Take a closer look at the recently constructed and proposed high-rises in downtown Ottawa, and you’ll see a significant shift in how the city is developing.
Various mixes of commercial and retail units, residential condos or rental apartments, office space and hotel rooms are being combined in new projects. There are few limits in how large infill sites may be divided and integrated to allow for the independent financing and construction of the components within a single site, in one or more buildings or structures.
The days of sole-purpose development are a thing of the past, at least in the urban core.
Why are we seeing this shift? And why should we expect it to continue?
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Infill development costs
It’s essential for developers to maximize density within the constraints of zoning and official plan provisions to realize a reasonable return. Developers may attempt to increase the permitted density on an infill site to cover the costs of acquisition, marketing, land development and construction.
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Specialization of co-venturers
Integrated mixed-use developments may involve multiple parties. Each partner will ultimately own part of the project and bring expertise to the development, construction and financing of their respective component.
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Marketability of complementary uses
Condo residents and office space tenants are increasingly looking for nearby amenities and services – ideally within their building or in an adjacent property. And municipal planners want small-scale commercial and retail uses at grade to help create vibrant, pedestrian-friendly environments.
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Market absorption rates
The ability of the market to absorb a building that’s large enough to offset redevelopment costs may be insufficient to ensure full occupancy and return over a reasonable period of time.
Construction financing may depend on commitments of future tenants, or the pre-sale of residential units. Increased density used to offset development costs is of no use where the market is unable to absorb the space constructed. Hence, there is an increased desire to divide the interests and mix the uses to ensure maximum return on an integrated product that the market can absorb over a reasonable timeframe.
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Other expenses
The climbing costs of infill urban development are attributed to factors beyond inflation.
The City of Ottawa no longer offers development charge exemptions and reductions to incentivize construction in the core. And changes to the Building Code Act and seismic requirements are forcing developers to dig deeper foundations to support the density above grade.
Additionally, regulators have tightened worksite health and safety rules as well as restrictions on the disposal of demolition waste. These are positive moves, to be sure, but have pushed up costs for developers.
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Risks
There is a misconception surrounding the profitability of large-scale land development relative to the risks that are assumed by the developer.
Even the most careful financial projections may be disrupted by risk. As projects get larger in scale, the timeline from start to completion is extended, and risks increase. Without some reasonable element of contingency, there is no incentive to undertake urban infill development.
Other risks include:
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Uncertainty as to the extent of contamination and the means available to deal with it;
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Increased construction costs, which may be harder to predict over long periods of time;
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Changes to municipal and/or regulatory requirements that are imposed between land acquisition and construction; and
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Site shutdowns due to labour disputes, occupational health and safety issues, and extreme weather conditions.
A great deal of work and financial investment is required between the conception of a large integrated mixed-use development and the date of no return when shovels break ground.
The resources required and risks involved mean that the number of sole-purpose projects – and the developers able to undertake them – will continue to decline.
In smaller markets, where absorption is more limited, co-ventured, mixed-use and integrated developments provide exciting opportunities to deliver the scale of project that is necessary to offset the costs and risks.
Debbie Bellinger is a partner with Nelligan O’Brien Payne, and leader of the real estate and development practice group. She has more than 20 years of experience in the creation and administration of developments that involve shared property interests.
