Value creation in infill development part 2 - fundamental questions

Value creation is the art and science of infill development success, where the end product exceeds the cost of the inputs (land, labour, material, expertise, time value and risk capital). The inputs are in the care and attention of an individual or team entrusted with execution. The magic recipe is found in the quality and efficacy of the executor. Highly Leveraged land ownership, an unrealistic concept drawing, and a vague but optimistic marketing pro-forma is not execution, it is speculation, or a fairy tale. I don’t daydream about value creation aspirations, I live it 100% of the time, and I’m intolerant of such dabbling dilettantism in my market by weak handed players. Below are a few of the key questions likely to be common to most infill projects, and some answers related to my value creation experience.

What is the execution and what does it mean to do it well, can you measure execution? The execution is the degree of mastery of the inputs and tasks that lead to value creation. Generally this is going to be the builder combined with project manager, that can be the same entity in smaller projects (my typical project has been too small to divide these two). I believe execution and value creation are inexorably linked, but the execution is more measurable, against a budget, schedule, and relative quality of work. The value creation part is determined by the market, client reaction, appraisal, and appeal to the credit market. For classic purpose built rental projects, the value creation is theoretical because it is only measured by an appraisal if required by a banker looking to check a qualification box. I wont pursue an opinion on market value if it is not required to get financing, as the report is quickly outdated. I have executed projects extremely well, while allowing myself some grace for the inevitable screwups and do overs.

Is value creation all about profit and margin? No, profit suggests a sale, or a cessation of value creation. Value is enduring and is a continuum, that grows over time. The allure of creating value is distinct from cashing out of a project, which tends to create a taxable event, value is not necessarily taxable, today, with the removal of new rental supply GST, value is given preferable tax treatment vs spec home business. The sheltered nature of value creation is a storage of wealth in a physical asset, and can be leveraged into more value without being lost or traded. A benefit of value, is that once created, it can provide a more passive income source, a stark contrast to the act of execution, an intense period of action, the opposite of passive. Transfer of the energy and willpower of execution of value creation into passive income, is the key to the longevity and resilience of the developer. Avoiding transaction fees and letting the compounding nature of these assets work over time is how value is nurtured over decades.

Can the execution be outsourced? I think perhaps, but the more outsourced is the execution, the more value that must also be shared, not all projects have enough value potential to attract the execution talent needed. The risk of attempting to outsource the execution is the strong likelihood that the interest of the project owner and the project manager are not aligned. Attempting to outsource value creation is indicative of an individual who wants to shortcut the execution challenge, making that person susceptible to the weakness of a poor choice of manager. Many investors view their own personal time to be too valuable to be engaged in project execution. This is possible for high wage earners, but based on median wages in Canada, this is not true for all but the highest paid individuals. A poorly managed project could waste far greater sums of time and money in a month than a typical employee would earn per year. My tactic has been a rigid, bordering on maniacal control of execution, despite the obvious personal toll it takes to manage the execution to the standard set. Self performance of the execution has a major benefit of allowing a degree of opportunism, compounding the value created by capitalizing on unforeseen tactics to improve the project. Self performance is also scale limiting, in both project size and the amount of projects that can be tackled by one person. Outsourcing more of the execution, while sharing more value, could lead to more volume and overall create a lot more value. This is an eternally ongoing point-counterpoint, in the end, most any infill project today is significant enough that vast value can be created vs typical household net worth. This is the allure of being the majority owner of the value, it isnt a wage tied to time, and it can improve over many years as markets grow. The upside of the value can exceed multiples of what a person could earn trading time for money as a skilled worker or white collar professional. Potentially a focus may be required, is it better to own a majority of a small project and have total control, or to own a fraction of a large project and have little influence? Which of these approaches is more likely to have value mismanagement, or fees and tolls embedded in operation, diluting the value? To answer these questions, a person could examine my portfolio direction and see my preferred project size. I do have aspirations to attempt larger projects that better fit the world of finance, yet the crown jewel portfolio assets I most pursue tend to be too small given the land size of typical infill properties.

