Pre-sales are a big part of many condominium markets. The way it typically works is that developers sell suites in their building before construction has even started and then uses those purchaser deposits (which are held in trust) to obtain a construction loan to actually build the building. Part of the reason this is done is that it, in theory, reduces speculative overbuilding.
Nobody really knows the exact number, but here in Toronto many suites within a new building often end up getting sold to investors. And in some locations and some buildings, it could be most suites.
On the one hand this is a good thing. Because in a way they provide the short-term money that gets new projects off the ground. And if they end up holding onto their suites, they also become landlords for new rental housing. Here in Toronto condos have been almost the only new rental stock built in this city for decades. (Purpose-built rental is now starting to come back though.)
But one of the potential negatives is that buildings could be getting designed more around investor needs as opposed to end user needs. And that is happening because many end users – particularly when it comes to larger suites – find it difficult to make such a big life decision 3-5 years out. Doing that means saying to yourself: Okay, I’m going to buy this 3 bedroom condo today because 4.5 years from now when it’s complete I expect to be married and have 1.5 kids. Life doesn’t always work that way.
We also have antiquated tax policies in Ontario that encourage the building of smaller suites. And I believe they should be modernized. (This topic deserves a dedicated post.)
So if we are to think of these condo suites as products, then you could say that there are two broad customer segments: the investor and the end user. There are obviously sub-segments within each, but let’s assume that those are the top of the funnel.
The challenge now facing developers creating new product is that the system we have put in place arguably privileges one customer segment over the other. And it’s a problem that is somewhat unique to the real estate industry because it takes so damn long to bring new supply to the market. (If you sell jets or yachts, maybe you have a similar problem.)
Now one way to solve this might be to create lots of flexibility in the product. That is, you could allow people to adjust and combine suites to fit their current needs. And that’s what great products do: they meet specific needs and solve problems. In this scenario, perhaps the single person could “add-on” to their suite as they enter a new life phase. And indeed, this is something people are experimenting with by way of things like “knockout panels.”
But the problems with this are twofold.
Firstly, this requires an adjacent and suitable suite to come on the market so that you can buy it. And that may not happen 6 months before the baby comes.
Secondly, most Toronto condominiums are built using something called shear walls. These are structural reinforced concrete walls that cannot be removed without compromising the integrity of the entire building. And most purchasers like these walls between them and their neighbors because they’re worried about noise. So combing suites isn’t always as straightforward as we might think. There are many constraints.
One way to mitigate these problems is through smaller projects. That reduces the lead time between purchase and occupancy. But I am sure there are probably other creative solutions that we could come up with to better align product and customer needs.
I have been thinking a lot about city branding lately. It’s a topic I’m interested in to begin with, and all of the Blue Jays mania going on in Toronto right now has got thinking about our own brand.
Because at the end of the day, yes, it’s baseball. But it’s also something much larger. It’s about civic and national pride, and it’s about who we are as a city. That’s why city branding has become a global industry and why it’s so closely connected to tourism, media, sports, and entertainment.
Still, great city branding is incredibly difficult to do. Lots of cities have tried and lots of cities – from Adelaide to Toronto – have failed. Anyone remember the “Toronto Unlimited” brand of the mid-2000′s? It had absolutely zero stickiness.
But in reality, cities are brand building all the time whether they realize it or not. Here in Toronto, our biggest brand builder right now is probably Drake. That might sound silly to some, but I believe it to be true. And next to that, you have people like Jose Bautista with his bat flips and his support of local brands like Peace Collective. In addition to their day jobs, these people are helping to shape the identity of the city.
What, then, is professional city branding supposed to do?
Well, in my opinion, it is their job to mine a city for the things that already exist. A city brand, no matter how great it may be, cannot be expected to create something from nothing. There has to be something there to begin with.
But once you identify that something, a great city brand can tie it all together; create a cohesive and collective identity; and serve as a guide for future decision making. And when that’s done effectively, you actually begin to enhance the things that you initially started out with. The associations become even more powerful.
So today I thought we could have a discussion in the comments about city brands. How would you describe the brand of your city in one sentence?
For me, I would describe Toronto along the lines of being the most livable and multicultural 24/7 global city. And when you think of it this way, you can probably see why I think a 2AM last call at the bar is laughable.
Yesterday I wrote about a new book that was just released called The Next Urban Renaissance.
The first essay in the book, written by Ingrid Gould Ellen of New York University, is centered around three ideas to help cities deal with the affordable housing problem. This is something that successful cities all around the world are grappling with.
