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.
Pat Hanson of gh3* is absolutely right with her comment, here, about why we are seeing more windowless bedrooms being built in Toronto:
In much the same way, some of Toronto’s development policies encourage windowless bedrooms. “I don’t think it’s driven by cost,” says architect Pat Hanson, a founding principal of gh3* and a member of Waterfront Toronto’s Design Review Panel. “It’s driven a lot by building forms. Where you find a lot of these inboard bedrooms is in the mid-rise type.” The requirements to step back mid-rises on an angular plane, she adds, forces the developers to populate their projects with very deep units.
This condition is being driven by building forms and by overall housing affordability. Here is a post that I wrote on this exact topic back in 2017. The numbers are dated. I cited $857 per square foot as the average price of a downtown Toronto condo. But the forces at work remain the same.
And they are not entirely unique to apartments and condominiums. One of the reasons why many condominiums are becoming long and skinny — and getting designed with windowless bedrooms — is the same reason that many cities, like Toronto, have long and skinny single-family lots.
You can certainly find wider lots, but it’ll cost you.
Urbanation is forecasting that approximately 27,000 condominium suites will finish construction and be ready for occupancy this year in the Greater Toronto Area. This is some sort of a record, and is naturally the result of record pre-construction sales over the last cycle.
This number is going to come down given that construction starts are declining, but before that, these suites will need to get absorbed into the market. And that’s why I think that one of the biggest risks for our industry this year is going to be closing risk.
In other words, you’ve got the pre-sales, but will the purchasers actually show up and close on their homes?
It is for this exact reason that most/all construction lenders want to see pre-construction purchasers pay at least 10% in deposits before they’ll advance their loan. It is also why the most risk-averse developers won’t start construction until they have even more than 10% sitting in trust. The more hard money a purchaser has paid, the more likely they are to close.
It can be easy to forget this when the market is on fire and you’re more preoccupied with holding back inventory because you think that sale prices will be higher in the future. But it’s prudent to remember these times. They are a naturally occurring part of real estate cycles.
The most risk adverse execution strategies will likely leave some money on the table in the best of times. You won’t be profit maximizing. However, they’ll leave you more protected in the worst of times. That’s how risk and reward work.
Last year in the Greater Toronto Area, condominium construction starts fell to a 9-year low of 15,891 homes. And this year, condominium construction starts are forecasted to fall to a 15-year low of 11,500 homes (though new sales are expected to rebound). Both of these figures are from Urbanation’s Q4-2023 market data.
One possible explanation for this drop in construction starts could be that developers are somehow colluding to keep supply low and prices high. Another one could be that more developers are right now independently speculating that prices will be higher in the future, and so they think it’s better to just wait. But both of these explanations would be wrong.
The correct answer is that more developers are unable to start construction because the market isn’t there. In the case of Toronto’s condominium market, this means that the pre-sales aren’t there. This might seem obvious, but there seems to always be a contingent of people who believe that developers can choose to build whenever they want.
It is for this same reason that some people think that zoning approvals should have an expiry date. Call it a use-it-or-lose-it approach. But as I think we can see in the above numbers, developers don’t control the market. And so I would never want to be in a position where I need to start construction by a certain date, or else.
That’s not entirely within my control. In fact, sometimes it’s completely out of my control.
It is very disappointing to hear that Paul Calandra — Ontario’s new Minister of Municipal Affairs and Housing — is talking about “use-it-or-lose-it” zoning policies and that mayors are coming out in support of it. This is a terrible idea.
On the surface, it may seem like this would force/incentivize developers to build more housing sooner. But what it fails to recognize is this: just because a developer wants to build, it doesn’t mean that they are able to build.
This current market environment is a perfect example. It is likely that the Greater Toronto Area will see dozens of new condominium launches this fall. These are developers who will be spending millions of at-risk dollars to bring their projects to the market in the hopes of pre-selling homes and then obtaining construction financing.
