Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
The Greater Toronto and Hamilton Area is expected to see 6,821 new rental homes completed this year. This is a “multi-decade high”, according to Urbanation’s latest rental report. Indeed, you need to go back to the 1970s to get rental supply figures of this magnitude.
A big part of this has to do with the fact that we are now taxing rental housing less. Toward the end of last year, the federal government removed their portion of the HST on new rental housing and, then in November, the province of Ontario followed with theirs.
But there’s another reason that many developers are now looking to purpose-built rentals: fewer people are buying new condominiums. And if you can’t presell condos, well then you’re going to need to find another path forward for your land.
However, flipping over to rental is not necessarily a panacea. The margins are generally razor thin (+/- 50 bps). It requires more and different capital (typically). And you need to believe in some fairly non-consensus assumptions (high rent growth, low cap rates, etc.).
It’ll be interesting to see how many developers are able to successfully flip over to rental and how sustained this rental supply number will be.
I came across the above floor plan over the weekend. I reshared it on Twitter and there was then a pretty good discussion about what people like and don’t like. I mean, who doesn’t like looking at floor plans?
The suite is 790 square feet with 2 bedrooms and 1 bathroom. It rents, at least according to Bobby’s original tweet, at $2,600 per month. That’s $3.29 per square foot. I’m guessing that the apartment is in Philadelphia solely based on Bobby’s location.
The divisive thing in this floor plan is the two inset bedrooms. Some people don’t like these. But designing a good floor plan is like working through a puzzle. You have all these constraints (some of which are just personal preference) and you have to find ways to work around them.
When you’re working with a deep urban floor plate, you pretty much have no choice but to design floor plans with inset bedrooms. Otherwise, the suites get too big and they stop making economic sense. I have talked about this a few times before on the blog.
So what you do is “bury” the bedroom(s) and keep the main living space as open as possible. In this case, the living/dining dimensions are about 17′ wide x 10′ deep. So a pretty good size, and certainly a very good width.
An alternate solution might be to flip one of the bedrooms up towards the main glass (keeping the second one inset). But given that you only have 17 feet to work with here, something is going to have to give. So if you made the living room 9′ wide, you’d then only have somewhere around 8′ for your bedroom.
Personally, I don’t mind inset bedrooms, especially if they allow for more generous living spaces. So I think that this is a fairly reasonable and functional suite layout. I would have absolutely lived in an apartment like this when I was going to school in Philadelphia. (Is this even the right location?)
But if I were to make a few tweaks:
I would compress the bedrooms slightly to enlarge the living space even more. (Though if the target market is student roommates, perhaps the idea is to allow for a desk in the bedroom.) I would then flip the closets to the partition wall between the two bedrooms to improve sound attenuation.
I would also try and get the kitchen out of the hallway and into the main living/dining area. I don’t know where all the plumbing stacks sit (see, constraints), but perhaps it just slides up toward the glass. Another solution might be on the other side of the upper bedroom (where there is currently a closet).
But what are your thoughts? Would you rent this apartment? Comments welcome below.
The San Francisco Chronicle recently published an article called, “SF residential projects languish as rising costs force developers to cash out.” It talks about the impact that rising costs (both construction and other) are having on new housing supply. Some developers aren’t building even though may have entitled sites. And that’s because the math doesn’t work, even though we’re in a market with a severe housing shortage.
Here is an excerpt from the article that talks about the kind of pricing that is needed in order to make a project work:
Chris Foley, a real estate investor and partner in brokerage firm Polaris Pacific, said that in the current construction environment a condominium developer needs to sell units for at least $1,400 a square foot for a wood-frame building and $1,800 a square for a taller, steel-frame midrise or high-rise. Even in a city where more than 80 percent of the population is priced out of the market, those numbers are a stretch, Foley said.
San Francisco also has inclusionary zoning, which requires a certain percentage of units in any new development to be priced below market. According to the article, it is 18% for new rental projects and 20% for new condo projects. That’s a cost that needs to be absorbed by the remaining market rate units – so price accordingly.
The MIRA tower designed by Studio Gang is currently under construction and has 156 affordable units and 393 market rate units. The market rate pricing looks something like this:
That’s the case with three buildings rising near the new Transbay Transit Center: Mira, the Avery at 400 Folsom St., and One Steuart Lane, which overlooks the Embarcadero at the foot of Howard Street. Unless there is a remarkable drop in the market, units in all three of those buildings will probably have an average sales price of more than $2,000 a square foot and penthouses could fetch $3,000 or even $4,000 a square foot. A 3,326-square-foot penthouse at 181 Fremont St., which opened last spring, recently sold for $15 million, or $4,500 a square foot.
Projects being squeezed by rising costs is something that we are also seeing here in Toronto. And I don’t believe that the general public fully appreciates that there are limits to the costs that can be shouldered by new development. And the reason for that is because there are limits to what people can afford to pay for new housing.
Yesterday Urbanation released its Q2-2018 rental report for the Greater Toronto Area. It tracks both purpose-built rentals and condominium rentals, the latter being condominium units that are listed for rent on MLS. The average condo rent, for all unit types across the GTA, is up 11.2% year-over-year to a face rent of $2,302 per month.
The former City of Toronto, which includes downtown, is actually up 13.5%:
But here are the stats that I really wanted to draw your attention to today (figures from the Globe).