How technically skilled must one be to manage the execution of the infill development? Expertise in the running of the project is obviously essential. The natural order of the job site is chaotic and risk filled. Management brings order to the chaos. Certain legal certification and registration are likely needed to run any infill project, which is why I maintain these in good standing. Execution can be partly a question of ‘who not how’, but you must know ‘who’ to put in place or risk putting into motion something awful. Anecdotally, I have managed projects far better than other projects I have observed, of similar scope, taking twice as long and showing inferior quality. I have also seen amazing feats of construction prowess by larger build companies that I have no hope to replicate without a team of similar calibre. Building a team that executes the value creation is one way to scale, and also a way to vastly increase overhead cost. There are many levels to execution, the secret is using a manager at an appropriate level of competency at the scale of a given investment. Typically bigger is better here, and larger fees from more units can attract pro teams with a track record. I would say to any aspiring infill developer that wishes to start out at the top, how could I show up at a dentist office and operate on a patient, or at an airport and pilot a jet, so how could a person of limited experience expect to manage the execution of a seven figure construction project effectively? There is a vast capability chasm between a typical educated person and a professional value creator with multiple successful projects in his portfolio, of that asset class, in that jurisdiction. It appears unwise for a new developer to tackle a multi family build as his first attempt without support. Execution skills and contractor relationships do not translate well to different geographies. This limits a developer in how many markets hard earned experience and knowledge apply to. I’m even afraid to step out of calgary now, a jurisdiction I can predict with some certainty how the city will react to my plans and what work will cost to execute vs the value likely to be created. Unfortunately I am a value creation specialist only in a tiny slice of geography, in a niche market.

How does an infill developer determine if a project is likely to create value? This may well be the million dollar question. Imagine the folly of committing resources to a large project only to learn, too late, that the end result won’t create any value, instead it will create a loss. This could mean the sales or appraised value of the units would amount to less than the input cost. Instead of value creation, you’ve destroyed your own equity in the deal. Or the ill managed time and effort to complete the delayed work simply erode the value, day by day, until none remain. Each of the inputs must be estimated, from land selection through to cost of the time of construction. This is a massive mathematical undertaking with a high margin of error, usually you still have to vote with your gut, very early, before purchasing land. Clearly one must enter the deal with fair sized buffer, such that an increase in any input won’t eliminate too much value. After all, the reason we do those projects is to create value, not for fun or practice. I once counselled a prospective developer to bail on a project that had an excess of slope stability and soil retention cost. Those would look impressive when built, but cost too much and not create much value. Not all the inputs will create value equally, one must figure out what the key inputs are that will magnify value, like unit count, or quality of floorplan, or location. What market to build in could have more impact on value than the actual project itself! In a smaller project, all the value of one unit is likely lost to fees and compliance, again, this makes the case that larger projects will create more value due to dilution of fees as part of the overall body of work.

what has been the secret ingredient to my most successful projects that led to the most value being created? Sadly, market luck has been a huge factor in initial value creation. Massive action, which has been required to execute every project, hasn’t been as much of a factor as I would have estimated up front, other than through its role in taping the bullseye to my own back where luck could strike it. The infill market components, like land value, and interest rates, and yield or net operating income can fluctuate substantially. Of the project inputs I can control, land selection has been huge. But the greatest has been a blood commitment to getting it done, with quality and pace incorporated in the mix. The secret then is willingly and eagerly paying the personal price, sometimes seven days a week. Nobody realistically can or should work seven days a week permanently, but this is playing the game to win, and refusing to quit until it is won. When fuelled partly by passion this is the dynamite that overcomes obstacles in the way of execution. Endurance and grit then is a key to unlocking value creation. Another has been a singular focus on preliminary value engineering. Without going into too much detail, the ability to value engineer the documents comes from the 10,000 hours of lived experience in the trenches suffering as a wallet victim of bad design. To simply know, is to then find a way to make design changes to avoid problems ever becoming real. The casual observer could never imagine what has been done to detour land-mines before they show up at the site, eliminating entire categories of cost and value destruction. And, inevitably, something will be missed, so speed in overcoming mistakes cannot be underestimated. Becoming a person who can decide, and who lives comfortably with the consequences of the decision is how the project can actually change the individual, and better prepare him for greater challenge.

What type of person should and should not be considering tackling these projects? A person who, over the course of their life has shown a disinclination to commit, to crumble under pressure, who is indecisive, who lacks discipline, who cannot delay gratification, who can’t work hard for months without income, these are deadly value destructive traits. If this is you, run from this business and invest in safer markets. Execution is not for someone who is prone to flaking out when it gets tough. An infill project executor may feel like they are getting kicked daily, and the moments of triumph can be outweighed 100:1 by the hardship. Pre-project personal development via exposure to increasingly difficult tasks and levels of responsibility prior to jumping into the infill game is relevant training for an aspiring developer. Risk exposure is a real thing and a failed project could lead to bankruptcy. Even a successful project could lead those in charge to be depleted, diminished, and burnt out, but also the proud owner of a massive fountain of lifelong new value. The upside of these projects is the satisfaction that comes from winning the game, inflation protection, time off the grind. A masterful executor takes satisfaction from the manifestation of his vision and the above market cap rate too! This lengthy post appears as somewhat of an autobiographical diatribe, whispered into the web, where few persons shall tread. Rant over, we can move on to more practical methods of value creation.

