I came across a staggering figure in the Globe and Mail a few weeks back. There were, as of 2010, 1,925 apartment towers of eight storeys or more in the Greater Toronto Area, and an additional 1,155 in the five- to seven-storey range.
This has little to do with the recent condo boom, but in fact was the result of a post-war building boom that shaped the Toronto skyline decades earlier.
As I wrote in my last article, commercial office towers underwent a similar post-war boom. Major cities across Canada are now crowded with buildings that were churned out in the ’50s and ’60s and have little heritage value. Some have decent bones and can be gutted and retrofitted, while many others, regrettably, are write-offs and will have to be torn down.
The slippery slope to slumlord
But there is crucial difference between a commercial tower and a residential one. An apartment owner can allow a property to show its age and still fill the building. However, the divide between what a tired rental unit can command versus its more current and better-maintained counterpart can quickly rise to $400 to $500 a month, multiplied by the number of units in the building.
This represents a substantial loss of revenue to pay for building repairs and improvements. Buildings in deteriorating condition are at the top of a slippery slope; without enough revenue to keep them in good condition their end is on the horizon. Being labelled a “slumlord” brings with it a host of problems, not the least of which is unwanted attention from city inspectors.
The commercial property owner has a different reality. Well-heeled tenants usually desire an address worthy of the persona or brand image they want for their businesses. They want a quality product and are willing to pay full market rate, perhaps even a premium.
All of which means the typical 50-year-old apartment tower has likely not enjoyed the same TLC over the years as the typical 50-year-old commercial property.
Will a building boom compound the problem?
That poses a big problem, considering some industry watchers are heralding an apartment building boom in major markets across Canada. Quoting another recent Globe story, the expected construction surge is being fuelled by several factors – relatively high prices for older apartment buildings, low financing costs for new construction projects, tighter mortgage rules that are keeping some people as tenants, growing market demand for rental options, weakening condo markets, and of course, the cadre of investment funds looking for places to park money.
But if the overriding market reaction in response to these various stimuli is to build new, what happens to all of those tired old properties? I doubt anyone wants them to become the sites of increased ghettoization for immigrants and the working poor. These buildings number almost in the tens of thousands across Canada.
But again, the cost of a retrofit can be prohibitively high, complicated by the fact that, in contrast to a commercial space that may have only a handful of stable tenants, an apartment building could have hundreds of leases to manage. These tenants may all have to be turned out.
If they remain, they must endure whatever chaos is likely to ensue from living in a construction zone, which will no doubt create legal and customer service headaches for the property owner/manager.
Upgrades to improve market value will include everything from kitchen cabinetry and plumbing to accommodate the dishwashers and in-unit laundries that tenants now expect, to better broadband services and repairs to crumbling balconies. Add to this creaky elevator systems and outdated HVAC systems that are highly inefficient.
It’s therefore no wonder developers would rather start fresh with a new build. As I always say, developers are in business to make money. Don’t hold that against them. It’s just the nature of the beast.
Time for some fresh ideas
That leaves Canada’s urban centres with a huge problem. But there is hope, if a community’s stakeholders and business leaders are willing to pull together.
That Globe story I referenced at the top featured a new initiative in Toronto by a group of non-profits and architects, called Tower Renewal. It is an effort to revitalize many of these buildings with energy-efficient upgrades, as well as seeking zoning changes from local government that will allow for ground-level retail and community spaces.
The intent is to not only make these properties more attractive to the market and extend their useful lives, but to also revitalize their neighbourhoods at a social and economic level.
It sounds like a good start. If the current market reality means there just isn’t a reasonable business case to be made for a traditional retrofit of many of these urban dinosaurs, we need to come up with new approaches or rules … on the double.
(To discuss this or any other valuation topic in the context of your property, please contact me at firstname.lastname@example.org. I am also interested in your feedback and suggestions for future articles.)