According to Urbanation, there were some 384,000 condo apartments in the Greater Toronto Area in 2017 and nearly 1/3 of them were rented out. Given that the Canada Mortgage and Housing Corporation pegs the total number of rental apartments in the GTA at approximately 311,596, condo apartments represent about 40% of all our rental housing stock.
So condo buildings are actually doing quite a bit of heavy lifting when it comes to providing rental housing in this region.
This week it was announced that the very first condo building in Toronto (and in Canada) has just signed on to Airbnb’s Friendly Buildings Program. The agreement will take effect on November 1, 2017.
As the name suggests, the program is about bringing greater legitimacy and structure to short-term Airbnb rentals. Here are two key measures from this particular agreement:
– Building security will now have full transparency with respect to who is hosting and who their guests are at any given time
– Airbnb will share 5% of the building’s revenue with the condominium corporation (hosts will also need to pay $50/month to cover any additional maintenance costs)
What’s compelling about the above is that there’s now a bit of a financial incentive for buildings/boards to support Airbnb rentals.
At the same time, if something happens, it’ll now be a lot easier to figure out who was responsible and then chargeback any relevant costs. Right now it’s all happening under the radar.
My view on Airbnb is the same as the one I took (publicly on this blog) on Uber: It’s not going away. Many people clearly want it. An entire building just accepted it. So let’s figure out how to make it work better.
One regulation that Toronto is currently exploring and that I think will materialize in some form is a limit on short-term rentals when the unit is not your principal residence.
This is the difference between Airbnb’ing your place when you leave on vacation (or when you have an extra room) and buying a condo strictly as a short-term rental investment.
It’s interesting to see the evolution of companies like Uber and Airbnb. Both would never have been successful if they started out by first asking for permission.
But now they are mature enough that they are being forced to play nice.
Based on this article, demand is outstripping new supply and rents are starting to push above $2 per square foot. This strikes me as a solid number given that there are also for sale lots/houses in the city going for $10,000.
Going back to some of the posts I have written about rental apartment development in Toronto, you might remember that $3 psf is roughly our magic number given current cost structures.
In some special circumstances you might be able to get a project off the ground with rents closer to $2 psf, but that’s an exception to the rule. There are many areas in the Toronto region with $2 psf rents and few, if any, new rental apartments.
But Detroit is obviously a different city, as is every real estate market.
Land would be cheaper. Many of these new rental apartments are conversions of existing buildings (which were probably bought for cents on the dollar). And I wouldn’t be surprised if there are tax abatements and other incentives to encourage more development.
I also wonder if people in the city aren’t being at least partially drawn to multi-family buildings because of the safety and security benefits. That’s something that certainly came up when I was in Detroit last weekend.
Regardless, this is a good news story for Detroit, which is not always the story you hear people telling of the city.
A new startup out of San Francisco, called Rentberry, has just launched, allowing tenants to openly bid on rentals in the city. Think of it like a rental auction. Landlord lists property. And then tenants compete for it by submitting offers.
Not surprisingly – especially since we’re talking about San Francisco – there’s concern that this will do nothing but drive up the city’s already high rents.
But I think the key detail is that the platform will make public the total number of applicants. As a tenant, it’ll even tell you how your credit score compares to those of the other bidders (presumably, so you can gauge how aggressive you might need to be on your bid).
The real estate industry is rife with information asymmetries. So anything that improves transparency is something that catches my attention. If you’ve ever bought or rented a place in a competitive market, you know that one of the worst things you can hear from the broker is: “We have another offer.” (Even worse: “We have 12 other offers.”)
It’s frustrating because it now means you’re competing. But even more frustrating is the fact that you have no way of assessing whether or not that statement is fact or fiction. Yes, I realize that there’s a code of ethics that’s supposed be followed, but you and I both know that games are played all the time.
In fact, I think someone could easily make a full career out of just trying to correct the information asymmetries inherent in the real estate industry. Who knows what sort of impact they might be having on the market. So I’m excited to see how things pan out for Rentberry.
Here in Toronto there’s a push for more family-sized apartments. That’s what the planners want to hear.
Because the city has been trying to encourage developers to build more of them for years, but the challenge has always been that they didn’t sell or that they took a long time to sell. The market wasn’t ready.
But as I discussed earlier this week, that is starting to change. I think Toronto is reaching a tipping point where low-rise housing has simply become too expensive and people are starting to look to alternatives, mostly at the mid-rise scale.
It’s interesting though that something of the opposite appears to be happening in New York. I don’t know enough about the New York new construction market to really comment on overall unit mixes and sizes, but there definitely seems to be a push to create more affordable micro-units.
“…a report currently under public review, called Zoning for Quality and Affordability, recommends relaxing density caps and eliminating the 400-square-foot minimum for studio apartments, thereby creating more housing for single people. Almost 50 percent of the city’s population is estimated to be single, but only seven percent of the housing stock is studios.”
And just recently, New York completed its first all-micro-unit apartment building called Carmel Place. Rents start at $2,650 per month for a 265 square foot apartment.
As a point of reference, that works out to be $10 per square foot per month and more than 3x the highest rents you could reasonably achieve in the more desirable areas of Toronto, today.
The model suite is 302 square feet and looks like this:
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.