The first idea is land-value taxation, which is also known as a “split-rate” tax. I’ve touched on land-value taxation before on ATC, but I never really dug into it. So this was a good reminder to do that.
The idea behind land-value taxation is to split property taxes into a land tax and an improvements tax (i.e. the building), and then shift more of the burden over to the land side. Economists tend to really like this model because taxing buildings/improvements can discourage property investment and development, whereas taxing land doesn’t impact supply. The supply of land is fixed.
So in the context of affordable housing, land-value taxation is thought to be a way to encourage more development and to increase the supply of new housing – which is usually a good way to keep home prices in check.
Here’s how Ingrid Gould Ellen described it:
…a land tax would discourage speculators from hoarding undeveloped land and incentivize them to develop their parcels to the full extent allowable. Regardless of whether a parcel sits vacant, houses a partially occupied, one-story retail strip, or holds a 30-story apartment tower, the annual tax bill would be the same. By switching to a land tax, a city could therefore increase the supply of housing and, by doing so, reduce prices across the board.
But I can’t help but wonder if this isn’t more applicable to cities or areas that are currently struggling to encourage development. For instance, would boom town Toronto really benefit (in terms of affordable housing) from a tax change that ends up encouraging more high-rise development?
It also strikes me as being exceptionally difficult to implement, particularly in city like Toronto that is growing and changing so quickly. Is it reasonable to ask the owner of a small downtown parking lot to being paying property taxes as if a 90 storey supertall had been built on top of it? Because that is the reality in some parts of this city.
And if we opted to phase in this new land tax, would it then become a game of arbitrage where developers look for properties with the lowest land taxes but the highest achievable densities?
Finally, I wonder if it wouldn’t exacerbate some of the problems that already exist in rapidly growing cities, one of which is the preservation of smaller heritage buildings in centrally located neighborhoods:
In the case of a split-rate tax, the losers will be owners of parcels with high land-to-building value ratios, or owners of small buildings on valuable, centrally located parcels, who will likely see an increase in their tax bills after the switch to a split-rate tax.
Land-value taxation is something that I’ve been thinking about for a number of months now. But I am struggling to come up with a decisive position. If you have any thoughts on this, it would be great to hear from you in the comments.
Pre-sales are a big part of many condominium markets. The way it typically works is that developers sell suites in their building before construction has even started and then uses those purchaser deposits (which are held in trust) to obtain a construction loan to actually build the building. Part of the reason this is done is that it, in theory, reduces speculative overbuilding.
Nobody really knows the exact number, but here in Toronto many suites within a new building often end up getting sold to investors. And in some locations and some buildings, it could be most suites.
On the one hand this is a good thing. Because in a way they provide the short-term money that gets new projects off the ground. And if they end up holding onto their suites, they also become landlords for new rental housing. Here in Toronto condos have been almost the only new rental stock built in this city for decades. (Purpose-built rental is now starting to come back though.)
But one of the potential negatives is that buildings could be getting designed more around investor needs as opposed to end user needs. And that is happening because many end users – particularly when it comes to larger suites – find it difficult to make such a big life decision 3-5 years out. Doing that means saying to yourself: Okay, I’m going to buy this 3 bedroom condo today because 4.5 years from now when it’s complete I expect to be married and have 1.5 kids. Life doesn’t always work that way.
We also have antiquated tax policies in Ontario that encourage the building of smaller suites. And I believe they should be modernized. (This topic deserves a dedicated post.)
So if we are to think of these condo suites as products, then you could say that there are two broad customer segments: the investor and the end user. There are obviously sub-segments within each, but let’s assume that those are the top of the funnel.
The challenge now facing developers creating new product is that the system we have put in place arguably privileges one customer segment over the other. And it’s a problem that is somewhat unique to the real estate industry because it takes so damn long to bring new supply to the market. (If you sell jets or yachts, maybe you have a similar problem.)
Now one way to solve this might be to create lots of flexibility in the product. That is, you could allow people to adjust and combine suites to fit their current needs. And that’s what great products do: they meet specific needs and solve problems. In this scenario, perhaps the single person could “add-on” to their suite as they enter a new life phase. And indeed, this is something people are experimenting with by way of things like “knockout panels.”
But the problems with this are twofold.
Firstly, this requires an adjacent and suitable suite to come on the market so that you can buy it. And that may not happen 6 months before the baby comes.