Value creation in infill development part 1 - an introduction

This is the first in an ongoing and likely open-ended series of posts on value creation in the context of the infill developer. We will discuss what exactly this means, and what it doesn’t, pitfalls often encountered, tales of woe and horror, and triumph. Value creation is a distillation of intangibles, yet a physical manifestation of willpower, somehow abstract, but cultivated in the real world of mud and markets, and visualized long before execution. And execution, the key phrase, often repeated in this series, it is all about execution. What does it mean to execute value creation as an infill builder? I know a few things about this space, I have the 10,000 hours of repetition, but do not claim to know it all, or even enough. There be levels to this pursuit after all, I know mostly about the level I play in, and little of those levels above. Value creation is distinct from employment for sure, employees create value but not necessarily play in the realm of the owner/investor. A mindset is surely needed to create value, but how to cultivate this mindset, how to transition from wage work to value creation work, an obstacle many cannot overcome. And finally, strategies of what to do with the value, to compound it and shelter it from those who’d take it from you.

I find myself somewhere in mid-career, blessed to be freed of survival work, largely due to following my own strategies discussed in these posts. My focus now is laser sharp, to create value, and execute my plans into reality. These posts hopefully can help aspiring developers chase their own dreams, a road map that I wasn’t able to find when I needed it. I can respond to specific questions and will post replies to clarify my thoughts on topics of interest. Thanks for reading and good luck!

Priced beyond perfection- land sales that stymie any scenario other than a standard deviation of positivity.

On occasion a remarkable land sale gets remarked upon on these posts. This one is particularly egregious, my new favourite phrase. Given the carrying costs of land and the cost to build, these deals appear to appeal only to the most cash rich builders who also have the highest tolerance of risk and the most optimistic outlook. In my view these highly optimistic scenarios don’t often unfold according to the schedule of how they’d need to in order to justify such investment exuberance. Nevertheless I’ve been wrong and right plenty.

City wide RCG zoning implications, the dissonance of the public opposition

Some time has passed and we can all digest the implications of the new policy direction to change the basic zoning of the city. This will allow townhouse/rowhouse (seems interchangeable terminology here) typology basically everywhere in the developed residential areas (the inner city as it is known, where I work). I don’t see a massive amount of supply being added, given there are only so many building companies specializing in small scale townhouse construction. These are complex and costly endeavours, and I pity any new entrant into the business choosing a townhouse infill as his first project, unless he has a lengthy background in building, project management, and the mind numbing technicalities that arise and must be conquered, and loads of cash. The bigger companies already complain the smaller lot projects don’t necessarily work for them, simply because they need more scale than a handful of row houses to justify funding a team. Of course, you need a team to build anything more than one or two houses at a time, the company owner is perpetually caught in the middle of this scale conundrum. Simply put, starting a bunch of townhouse projects scattered throughout the city is really hard logistically, and would require eight figures of financial backing to do so. Not many new volunteers I would guess that would result in a massive amount of new supply beyond what is already earmarked for investment.

This brings us to the next point of commentary, the calibre of opposition raised to oppose the policy change to allow redevelopment, formerly prohibited, in the swath of RC1 and RC2 zoned areas that surround the city core. The arguments put forth often show a level of dissonance, to rationalize the opposition a person has to tie a knot with their tongue because the central argument means something different than what it purports to, you must interpret the coded language. Councillor Carra did a nice job of highlighting this, while challenging the anti-supply contingent to come up with better arguments. I didnt hear any great arguments against supply, but plenty of dissonance. Here are a few key themes observed.

• Rowhousing will cause economic harm to existing property owners property value, Allowing RCG will enrich developers by driving up property value. All of this I think is misleading and argues that RCG zoning will make property value both lower and higher AT THE SAME TIME, which is impossible. The real argument made is single family home owners just dislike row housing, density, people and cars, and want to entrench their currently free amenities (empty streets, lots of space) using the authority of the city bylaw and planning department. If all areas have equal RCG potential, then that removes the current premium on land with current RCG, or easy to rezone to RGC status. There is currently a scarcity of RCG land, once the maps are changed, this artificial shortage is gone. Given the same size of building industry and its investment potential, the impact on land value will be low, because now every property has the same upside, whatever it is, of the RCG zone. We could see less competition among builders for land, this is overall a good thing for new housing affordability. Developers will not be enriched by land value increases, that benefit flows entirely to the land seller, the same people that oppose development also take the highest bid when it comes time for them to sell. All the scarcity driven, high land cost we see today does is make new supply more costly, which leads to the second point of dissonance, shown below.

