After seeing this beautiful 6-storey and 21-unit social housing project in Lyon, I decided to retweet it and share the fact that we recently had a site under contract in Toronto with the intention of doing a very similar build. We wouldn't have been able to do the same outdoor spaces at the corner, but it was going to be 6 storeys and without any setbacks. The overall dimensions appear to be similar.
However, in the end, we had to drop the site because the margins were simply too thin. I was disappointed. Of course, some people responded to my quote retweet by calling this an example of developer greed. But once again, I don't think most people understand how development economics work. If the margins are too thin it, among other things, means:
It's going to be hard/impossible to raise capital and finance the project
You might be better off buying a "risk-free" government bond instead
That unexpected situations could sink the project (i.e. you lose money)
To give a specific example, let's assume that your expected base case rent at the time of occupancy is $4.75 psf. This would mean that if your average suite size is around 600 sf (which ours was), you would need a face rent of about $2,850 per month.
After seeing this beautiful 6-storey and 21-unit social housing project in Lyon, I decided to retweet it and share the fact that we recently had a site under contract in Toronto with the intention of doing a very similar build. We wouldn't have been able to do the same outdoor spaces at the corner, but it was going to be 6 storeys and without any setbacks. The overall dimensions appear to be similar.
However, in the end, we had to drop the site because the margins were simply too thin. I was disappointed. Of course, some people responded to my quote retweet by calling this an example of developer greed. But once again, I don't think most people understand how development economics work. If the margins are too thin it, among other things, means:
It's going to be hard/impossible to raise capital and finance the project
You might be better off buying a "risk-free" government bond instead
That unexpected situations could sink the project (i.e. you lose money)
To give a specific example, let's assume that your expected base case rent at the time of occupancy is $4.75 psf. This would mean that if your average suite size is around 600 sf (which ours was), you would need a face rent of about $2,850 per month.
But what happens if you're off by only $0.25 and your face rent for this same 600 sf apartment is now $2,700 per month at initial lease up? $150 per month may not seem like a big deal, but it is. If you capitalize this income at something like a 4% rate, you will find that it becomes material.
This is what I mean by "the margins are too thin." And it's similar to any other professional not wanting to take on a job because they might lose money or because it's "not worth their time." It's about managing risk and understanding the opportunity cost of taking on such a project.
The Monte Palace Hotel on São Miguel Island opened in 1989.
Perched up 500 or so meters above sea level, the hotel offered panoramic views of Lagoa das Sete Cidades. It had 88 rooms, two restaurants, a bar/nightclub, and a total construction area of approximately 13,104 m². Notably, it was the first luxury five-star hotel in the Azores. And in 1990 it was even awarded "Hotel of the Year" in Portugal.
Then, the place closed — just 18 months after its opening.
Today, it looks like this:
But what happens if you're off by only $0.25 and your face rent for this same 600 sf apartment is now $2,700 per month at initial lease up? $150 per month may not seem like a big deal, but it is. If you capitalize this income at something like a 4% rate, you will find that it becomes material.
This is what I mean by "the margins are too thin." And it's similar to any other professional not wanting to take on a job because they might lose money or because it's "not worth their time." It's about managing risk and understanding the opportunity cost of taking on such a project.
The Monte Palace Hotel on São Miguel Island opened in 1989.
Perched up 500 or so meters above sea level, the hotel offered panoramic views of Lagoa das Sete Cidades. It had 88 rooms, two restaurants, a bar/nightclub, and a total construction area of approximately 13,104 m². Notably, it was the first luxury five-star hotel in the Azores. And in 1990 it was even awarded "Hotel of the Year" in Portugal.
Then, the place closed — just 18 months after its opening.
Today, it looks like this:
Yesterday we visited the Arquipélago — Centro de Artes Contemporâneas in Ribeira Grande on the northern part of the island. Originally the Ribeira Grande Distillation Factory, the site dates back to the late 19th century. Construction on the original buildings began in 1893 and the first export of alcohol was reported in 1896. However, production was short lived.
