Over the years on this blog, we have spoken many times about what Pouyan Safapour, president of Devron Developments, wrote about in this recent Maclean's article: the method of pre-selling condominiums (which is what we customarily do in Toronto) biases the market toward investor buyers and smaller, more cost-effective suites.

Unlike end-user buyers, investors have generally viewed waiting three to five years for their condominium to be complete as a feature in recent years, rather than a bug. It has meant asset appreciation without having to carry or actually manage the property.

The pre-sale model works very well for a number of other reasons, too. Firstly, by pre-selling, developers minimize market risk for both themselves and the construction lender. Now you have contracted revenue to take out the construction loan at the end, as opposed to building on "spec" and hoping the market will be there, which may or may not be the case.

It's also an equity-efficient model for developers. Banks are able to offer higher LTVs because of the contracted revenue, and insured purchaser deposits can be used as a source of funds for the project, reducing the amount of required equity.

But it is certainly true that many, perhaps even most, end-users would prefer to buy when the building is complete. So how might we reorient the model to better cater to these homebuyers? This is especially relevant in today's market, where end-user buyers have overtaken investors.

In the current framework, there are a couple of things that can be done. Developers can just build smaller projects. This minimizes the window between pre-sale and completion. Another option is to segment the project between homes that will sell quickly upfront (and fulfill lender pre-sale requirements) and homes that are geared more toward end-users but won't sell until later. In this case, you're trying to sell enough to start construction, and you're building the balance on "spec."

Changing the entire financing model requires a lot more work. Removing pre-sales means more market risk and more required equity (unless these risks somehow get shifted by the government). If this happens, then there's a reasonable argument that we would see far fewer condominiums getting built, even if the ones that do get built are better suited to end-users.

There are developers in Toronto today that do not believe the investor pre-sale market is coming back, or at least not coming back anytime soon. If that ends up being the case, and I'm not sure it will be, then market participants, whoever they might be, will be forced to meet this demand in one of two ways: building more rental housing (which is by definition on "spec") or getting better at delivering end-user condominiums.

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I came across these survey results in a guest column by Wendy Waters in Connect CRE Canada called, "What Will Attract Young Professionals to a New Rental-Apartment Building?" If I ignore the typo in "strong cel [sic] signal" and just look at the results, many of them are intuitively obvious. The vast majority of renters believe that in-suite laundry is essential, and it's the number-one want in this survey.

Pet-friendly is also not surprising given that pets are going to outnumber kids in most new purpose-built rental apartment buildings. And, of course, people want connectivity. I interpret high-speed wireless and strong cell signal throughout the building to specifically mean the common areas. Presumably, 100% of people want internet and cell signal within their apartments.

At the same time, there are some other interesting results. For example, 55% of respondents (in this segment) said that a private balcony is essential and 97% said it was either essential or a nice-to-have.

There's a common debate in developer boardrooms about whether private outdoor spaces are essential to sell or lease an apartment and there are certainly rental developers who abstain from them altogether. But tenants seem to like them a lot, at least according to this survey. And a "nice-to-have" is still something that helps with leasing.

People also seem to want a king-size bed. Whether they'd be willing to pay for the additional space is a separate matter. There is always an affordability and willingness to pay dimension to surveys. I mean, who wouldn't like more? But a larger primary bedroom appears on this list and, right now, there's a growing sense in the market that buyers and tenants want livable spaces over things like podcasting rooms and ski simulators.

From a Maslow's hierarchy of needs perspective, this seems to make sense. People want their physiological needs — such as a comfy bed — solved first, and then they'll worry about finding self-actualization in their new podcast.

Cover photo by Lotus Design N Print on Unsplash

Chart via Connect Canada CRE

I was recently debating with a friend about climate risk in Florida. He is less concerned about climate risk than I am and part of his argument was, "Why would the world's elite move to Florida only to get pushed out by sea-level rise in the near future?"

My view is that we shouldn't necessarily view the migration of high-net-worth individuals to the state as clear confirmation that they all believe everything will be fine (though I'm sure some or many do). Instead, I see it as rational consumer and economic behavior.

If you're a wealthy individual and have the means to be highly mobile, Florida offers two obvious benefits: warm winters and lower taxes (including little to no risk of something like a California wealth tax).

Let's look at some numbers.

If you had a $100 million capital gain from your private placement in SpaceX and you switched your tax residency from New York City to Miami, you would save 14.776% in state (10.9%) and city (3.876%) taxes, equaling about $14.8 million at t = 0 (definitely not tax advice!).

You could then use these tax savings to buy a waterfront home and get this benefit for all future income streams. In addition, you would get the benefit of warm winters going forward and the optionality of bottle service at LIV whenever you want to see David Guetta. I'm personally not an EDM fan. I prefer house and techno, but to each their own.

So in a total doomsday scenario, if the market started pricing in climate risk and your $14.8M waterfront property went to $0 at t = 10 years, it would still be a rational lifestyle and economic decision. And if the value destruction happened at t = 25 years, it would matter even less. It's probably outside of the forecasting period.

For wealthy people, the value of their personal residence generally makes up a much smaller percentage of their net worth compared to that of the middle class. And my assumption is that the wealthy are making self-serving economic decisions and/or they really want to live in Florida for lifestyle reasons.

The greater concern is for less-wealthy people for whom an erosion in principal residence value would have a more meaningful impact on their financial health. At a certain point, the tax benefits and lifestyle benefits may not outweigh the climate risks, assuming you believe this is a risk in the foreseeable future.

Cover photo by Alex Guillaume on Unsplash