• The new RCG supply we see built today is already too expensive and damages low cost housing stock - The dissonance here is that, if you accept housing in Calgary is already too expensive (I do), then that means the current regulatory environment is not working to promote affordability, so should be changed. Allowing more supply of the least costly grade oriented supply option (rowhousing) surely cannot make the market work worse than it does now where the regulations restrict RCG supply to a very small land base. The public, when standing at the podium, fails to grasp this. Next, there is plenty of new RCG townhouse sales data, these units sell for much less than nearby semi detached, and far less than single detached new builds (by half or more). Simply put, the RCG product is the lowest cost new wood framed grade oriented building possible, this is not from greedy developers, the product cost is a reflection of its inputs, the commodities and labour are expensive today, and increasingly so. The next comment is demolishing of old single houses for rebuilding as rowhouses damages the affordable housing stock. Surficially, this makes some sense. The builders target the worst houses, because they can be economically demolished. This could lead to fewer overall low cost houses to rent. However, why are these houses so cheap to rent? They rent lower than the cost of holding them, because the houses are fully depreciated, maybe were purchased decades ago for a low price, and often have $100k deferred maintenance problems. These homes are rough enough that they can be unfit places to even live. Swapping one totally trashed house, for six townhouses is still a net benefit to five new households, this is forgotten by the public. Society needs to accommodate some people in poverty by giving them housing at far lower than its true cost, but the way to do it is not by curtailing supply of land for renewal, which drives up housing prices for the entire population. Are people really advocating for keeping the existing decayed housing stock as is to allow it further deteriorate?

• The city needs to offer housing diversity rather than a blanket zoning approach - This comment exemplifies the flawed argument frequently heard. It means that by Council valuing diversity, it also must value the form of diversity of not allowing diversity. if this seems odd, it is just the typical dissonance of the public. The premise is blanket zoning is wrong, because to have diversity over the entire inner city, some areas must remain as single detached enclaves. This then contributes to diversity, because community A,B and C allow row housing, yet community X, does not. Community X only allows single housing, so it is a demonstration of overall diversity. Those promoting this are engaged in a doublespeak, they are saying their community is special and should remain as single detached only, because of character, and integrity of the design, and other arguments of why wealth enclaves are a good thing outweighs need for supply during a housing crisis. no solutions are offered other than token support for housing diversity, as long as it is somewhere else, far from their enclave. The problem is, given a chance to control development, many communities would outlaw any building except new single houses, the most expensive housing option. This is the system we largely have today, which is creating housing scarcity by choking supply, and the only new housing option is luxury product over $2 million.

• Rcg zoning is a massive negative impact to the community, but also not going to supply enough to make a dent in housing problems, thus, should not be done because it is not a significant enough improvement. This argues that RCG will harm existing communities, due to the usual bogeyman, traffic, density, shade, etc. And it will not solve the housing crisis, and it isnt meaningful enough to add enough supply to solve the affordability problem. This argues that RCG is a major change but also a minor change, thus status quo is the correct course of action. The response to this is difficult. What can you say other than something cannot be both major and minor, concurrently. This type of respondent wants the city to annex more land and sprawl, and put massive apartment towers on park and ride lots near c trains. These are some terrible solutions to a housing crisis, but shows the capacity for creative problem solving among the general public. Best solutions presented involves ring fencing their valued Rc1 core areas, with all the density packed onto busy roads. The enclave residents then do not have to make any concessions inside the core area and can virtue signal about their progressive and unselfish approach to redevelopment.

• The public is shy to attend the public hearing because they dont want to be publicly shamed - This was actually commented on by Councillor Chabot, his constituency was very opposed in private communication to him, but they did not want to speak publicly. Perhaps this is because their ideas are so terribly self serving, classist and nimby? The Councillor Chabot constituents must have truly awful arguments opposing new RCG housing supply if they are scared to debate their position in public or attach their names to the public record.

• RCG zoning is a socialist style plot - This is a poor argument because RCG is a deregulation and red tape removal program to enable the market to function better. Again, how can this be socialist central planning when it is supported by the small business community that dominates this market segment. The opposite can also be argued, that the current system is heavy handed against individual property rights, anti competitive, uses bylaws to crush business development and poorly allocates supply of new product (sounds pretty socialist to me!). RCG is a massively pro-business policy, hardly a socialist plot by an NDP dominated Council. RCG is one of those broad spectrum policies that can unite both right and left in a common direction, rare today.