In 1901, due to pressures from the Portuguese mainland, a protectionist measure was put in place capping alcohol production across the Azorean islands to 2 million liters per year — a drop from 10 million liters per year. The mainland simply couldn't compete with low-cost alcohol from the islands and so they complained. This crippled the local industry and the factory shut down shortly after.
Subsequent to this, the site was repurposed for tobacco drying and storage, and even served as military barracks for a period of time. Then in 2006, the property was purchased by the Azorean government and, using money from the EU's Regional Development Fund, it was remade into what is now fittingly referred to as a "factory of culture."
The architects for the project were João Mendes Ribeiro and Menos é Mais Arquitectos, and if you ever find yourself on São Miguel, I would highly recommend you visit the center. The architects did a wonderful job creating a cohesive dialogue between the old (constructed out of black volcanic basalt) and the new. It was recommended to me and now I'm recommending it to all of you.
Supposedly the hotel failed for a number reasons. It was hard to get to. It lacked on-site amenities. It didn't, for example, have a pool. And the unpredictable (and often foggy) weather of the Azores made it so that a lot of the time you couldn't even see the main attraction, which was the view. The sponsors may have also overshot the market at the time.
In 2017, the abandoned property was finally listed for sale at €1.5 million. Level Constellation ended up buying it for an undisclosed amount at the end of the year. They are a Lisbon-based developer founded by Chinese entrepreneurs. The plan was/is to reopen another 5-star hotel, but that hasn't happened yet. Though there's certainly no lack of visitors to the property today!
I don't know how you address the weather thing, but nowadays there are many other 5-star hotels on the archipelago. Regardless, my bet is that the existing structure will end up being demolished. I mean, it's been abandoned and unmaintained for about 35 years.
Yesterday we visited the Arquipélago — Centro de Artes Contemporâneas in Ribeira Grande on the northern part of the island. Originally the Ribeira Grande Distillation Factory, the site dates back to the late 19th century. Construction on the original buildings began in 1893 and the first export of alcohol was reported in 1896. However, production was short lived.
In 1901, due to pressures from the Portuguese mainland, a protectionist measure was put in place capping alcohol production across the Azorean islands to 2 million liters per year — a drop from 10 million liters per year. The mainland simply couldn't compete with low-cost alcohol from the islands and so they complained. This crippled the local industry and the factory shut down shortly after.
Subsequent to this, the site was repurposed for tobacco drying and storage, and even served as military barracks for a period of time. Then in 2006, the property was purchased by the Azorean government and, using money from the EU's Regional Development Fund, it was remade into what is now fittingly referred to as a "factory of culture."
The architects for the project were João Mendes Ribeiro and Menos é Mais Arquitectos, and if you ever find yourself on São Miguel, I would highly recommend you visit the center. The architects did a wonderful job creating a cohesive dialogue between the old (constructed out of black volcanic basalt) and the new. It was recommended to me and now I'm recommending it to all of you.
Supposedly the hotel failed for a number reasons. It was hard to get to. It lacked on-site amenities. It didn't, for example, have a pool. And the unpredictable (and often foggy) weather of the Azores made it so that a lot of the time you couldn't even see the main attraction, which was the view. The sponsors may have also overshot the market at the time.
In 2017, the abandoned property was finally listed for sale at €1.5 million. Level Constellation ended up buying it for an undisclosed amount at the end of the year. They are a Lisbon-based developer founded by Chinese entrepreneurs. The plan was/is to reopen another 5-star hotel, but that hasn't happened yet. Though there's certainly no lack of visitors to the property today!
I don't know how you address the weather thing, but nowadays there are many other 5-star hotels on the archipelago. Regardless, my bet is that the existing structure will end up being demolished. I mean, it's been abandoned and unmaintained for about 35 years.
