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.
We tend to think of buildings as being very permanent structures. After all, our cities are filled with buildings that are hundreds of years old. And in some cases, much older.
But the reality is that buildings, just like everything else, depreciate over time. They have life cycles and they need to be regularly maintained and periodically renovated in order for them to survive.
This morning I was reading the blog of Witold Rybczynski, who is an author and architecture professor at the University of Pennsylvania. A few months ago he wrote a post talking about the short life cycle of modernist buildings.
According to a recent colloquium at the Getty Center, the average life span of a conventionally built building (masonry and wood) is about 120 years. But for modernist buildings (reinforced concrete and glass curtain wall) it’s half that: 60 years.
And if you are to consider the typical big box retail store, the life expectancy is probably a third of that – if even that. Usually it is cheaper to just tear down the old box and build a new one when needs change. That’s part of the reason why the leases usually have clauses that try and prevent the retailer from just “going dark” and stopping operation.
So we are literally not building them like we used to. And there’s a lot of debate in architecture and building circles about whether or not this poses a serious problem for cities. It is clear that Witold is unhappy about this shift.
I am a strong believer in heritage preservation. I believe wholeheartedly that cities are far richer with layers upon layers of history. But I also acknowledge that in our world of 6 second Vine videos, we seem to be less worried about whether something will last 60 or 120 years.
Perhaps that’s a problem. Or perhaps the times are just changing.
Toronto Life recently published an interesting article called Stuck in Condoland. A lot of people have mentioned it to me, so there seems to be a lot of interest in the topic. It basically profiles the lives of a few young families who live downtown and are trying to raise young children in relatively small condos (think 700 square feet).
I thought it was interesting because I like the idea of small and efficient living. The average post-war bungalow in Toronto was probably less than 1,000 square feet. And so this modern notion that you need a big house in order to properly raise a family is a relatively recent phenomenon. Although we’re a richer city today and that’s what happens when people become wealthier: they consume more.
But the article also makes it seem that developers only want to build small condos and that larger condos and single-family homes just aren’t profitable enough. Thus the reason all these families are being forced to into tiny shoeboxes in the sky. But that’s not really true.
Look, just like every other for-profit business on the planet, developers are concerned with making money. And so they will always look for ways to increase efficiency, drive down costs, and so on. But there are certain realities of the market that developers don’t have control over.
First, developers aren’t building new single family homes in the city (at any sort of meaningful scale) because there’s no land to do so. And because the land use policies in place and the current thinking around how we can more sustainably build our cities for the future dictate that we should be building more intensely. In other words, building up. So it’s not a question of developers not wanting to build single family homes; it’s a question of not being able to.
Second, trust me when I say that if the market wanted large 3 bedroom family units, developers would build them. Mandating them is a useless exercise if people don’t want them or are unable to afford them.
The challenge we face is that a reinforced concrete condo tower is more expensive to build than a wood-framed single family house. So until land values get to a point where single family homes become the more expensive option (compared to condos), I don’t think we’ll see a huge rush towards 3+ bedroom suites.
This is my hypothesis at least. Because when you buy house, you’re really buying two things: the house itself and the land. If the house itself (wood) is cheaper to build on a per square foot basis than a condo (concrete), then the variable that will make a difference is the land. And as people like to say: “buy land, they ain’t making any more of it.”
So what I’m saying is that I just don’t think the situation is as simple as: “developers are bad, all they want to do is build tiny condos and make lots of money.” It’s more complicated than that. But I do believe the question of how families are going to live in the city is an important one.