I think summarizing all of this it appears as typical Calgarian reaction to accelerating evolution of the city. A forecast of 200,000 plus per year population growth (2023) for Alberta was recently discussed in the media. New patterns and ideas on how to house an influx of people is needed, not just sprawl and detached homes, or Rc1 communities in decline with falling population within them during a crisis. We only saw 66 MLS listed new townhouse sales in 2023 reported by the realtors, this is tiny amount of new product coming to market for sale (lots of rentals were built though). The pendulum has truly swung in the other direction, this is the next generation - the millennials, exercising newfound power over its parents and the city it is inheriting. Will the opportunists among us adjust and take advantage of the changed marketplace? Will the city ever tackle the restricted covenant problem it has a major role in unwinding? Will the Province help with the financing hardships faced by home builders that is impacting new investment in supply? These are next on the to do list once the zoning issue is fixed.

my construction race against the weather

When it gets cold, construction slows. this seems to be the law of nature around Calgary and can only be defeated by massive expenditure in terms of labour, heat, and hoarding materials. I’d prefer to do none of that and simply use the favourable autumn weather. This means a few tasks must be done, some in order, some less restrictive. The volume of work is as follows, 1. gas install underground, 2. garage pour, sidewalks and patios pour, 3. sewer and water install, 4. paper and wire prep for stucco, 5. inspections for all pre board related activities, 6. insulation install and spray foam, 7. load drywall, 8. prepare scaffold and materials for stucco, and soon after do the sand and cement scratch coat, 9. trench for electrical to garage, inspect and lay cable in trench, 10. acrylic stucco final coat after scratch coat cures, 11. frame and prep garage for stucco, prep siding soffit fascia and garage doors, 12. install mast for electrical service and inspect garage electrical, create enmax billing account, have power connected, 13. commission the furnaces and have gas account up and running, condensate lines, other mech room work before furnace firing, 14. whatever else comes up!. If this appears to be a lot of work to compress into a short period, it is. All of this is currently in some stage of readiness at my site, and most of it needs done before October is over, or perhaps a little later if the weather is ok. Often there are plenty of warm spells up to and sometimes beyond Halloween that assist greatly in these construction races against the weather. Some of the stages require drying and curing, multiple days of preparation before work can proceed, or dry weather. Any work that isnt done may need to wait, and this could actually be the month of May 2024. That is a tremendous amount of time to wait for a project with an early winter finish date to wait six months for mild May weather. I think over the years we have learned the true cost of waiting for some of these stages, or have accepted delays from contractors that created a chain reaction of delayed work and the onset of winter. This year I have committed myself to getting the project complete before Christmas and this means everything outside has to be done. So far we are looking good, the next two weeks will be pivotal.

The end of incrementalism - Calgary embarks on a significant change to the restrictive zoning rules, finally.

During the Mayor Bronconnier era I was much less of a council observer than today. One exception was the despicable decade of nimbyism regarding secondary suites that bled into the mayor Nenshi era, the one I observed much more, even dragging on into the second Nenshi mandate. At the time the boomer heavy Council was able to defer, defray, and deny the legalization and construction of much needed basement suites. The conservative council was extremely interested in denying the rights of the individual to do as she saw fit with her property. Of course, basement suite development occurred in massive numbers, with the general public just denying the silly rules and building many of these suites in their private residences. This shadow inventory made up a significant portion of lower cost rental housing, eventually the rules were updated after much high profile and embarrasing bickering, currently secondary suites are largely a non-issue.

Next was introducing the townhouse or row house zone into the Rc2 areas, where a good set of contextual rules was drafted, each property would need a council vote to be re-designated to allow the row houses to be permitted. This remains a slow and costly process, but, with each successive council, the likelihood and predictability of success became much more certain. Some city led rezoning was done as part of main streets initiatives, and with the advent of local area planning, lumping a group of adjacent communities into a revised master plan, more policy backing was provided to rcg aspiring builders.

This incrementalism was quite successful in adding new supply, fortuitous it can be looked upon, as a lot of purpose built rental stock hit the market from 2018-2022, as a massive wave of immigration and demand for grade oriented rental housing arrived to Calgary. The consequence has also been a run up in land values, and now, with high cost of financing, a lack of land supply to be rebuilt as rcg rental stock harms supply growth today, when the need has never been greater.

