations.
Conclusion: Crafting Sustainable Urban Futures
Inclusionary zoning, as championed by advocates and cautiously endorsed by industry leaders like Paul Morassutti, represents an important aspiration for urban development: to ensure that growth benefits everyone, not just a select few. However, its effectiveness hinges entirely on thoughtful design and a keen understanding of economic realities. As Morassutti aptly summarized, it is in the “details” where the true impact of such policies is determined.
Without carefully designed incentives that mitigate the financial impact on developers, inclusionary zoning risks stifling the very development it aims to shape, ultimately intensifying the affordability crisis. The goal must be to create a policy framework that encourages the construction of diverse housing, integrates affordability, and prevents the erosion of the middle class and essential workers from our cities. By embracing a balanced, pragmatic, and holistic approach, cities can move closer to achieving the vision of vibrant, equitable, and truly affordable urban environments for all.