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Investors are reshaping the Toronto high-rise condo market

Ben Myers | The Numbers Game | 2015-09-01

Ben MyersThe average unsold new condominium in the Greater Toronto Area suburbs was 865 square feet, according to June data from RealNet Canada Inc.,

At an average price of $515 per square foot, that’s likely a stretch for the average first-time buyer to afford at $445,000. If young professionals want to be in the action, they’ll have to settle for less square footage and a higher price.

The average unsold new condo in downtown Toronto was 769 square feet in June and offered at $625 per square foot, or approximately $480,000.

I believe the reason these units are unsold is that they’re too big. For my latest “Market Manuscript,” a robust 60-page housing report, I conducted a survey of Canadian residential builders and developers. I asked them what their best-selling suite size is at their downtown condo projects.

Just under one-third of respondents indicated their most popular unit size was under 600 square feet, while 45 per cent of these builders listed a unit size between 600 and 700 square feet. These suites are popular because investors like them, and investors are the largest group of pre-construction purchasers.

Suite mix and unit sizes must cater to investors

A project’s suite mix and unit sizes must be designed to cater to this buyer segment. Higher down payment structures, uncertain occupancy and the reluctance to “buy off paper” are all reasons why end-users are slower to make the decision to buy a new condo prior to completion.

Their desires are no longer being considered. These days, 769 square feet is a very big suite.

In the second quarter of 2015, just seven per cent of resale condo buildings in the GTA had their average unit size for traded units below 600 square feet, while 19 per cent had an average unit size of between 600 and 700 square feet, according to data from Urbanation Inc.

Going back to the earliest data Urbanation has available, in the second quarter of 2004, the shares were four per cent for under 600 square feet and 10 per cent for 600 to 700 square feet. The investor condo boom is slowly changing the high-density resale landscape in Toronto.

Despite record condo apartment completions, the condo rental market in Toronto remains red hot. However, developers continue to shrink units to allow investors to purchase them at a price where they can rent them out for a profit. In theory, that trend can only be sustained for so long.

Demand for high-quality downtown rentals

Institutional capital has recognized the insatiable demand for high-quality downtown rentals. That’s a quandary that developers and their private investors will soon be faced with as it relates to small unit sizes as they look to get involved in rental apartment development.

With lower return metrics and longer time horizons for institutional owners and many of their partners, new purpose-built rental projects will feature slightly larger average unit sizes and professionally managed buildings.

Will an onslaught of these projects choke off rental demand for micro-suites owned by private landlords? Will investors shy away from buying pre-construction, knowing they’re competing with cash-strong institutions with professional rental management?

There’s a lot of change coming to the downtown Toronto high-rise market in the next five years, and a coming boom of purpose-built rental construction may not be a good thing for local condo developers. To read more of my thoughts on the Toronto and Canadian housing markets, download the “Fall 2015 Market Manuscript.”

Fortress Real Developments is a diversified real estate development and investment company that partners with established builders and developers across the country. Fortress sources equity capital for the partnership in addition to providing value-add services such as market research, structuring of debt, marketing and other realty services.

Ben Myers assists in evaluating both the market conditions and projects that Fortress is active in. Follow his blog posts and commentary on the Canadian housing market here or follow him on Twitter at @BenMyers29.

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Ben Myers

About the Author ()

Ben Myers is President of Bullpen Research & Consulting, a boutique real estate advisory firm, that works with land owners, developers, and lenders to better inform them of the current and future macroeconomic and site-specific housing market conditions that can impact their active or proposed development projects. Follow Bullpen on Twitter at @BullpenConsult or find Ben at www.BullpenConsulting.ca.

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