With the city decrying a housing emergency, a task force was created to address the supply of affordable housing, and one of its key conclusions was to engage in a mass land use change of the base zone, largely Rc1 and Rc2, to the rowhouse/townhouse zone, Rcg. This would change, almost overnight, a large amount of the untouchable and exclusive housing stock, particularly in the Rc1 areas, to allow multi family development. Note, the Rc1 areas have the best locations, and largest lots, and the most restrictive rules, as they don’t allow any building except the much maligned McMansion. As of the special council meeting on Saturday, September 16th, 2023, the previously unthinkable actually took place, and by a vote of 12-3, the policy passed. It can now head to a future council meeting where a clear path to do the broad land use change will be executed by the city admin.

My thoughts on this include a sense of relief, that the people in charge actually show an ability to act. One of the greatest issues we have today is our slow and dim witted levels of governance, and the fecklessness shown on addressing key issues. Instead we tend to get government creating more problems, or attempting to solve make believe problems through virtue signalling. A broad based land use change would have been impossible just a few years ago. The tiny changes, allowing basement suites, to allowing some townhouses in some areas, and then all at once leaping forward to a mass land use change is a tremendous shift. It will save so much time, cost and headache for the builder, that, in combination with the new Federal ruling on gst will make development of multi family homes much more viable. This is a major benefit to society to balance supply and demand, thus mitigating future rent and home price escalation in Calgary. Those arguing against it, including the three opposing Councillors, appear as stodgy dinosaurs, relics of a boomer era of backroom planning politics, where preservation of wealth enclaves occupied by campaign donors would drive land use policy. Special mention of the Councillor who attended the full session despite being due to give birth is warranted, as she wanted to make sure her vote would count in case it was a split Council. The typical gatekeepers and their arguments appeared to fall far short of swaying Council, other than the usual suspects who have zero sophistication in land use matters and typically vote against infill development anyway. Absent a new modernized zoning bylaw, this change appears to be the biggest story in Calgary land use planning in our lifetime.

The unnecessary panacea of modular building

Good trades render modular construction unnecessary, thus, modular construction is only needed in the absence of good trades (like remote sites and tourist destinations). Lack of good trades is a societal failure, not a justification for modular as a panacea. In calgary we have good trades (and a simply massive construction sector) and modular isn’t catching on despite decades of hype. If modular was better, the big boys would have latched onto it years ago and it would by now dominate production. If the big boys don’t do it, the reason is it doesn’t make dollars so it doesn’t make sense. Of course what does make sense is mini prefab items, like trusses, and cabinets and flooring, and possibly prebuilt wall sections. All the work is done elsewhere and the workers on site assemble finished goods to save time and be more specialized. This stuff has all been perfected ruthlessly in a competitive market. modular housing isn’t a solution for what really ails society, affordability. Modular housing costs more than site built because of the overhead of the factory and the inability of the factory to overcome its inherent disadvantage, shipping, craning, and constraints of roads and wires, and that the type of housing demanded doesn’t fit well on a trailer nor within the confines of the existing city and development rules. Modular housing doesn’t benefit from factory scale as promised, because while everyone who wants a truck can use a ford f150 (millions made, all slightly different but identical major systems with interchangeable parts), everyone who wants a house doesn’t want a mass produced model with different paint and gadgetry packages. So housing doesn’t scale in a factory the way it would need to, if we wanted to lower costs. Some modular builders position themselves as premium alternatives, benefiting from climate controlled production, customized architecture, or they use extremely expensive equipment and go after net zero or European style quality This is the antithesis of mainstreaming new supply that could ever make a dent in demand. These models are likely to have walls of glass, integrated appliances and $1000 faucets, so the factory can create margins in its very high cost per square foot product that will be very expensive relative to site built competitors.

This brings us back to the central issue of affordability. Housing isn’t affordable because the individual components add up to what they add up to and can’t readily be economized, even when built smaller. And the land trades like a hard asset in an era of currency debasement, adding massive cost. Governments are such feckless creatures they simply add extra useless waste and fees and tolls and grifts upon the builder, eroding affordability further. The banks then take their share by lending money into the atmosphere and collecting interest upon what they created, this is a huge cost category today now that the easy money days are behind us. One small solution would be really cheap loans to builders, but that isn’t politically feasible as it is easily twisted in the media as handouts to the wealthy capitalists. However, society wants cheaper housing at scale, the most likely suspects to innovate into lower cost higher supply housing is by definition wealthy capitalists creating huge disruptive companies (like a Tesla), not governments, and not boutique artisans. So we come full circle to the conclusion that Modular isn’t the answer (yet, and maybe never) and there is no answer except less government taxes and involvement, less banks influence over the sector, and more innovative builders.

