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.
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The Lyon project has a single stair and elevator. Is it fair to say that if the OBC allowed a single exit stair, projects like this would become viable?
Who are these people complaining about “developer greed”? Short answer: people who have assiduously avoided risk all their lives. I met one in a dream/nightmare last night. This dream was set in a theatre (people who know me know that I hate being hectored by theatre types). My wife and I are in the audience, seated close to the stage. Within three minutes of the play starting, one of the actors freezes up and everybody walks off stage. A voice tells us that “the play will resume momentarily. It doesn’t. I get restless. Speaking with my wife, we analyze the situation. Sitting next to me is a guy who listens in on our conversation. He is a toxic amalgam of two former employees: Mr. Low Energy and Mr. Acerbic Sarcasm. After a little while, the guy next to me addresses me and says: “I have a policy of never saying things to people that I wouldn’t say to their face. You should try it”. I respond with: “So, you’d rather stay quiet and put up with mediocrity?”. He says: “I have done well by my creed”. Could this be your “developer greed” critic, a person who avoids risk is also a person who is allergic to challenges and potential confrontations?