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.

Today I spent the day at the 11th Annual Land & Development Conference here in Toronto. I found it particularly good this year, but it’s now late, I’m tired, and I want to go watch game 6 of the NBA finals. So I think this is going to be a fairly short post.

Here’s a summary of some of my key takeaways from the day (a lot of it is Toronto-centric):

• Increasingly, the commercial and residential sides of the real estate development business are converging. And it’s being largely driven by the focus on urban intensification and mixed-use.

• This is leading to an “institutionalization” of the residential side, which has historically been the domain of smaller private/local companies and rich families.

• Merger is creating complexity around asset valuations: Is it about the income (cap rates) and/or the future development potential?

• Low rise house prices in Toronto continue to skyrocket. Supply is highly constrained. This has been the story for a number of years now.

• High rise condo prices in Toronto continue to be more or less flat (modest increase). The industry is going to need to figure out how to work with and compliment the current surge in rental apartment development. There is an element of competition between the two asset classes.

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.

Today I spent the day at the 11th Annual Land & Development Conference here in Toronto. I found it particularly good this year, but it’s now late, I’m tired, and I want to go watch game 6 of the NBA finals. So I think this is going to be a fairly short post.

Here’s a summary of some of my key takeaways from the day (a lot of it is Toronto-centric):

• Increasingly, the commercial and residential sides of the real estate development business are converging. And it’s being largely driven by the focus on urban intensification and mixed-use.

• This is leading to an “institutionalization” of the residential side, which has historically been the domain of smaller private/local companies and rich families.

• Merger is creating complexity around asset valuations: Is it about the income (cap rates) and/or the future development potential?

• Low rise house prices in Toronto continue to skyrocket. Supply is highly constrained. This has been the story for a number of years now.

• High rise condo prices in Toronto continue to be more or less flat (modest increase). The industry is going to need to figure out how to work with and compliment the current surge in rental apartment development. There is an element of competition between the two asset classes.