Further thoughts on pace of work

Despite the obvious mantra of construction, time = money, a person such as myself needs to peel back a few more layers of the onion. Slow work, in a high cost capital environment is a disaster that mainly hurts the builder. I prefer a shared risk model where everyone takes on the pain rather than one person bears it all. This is hard to find a way to distribute the cost of slow work so the builder tends to eat it.

A second misconception is that faster work is worse work. I’ve debunked that myth on my sites many times. Often faster work is done by pros, who are extremely productive. It isn’t rare to see a true pro crew made up of all ‘A’ players work 4x the speed of a lesser crew. I’ve had crews where it is hard for me to keep the deliveries coming soon enough so they don’t have to quit early. I’ve had crews where the material sits forever waiting for an opportunistic scammer to come along and grab it.

But back to cost of capital. A typical smaller infill project will require some outlay of cash and credit to eventually approach $2 million as completion nears, with funds stuck in raw land for at least a year or two, drawing down cash reserves or taking hostage of the builders limited funds. Those final finishing months, with delays due to supply chain and busy crews, or when finished and waiting to sell can be really costly. Cost of the money can approach now the second most expensive line item behind land. That invisible drain is a massive parasitic drag that can eventually sink the strongest builder. A lot of builders are skilled at fleeing the sinking ship and ensuring they take the smallest loss, basically by burning up other peoples money.

The approach I’ve often used is less leverage and a greater focus on execution. Instead of the cost of capital being the second biggest expense, you can minimize it with pace of work improvement, and low rate internal funds, or even better, funds borrowed at low rate from other assets like cmhc deals. In the market today I have a hard time believing that double digit interest rates will be sustainable to the builder who also has to overpay for land at the outset. It seems like a recipe for margin squeeze.

And this brings us to today where there is a strong favourable sentiment. Land prices and input costs are very high, some at record levels. Interest rates for buyers are likely at the highest number they’ve seen in their adult lives, thus has to cap upside of home prices. Immigration is high, and the energy economy is doing well. All of this is fickle and subject to change, particularly the in-migration, out of province investment flows, and behaviour of Saudi princes and Russian authoritarians. This appears to me like quite a risk recipe, and I’ve stopped looking to purchase any land for the remainder of 2023 and into next year. I’m happy to build out my inventory, some of which I’ve had too long already. Past experience suggests that the market will cycle and much better land deals will result, eventually. Every project is taking longer than it should, and this leads to the greatest risk of them all for the builder. He starts building when the market is good, but pace of work is so slow that by the time he finishes he’s in a totally different market. This has happened to every calgary builder with any sort of track record. Seems to me this will happen again.

The easy days of summer building

It is remarkable how much easier and quicker work gets done in the summer months. The warmth, long days, crew productivity and soft soil make large pours quick and easy. We went from a hole in the ground to windows, roof, shingles, and a basement slab pour in a short few weeks. Over the winter, this can all be done, just with tremendous struggle and extra hoarding, heating, and difficulty. I need to avoid late summer and autumn starts, it is easily said but not generally followed through. I’d prefer to start some houses in may or June and have all the outside stuff wrapped up in October.

How does this not leak?

All of my regular readers will no doubt recall my frequent comments on upper level decks, and the fastidious details and products needed to ensure these don’t fail. To me these are all cost and risk and liability with minimal upside. That sort of exchange feels pretty sour to me, so I won’t be inclined to do it. Certainly won’t be putting a warranty on it. Roof decks are a whole different level of construction execution, third floor issues, etc. without getting too bogged into detail, I won’t do it. Yet when I see it done by others I’m just baffled. Particularly when a roof deck is installed with dozens of railing bolts drilled through the tiny waterproof layer. After doing this you can’t even be assured the vinyl materials isn’t already compromised from day 1. Someone explain to me how this doesn’t leak, because I’m way too dumb to comprehend it.

Leasing underway

We are now leasing the livebridgeland.com project. One townhome and the garage suite are currently available.

Garage suite progress - almost done

We are pretty pleased with the recent progress and finished product over at the garage suite. While it was considerable effort to add on a standalone building to a townhouse project, I think we leveraged some real construction synergies as well. Our opportunistic approach along with the scale of the townhomes lent itself to a more economical building, despite the heavy specification of the costly mechanical systems deployed. The finished product feels a lot more like a single detached home than it does a tacked on real estate derivative. This was an unexpected outcome. I hadn’t actually thought through what the finished home would be like. I was more conscious of the troublesome sewer design and how to manage costs. In the end I lavished upon the garage suite much of the same materials as I would in a seven figure luxury spec home. The end result is both unique and familiar. A second floor bungalow, disconnected from any neighbouring structure, yet somehow centred in the heart of Bridgeland. I just may be having a change of mind on if these should be built more often. Relative to a condo in a high rise, cramped, no parking, neighbours above and below, this home is far superior to that model of development. And no condo fees!

