When you build a new office building, the typical strategy is to pre-lease a certain portion of it. That is, you sign leases with a tenant or a few tenants so that you know for sure that X% of the building will be occupied upon completion. It’s a way to manage risk. If you don’t do this, then you are said to be building the office building “on spec.” 

When you build a new condo building, the typical strategy is to pre-sell a certain portion of it. That is, you sell suites to purchasers based on plan drawings, certain finishes, and a model suite intended to illustrate what that future suite will more or less look like. And the reason this is typical is because most construction lenders will require you to do that.

So when you see office buildings and condo buildings going up, there are usually already tenants and residents who plan to move in or investors who plan to rent out their suite and have generally transferred that risk away from the developer. 

Because really the only time that a purchaser or investor wouldn’t close on a condo suite (and walk away from their deposit) is when the market corrects so badly that it actually makes financial sense to do that. That happened in the U.S. in 2008-2009 in a number of markets.

But by contrast, when you’re building a rental apartment building you don’t have anything to pre-sell and your tenants (unlike office tenants) aren’t going to sign leases with you for some space that will be ready in 3 years. If you’re lucky, they might sign a lease with you for an apartment that will be ready in 3 months. This means that by default you are also building “on spec”.

Now rental apartments are often considered to be the safest real estate asset class and the least correlated with the macroeconomy. But as a developer and city builder, this dynamic is still something to keep in mind.

{ Explore the CITY } by Thai Hoa Pham on 500px

https://500px.com/embed.js

Melbourne is famous in urbanist circles for the revitalization of its central area. In 1992, 40% of the buildings were empty above the first floor and only 5 (yes five) residents actually lived in the core. Everyone had fled to the suburbs and the city had hollowed out.

Today, there are over 29,000 residents in the central area and Melbourne has become revered around the world for its vibrant public spaces and innovative laneway repurposing. 

Here’s a quick 11 minute video that explains how they did it (via The Urbanist). Click here if you can’t see it below.

[vimeo 131396094 w=500 h=281]

What is clear from the video is that it took a lot of work convincing property owners and getting them to buy into the vision. Being able to repurpose the laneways often meant punching through blank walls at the base of buildings. And so there was pushback.

Here in Toronto I’ve heard people say that we’re not Melbourne and we shouldn’t expect to have similar kinds of urban spaces. Well guess what, neither was Melbourne in the 1980s and 1990s. It was a dying city. But they made it happen.

When you build a new office building, the typical strategy is to pre-lease a certain portion of it. That is, you sign leases with a tenant or a few tenants so that you know for sure that X% of the building will be occupied upon completion. It’s a way to manage risk. If you don’t do this, then you are said to be building the office building “on spec.” 

When you build a new condo building, the typical strategy is to pre-sell a certain portion of it. That is, you sell suites to purchasers based on plan drawings, certain finishes, and a model suite intended to illustrate what that future suite will more or less look like. And the reason this is typical is because most construction lenders will require you to do that.

So when you see office buildings and condo buildings going up, there are usually already tenants and residents who plan to move in or investors who plan to rent out their suite and have generally transferred that risk away from the developer. 

Because really the only time that a purchaser or investor wouldn’t close on a condo suite (and walk away from their deposit) is when the market corrects so badly that it actually makes financial sense to do that. That happened in the U.S. in 2008-2009 in a number of markets.

But by contrast, when you’re building a rental apartment building you don’t have anything to pre-sell and your tenants (unlike office tenants) aren’t going to sign leases with you for some space that will be ready in 3 years. If you’re lucky, they might sign a lease with you for an apartment that will be ready in 3 months. This means that by default you are also building “on spec”.

Now rental apartments are often considered to be the safest real estate asset class and the least correlated with the macroeconomy. But as a developer and city builder, this dynamic is still something to keep in mind.

{ Explore the CITY } by Thai Hoa Pham on 500px

https://500px.com/embed.js

Melbourne is famous in urbanist circles for the revitalization of its central area. In 1992, 40% of the buildings were empty above the first floor and only 5 (yes five) residents actually lived in the core. Everyone had fled to the suburbs and the city had hollowed out.

Today, there are over 29,000 residents in the central area and Melbourne has become revered around the world for its vibrant public spaces and innovative laneway repurposing. 

Here’s a quick 11 minute video that explains how they did it (via The Urbanist). Click here if you can’t see it below.

[vimeo 131396094 w=500 h=281]

What is clear from the video is that it took a lot of work convincing property owners and getting them to buy into the vision. Being able to repurpose the laneways often meant punching through blank walls at the base of buildings. And so there was pushback.

Here in Toronto I’ve heard people say that we’re not Melbourne and we shouldn’t expect to have similar kinds of urban spaces. Well guess what, neither was Melbourne in the 1980s and 1990s. It was a dying city. But they made it happen.