However, it is highly probable that not all of these projects will actually start construction in the short-term. And if/when that happens, it will not be because these developers are just squatting on entitled land; it will be because they can’t get financing. In other words, the market isn’t there.
This will not be a good day for anybody. So I fail to see how it makes sense to penalize developers who happen to find themselves in this unfortunate situation. It’s as if our only solution to the current housing crisis is to make it more expensive to build new housing.
For another post that I wrote on this topic, click here.
We thought rising mortgage rates would crush the homebuilders, and bet against Pulte in the FT stockpicking contest. But the exact opposite happened: high rates froze the existing house market by giving homeowners a huge incentive not to move — their irreplaceable cheap mortgages. That left new homes as almost the only game in town for anyone who really needs to buy a home. Pulte has been one of the best- performing stocks in the S&P 500. Never pick stocks, even in a stupid stockpicking contest, on the basis of superficial research.
And here’s a chart that supports this argument (new homes as a % of total single-family home inventory, including resales):
It’s an interesting nuance.
But it’s certainly a different story here in Toronto with new condominium sales. According to Urbanation, in the first half of this year, the Greater Toronto Area sold 6,727 new condominium homes. This is down 59% compared to 2022, and represents the slowest first six months in a decade.
In this case, higher rates have dramatically slowed the market.
One of the most important considerations for livability in a multi-family building is the elevators. And as someone who has lived in a condominium building for the last 10 years, I know firsthand that it can be frustrating when they aren’t working properly. So this is obviously something that we pay a lot of attention to in our own projects.
The very general and crude rule of thumb is that you want at least 1 elevator for every 100 homes. For example, at Junction House, we have 151 suites and 2 elevators. So that means we have 1 elevator for every ~76 homes. At One Delisle, we have 371 suites and 4 elevators. So 1 for every ~93 homes. At the same time, I live in a building with 357 suites and 3 elevators (1 for every 119), and it works just fine.
But again, this is a very general rule of thumb. There are many other factors that can influence performance such as the number of levels in the building, the number of suites per floor, the number of below-grade parking levels, and so on. In my building, we have all above-grade parking, so I’m sure that impacts things.
If you have a building with a lot of below-grade parking, that will generally decrease performance all else being equal (i.e. increase weight times). Because now you have that many more stops, even if the number of homes remains constant above.
One common way to mitigate these impacts is to add a parking shuttle elevator. This is a dedicated elevator for just the parking levels, and it’s something that you’ll often see in office buildings. This helps service levels. It can also help the overall building efficiency (saleable area/gross construction area) by potentially eliminating the need for another elevator shaft in the above-grade levels.
But the trade-off is that you now need to transfer elevators, usually at the ground floor. Some people don’t mind this and think it helps with building security. If someone sneaks into the garage, there’s another obstacle to getting up into the residential floors. But it does mean that if you’re coming home with groceries in your hands, you need to take 2 elevators.
I’d be curious to hear from all of you what you think about parking shuttle elevators in residential buildings. Because I suspect that as building heights increase and as parking ratios continue to decline, parking shuttle elevators will likely become more common in cities like Toronto. Let me know in the comments below.
Disclaimer: I am not an elevator consultant! I am telling you just what I have learned over the years from speaking with actual professionals. So I recommend you speak with one before making any important elevator decisions on your own projects.
Here’s some data (via Jeremy Withers) explaining that a large portion — about 61% — of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower — about 24%.
Now, the premise of Jeremy’s tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).
But is non-owner occupied really such a bad thing?
First of all, non-owner occupied implies that somebody else is renting the place. I don’t think that a significant chunk of these homes are being left vacant. So isn’t the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?
One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.
This point cannot be overstated.
The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.
So if it weren’t for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.
“On some level, we’re [Toronto] still trying to be a Victorian city.” —Peter Clewes
It is not an exaggeration to say that Peter Clewes, of architects-Alliance, is one of the most important architects working in Toronto today. Over the last two decades, Toronto has built a lot of new condominiums and Peter’s firm has been behind many of them.