More budget Metalworks

We are entering phase b of my metal install plan. More perforated cut and dropped off at the powder coat booth. Is this a fun and economical way to achieve adding a little bit of decoration?

Acceleration of the patina

My rusting metal siding wasn’t rusting evenly enough for my liking. The solution was a re application of the special sauce mixture of peroxide and salt water and a back brush. This helped to smooth out and apply the rust how I wanted it. From this point onward it can weather and a natural patina can be created.

Degenerate people and their degenerate behaviour regarding infill redevelopment

It does appear there is a rising tide of thievery, vandalism and predation around the inner city. A lot of this is just routine deplorable types, who scavenge and steal to feed their bad habits. Worse are those that seem to target business owners and job sites, taking tools and ruining livelihoods of actual hardworking people. Now we are seeing attacks against the nature of development itself. There is a common perspective that infill is bad, nothing should change, worn out buildings decaying and vacant are ‘heritage’ and new housing is evil. You see some really awful examples of this mindset on Facebook community groups, Nextdoor app, and social media posts. Recently some degenerates torched a pile of lumber at an Inglewood location, actual arson, and pushed all the fences into the excavation. They basically just demonstrated a vast chasm between their own ignorance and those of the people that are rebuilding neighbourhoods from the inside out, often overcoming significant obstacles. At some point we will have to hire armed guards to protect our houses from these vandals, because the police don’t take it seriously. .

The washing machine time bomb.

The washing machine can alternatively be called a time bomb, ticking away until it is ready to go off, in an uncontrolled flood. One recent adjustment has been attempt to make the washer ‘safe fail’, as in, when it fails, it is ok because it won’t cause much harm. We did this by relocating the laundry facility back to the basement, the place they used to before the second floor trend came into being. A laundry room inside your home is a luxury, so why turn it into a liability by positioning it somewhere where it can do the most damage. And yes, I have done emergency floor drain, and I have clad the floor and baseboard in tile and caulked the edges. Still floods.

HGO everywhere. The missing middle unleashed in calgary.

It does appear now the tide has really turned in the missing middle solution to home building. The built forms, outlawed for so long, are unleashed upon the calgary infill market via hgo. It seems like a wave of hgo rezoning applications are hitting the streets now, with a flood of investment cash and builder interest. Is this just the right solution for a year of substantial immigration? I think so. I’m planning one too. Mine will be seriously interesting and different.

Risks and rewards, some self congratulation vs flagellation

Sometimes you push the boundaries and it backfires. Sometimes you take a calculated and deliberate risk and reap the rewards. So far I’m pretty happy with my outcomes related to my ‘doing it the hardway’ approach to my townhomes. Lots could have gone wrong, but hasn’t. Instead I get to manifest my construction related dreams into reality. Like i always say when I’m whipping out my construction cliches, these projects are like waging a war against entropy and you can afford to lose some battles and still win. We’ve had some wins lately, but the suffering is crushing too.

Design for durability - the long term rental approach

In my view, the approach to holding property long term as rental changes the calculus of what to spend and how to spend it. A good example is the garage suite. We, well, I, decided to do hydronic heat over a cold garage. The tenant will love the warm floor and compare it to a dingy freezing dungeon he used to live in, and anything else will be a major compromise so he won’t leave. That makes easy landlording. The cost is atrocious however. Hydronic set up and mechanicals is nearly $10k and then you’ve got an elevated pour, self level, membrane, and finally tile (the cheap part) and labour for all (not cheap). That is how you design for the long term in your personal build. Would I do it and give it away for free in a spec home? Not if I want to stay in business. Would a typical buyer appreciate these costs and hassles? I think not, and would undervalue it compared to a similar build elsewhere, thus assume the components were free (against a cheap vinyl plank and furnace job, as if these are remotely comparable). Such is the life of a spec builder vs someone in it for the long game. Over 10 years you can justify all manner of improvements if the financing and rental income can be organized as beneficial for all parties. Also, I just like the high end mechanical specifications, and the home comfort outcomes.

Hot water tank nesting ground

We’ve avoided screens in the hot water tank intake or exhaust. There is a very strong, maybe guaranteed likelihood of some winter frosting causing the tank to stall. The opposite scenario has been less likely, which is some birds finding the intake and clogging it with plant debris to nest. The intake draw is even strong enough to suck it right into the blower motor at the tank. That can be a long way inside the house.