Secondly, most Toronto condominiums are built using something called shear walls. These are structural reinforced concrete walls that cannot be removed without compromising the integrity of the entire building. And most purchasers like these walls between them and their neighbors because they’re worried about noise. So combing suites isn’t always as straightforward as we might think. There are many constraints.
One way to mitigate these problems is through smaller projects. That reduces the lead time between purchase and occupancy. But I am sure there are probably other creative solutions that we could come up with to better align product and customer needs.
I have been thinking a lot about city branding lately. It’s a topic I’m interested in to begin with, and all of the Blue Jays mania going on in Toronto right now has got thinking about our own brand.
Because at the end of the day, yes, it’s baseball. But it’s also something much larger. It’s about civic and national pride, and it’s about who we are as a city. That’s why city branding has become a global industry and why it’s so closely connected to tourism, media, sports, and entertainment.
Still, great city branding is incredibly difficult to do. Lots of cities have tried and lots of cities – from Adelaide to Toronto – have failed. Anyone remember the “Toronto Unlimited” brand of the mid-2000′s? It had absolutely zero stickiness.
But in reality, cities are brand building all the time whether they realize it or not. Here in Toronto, our biggest brand builder right now is probably Drake. That might sound silly to some, but I believe it to be true. And next to that, you have people like Jose Bautista with his bat flips and his support of local brands like Peace Collective. In addition to their day jobs, these people are helping to shape the identity of the city.
What, then, is professional city branding supposed to do?
Well, in my opinion, it is their job to mine a city for the things that already exist. A city brand, no matter how great it may be, cannot be expected to create something from nothing. There has to be something there to begin with.
But once you identify that something, a great city brand can tie it all together; create a cohesive and collective identity; and serve as a guide for future decision making. And when that’s done effectively, you actually begin to enhance the things that you initially started out with. The associations become even more powerful.
So today I thought we could have a discussion in the comments about city brands. How would you describe the brand of your city in one sentence?
For me, I would describe Toronto along the lines of being the most livable and multicultural 24/7 global city. And when you think of it this way, you can probably see why I think a 2AM last call at the bar is laughable.
Yesterday I wrote about a new book that was just released called The Next Urban Renaissance.
The first essay in the book, written by Ingrid Gould Ellen of New York University, is centered around three ideas to help cities deal with the affordable housing problem. This is something that successful cities all around the world are grappling with.
The first idea is land-value taxation, which is also known as a “split-rate” tax. I’ve touched on land-value taxation before on ATC, but I never really dug into it. So this was a good reminder to do that.
The idea behind land-value taxation is to split property taxes into a land tax and an improvements tax (i.e. the building), and then shift more of the burden over to the land side. Economists tend to really like this model because taxing buildings/improvements can discourage property investment and development, whereas taxing land doesn’t impact supply. The supply of land is fixed.
So in the context of affordable housing, land-value taxation is thought to be a way to encourage more development and to increase the supply of new housing – which is usually a good way to keep home prices in check.
Here’s how Ingrid Gould Ellen described it:
…a land tax would discourage speculators from hoarding undeveloped land and incentivize them to develop their parcels to the full extent allowable. Regardless of whether a parcel sits vacant, houses a partially occupied, one-story retail strip, or holds a 30-story apartment tower, the annual tax bill would be the same. By switching to a land tax, a city could therefore increase the supply of housing and, by doing so, reduce prices across the board.
But I can’t help but wonder if this isn’t more applicable to cities or areas that are currently struggling to encourage development. For instance, would boom town Toronto really benefit (in terms of affordable housing) from a tax change that ends up encouraging more high-rise development?
It also strikes me as being exceptionally difficult to implement, particularly in city like Toronto that is growing and changing so quickly. Is it reasonable to ask the owner of a small downtown parking lot to being paying property taxes as if a 90 storey supertall had been built on top of it? Because that is the reality in some parts of this city.
And if we opted to phase in this new land tax, would it then become a game of arbitrage where developers look for properties with the lowest land taxes but the highest achievable densities?
Finally, I wonder if it wouldn’t exacerbate some of the problems that already exist in rapidly growing cities, one of which is the preservation of smaller heritage buildings in centrally located neighborhoods:
In the case of a split-rate tax, the losers will be owners of parcels with high land-to-building value ratios, or owners of small buildings on valuable, centrally located parcels, who will likely see an increase in their tax bills after the switch to a split-rate tax.
Land-value taxation is something that I’ve been thinking about for a number of months now. But I am struggling to come up with a decisive position. If you have any thoughts on this, it would be great to hear from you in the comments.
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