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Writer's pictureJohn Turecki

Rising Rates Could Suppress New Parking Supply and Make Housing Even Less Affordable

Summary: Rising interest rates mean that parking spaces are a riskier investment for new projects, and it may not be viable to construct as many as before. Minimum parking requirements could impact affordability and development viability negatively.


By now, we all know that even free parking isn’t really free, even if it’s included with your lease or new condo. The costs of off-street parking are staggering. Estimates for underground parking, the dominant form of parking built today in Vancouver, vary from $40,000 to upwards of $80,000 per space depending on many factors.


Like any investment a developer makes, the decision of how much parking to build is guided by profitability and marketability. However, parking numbers also come with expectations from the city in the form of parking bylaws. Minimums mean that a relatively modest rental building in the City of Vancouver with 80 secured market rate units could be spending over $3 million on the direct costs of building parking to meet bylaw minimum requirements.


Of course, some parking is usually needed for a building to be viable, and some developers, especially those selling condos or leasing offices, are keen to provide parking spaces above the minimum. Providing parking, even more parking than the market may need, is sometimes a worthwhile risk to ensure projects are marketable. This is where rising interest rates come in. Rising rates make building that extra parking riskier, and potentially less profitable. This could lead to a lot less parking being delivered in new buildings.


Interest Rates are Climbing


With inflation running rampant, the Bank of Canada and other central banks around the world are raising interest rates. On June 1st, the Bank of Canada matched its largest ever increase in rates of 50 basis points or 0.5%. This pace of tightening is unprecedented in the last few decades. Markets are pricing in another 125 points by the end of the year, which would take rates higher than they’ve been since 2009. All this means that investment decisions today are being made using a different set of assumptions than in the low-rate environment of the past decade.


Interest rates have significant impacts on development projects. The most obvious impact is on the cost of borrowing. Just as mortgage rates are on the way up, the cost of construction financing is increasing as well. Most development projects rely on financing to get started, often for as much as 75% of the project cost. When financing costs increase, eliminating parking spaces that aren’t required is one relatively easy way to reduce overall project costs.

The cost of each space needs to be offset at the end of the day. Either the spaces are sold, or they are kept by the building owner and rented out. Each space provided above the by-law requirements should be subject to an assessment of the risks and benefits it creates.


Unsold Parking Spaces are a Liability


If a developer is looking to sell a parking space, theoretically the revenue it generates should be higher than the all the costs to build the space. So, if the parking is bundled with a unit, then the minimum viable sale price for that unit increases by the cost of the parking space. And, since there is a chance some parking spaces may not be sold, there is a higher minimum viable sale price for all the other units as well, even those that don’t have parking.


If the market price for homes aren’t as high as the minimum sale prices, then less parking will be built in order to reduce those costs. High minimum parking requirements set by cities could impact project viability if the market doesn’t support the required minimum sale prices.

In either case, because higher interest rates mean higher borrowing costs, the risk created by unsold spaces is greater. Therefore, developers are less likely to build parking above minimum requirements.


High Rates Hurt the Bottom Line


It’s more complicated when spaces are kept by the developer, like in an office building or rental apartment.


In theory, the discounted net cash flow for a parking space should offset the cots of its construction. This is the same as any other investment decision; the income generated needs to be sufficiently greater than the capital costs and maintenance expenses, discounted over time.


The impact of interest rates on the viability of a marginal parking space (above bylaw minimums) stems from the discount rates used for that cash flow analysis. When interest rates go up, the discount rate goes up as well. This lowers the value of the future cash flows generated by the parking space. This means that every new parking space, in any new building, is less viable in a higher interest rate environment.


So, for a rental building or an office tower in a higher interest rate environment, we can expect the number of parking spaces created by the market to decrease, and the cost of renting parking to increase. As above, high minimum parking requirements can hurt project viability if the market doesn’t support parking prices or unit rents that offset the costs of construction.


Everyone Pays for Unused Parking Spaces


What does this mean for city policy? Minimum parking requirements drive up the costs of construction, even if some spaces aren’t likely to be used. If the market price for renting parking isn’t high enough, those costs may be offset by upwards pressure on rents for homes, effectively having non-drivers subsidising parking spaces. Further, otherwise viable projects may not proceed if market rents can’t support the costs of minimum parking. This could reduce housing supply in the long run and impact affordability more generally.


There is broad pressure in the development, planning, and transportation engineering industries to eliminate minimum parking requirements (and many cities already have). Reducing parking requirements is often considered one of the best ways to encourage more sustainable transportation, because it helps remove a key subsidy for automobiles, plentiful parking. There are also significant sustainability benefits like reduced embodied carbon in construction.


How Should Cities React?


If market-based parking provisions really are dependent on macroeconomic factors like interest rates, then that could actually be an argument in favour of at least some parking minimums to ensure projects function. However, we would need to accept that this could impact project viability or housing affordability in some cases.


Cities have the difficult task of balancing the impacts of parking minimums with the viability of development, affordability of housing, and accessibility for all. While the discussion here is simplistic and meant to illustrate a few particular points, one thing is certain: rising interest rates will make parking spaces more expensive to build and more difficult to justify in new projects.


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Special thanks to Blair Erb from Coriolis Consulting for helping fact check this article.

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