I mean, I currently live in a building designed by architects-Alliance. My mom lives in a building designed by architects-Alliance. And the first condominium I ever lived in around 2005 or so, was naturally also designed by architects-Alliance.
Peter’s work is everywhere. And it has been instrumental in helping to define this new Toronto. But what is this new Toronto? It’s hard to say really.
Toronto may have built a lot of new things and added a lot of new people over the last two decades, but it has done so almost begrudgingly and without the confidence to say, “we are building this way because this is the kind of global city we want to become.”
I think Peter gets a lot right in this excellent interview with Azure about Toronto, condominiums, and city building. Despite everything that has changed, on some level, we are still trying to be a Victorian city.
Of course, we are no longer that city. It’s long gone. Time to think much bigger.
There is an ongoing debate in Toronto, and many other North American cities, about how to encourage more families to live in multi-family buildings. And here that has generally translated into (1) mandating a certain number of larger family-sized suites and (2) creating design guidelines to better equip both suites and buildings for families.
But what we often ignore is the very real economic reality of buying a large family-sized suite. If you look at the latest Q3-2022 data from Urbanation, the average price of a new condominium in the entire Greater Toronto Area right now is about $1,427 psf.
So if assume that a good family-sized suite is, oh I don’t know, 1,200 sf, the average price would be about $1.7mm, before you add in any parking (if necessary).
If this is too big and you can get away with something more similar to a post-war bungalow — let’s say 900 sf — you’re still at nearly $1.3mm, again before any parking. At these sorts of prices, you have a few options, particularly if you’re willing to sprawl outward. And I think it’s important to recognize this.
The other hurdle remains our industry’s requirement to pre-sell suites in order to obtain financing and start construction. What this effectively means is that you need buyers who can say to themselves, “I’m probably going to need a family-sized suite for the 1.4 kids I may have in 4-5 years.” This isn’t for everyone.
So if we are truly serious about encouraging more families in multi-family buildings (which is an obviously good idea), I think it can’t just be viewed as a design problem and/or the result of greedy developers who just want to profit maximize by building smaller suites. We need to be looking at both the cost structure behind these homes and new ways to finance them.
Back in May, I wrote a post about time to market and managing costs in condominium projects. What I wrote then remains true and equally, if not more, important today. But given all the uncertainty that we are continuing to see in the market, I thought I would elaborate on a few points.
It used to be the case, when I first started working on condominium projects back in 2007 or so, that you would go pens down on your design drawings while you launched pre-sales and worked toward meeting your construction financing requirements.
Once you hit 50% sales, or maybe once you completely reached your financing hurdle, you would then call your architect back up and kindly ask them to get started on working drawings.
And the reason you did it this way was because working drawings are kind of expensive and so you wanted to make sure that your sales were going to be there. You were also trying to push as many of your costs out to after you had your construction loan in place so that you had a lower peak equity requirement.
You can’t do this today.
Since the beginning of this year, we have seen average high-rise construction costs increase by about 12% in the Greater Toronto Area and, for the balance of this year, some are predicting as much as 4% per month. What this means is that if you wait like the old days, you will likely see costs run away from you and you won’t be able to finance your project based on the sales you do have in place.
So what you want to do is not go pens down. Keep going on drawings. Start buying construction (i.e. tendering). And work toward locking in as many of your costs as possible.
How much is ultimately up to you and the exact market conditions at the time. But I know a number of condominium developers now targeting at least 50% tendered, which means securing most of your key contracts: formwork, concrete & rebar supply, windows, M&E, and so on.
A lot of us are hoping that costs will eventually come down and follow certain commodities in the near term. But as our cost consultant effectively said to me this week, “just because the price of cold-formed steel has come down, do you really think you’ll be able to walk into a BMW dealership and ask for a deep discount?”
