CONDOS ARE SHRINKING TO MEET TIGHT CONSUMER BUDGETS AND BITE-SIZED INVESTOR APPETITES.
WHY RENT CONTROL MIGHT MAKE THESE TINY BOXES EVEN MORE POPULAR
There really i sn’ t much builders can do to shrink condominium units to make them more affordable — some are already as small as 280 square feet.
Peter Clewes, a principal at Architects Alliance, whose firm designed what is being billed as Toronto’s first micro condo, Smart House, said it’s really not possible to design anything smaller than that project’s units, the popularity of which is a testament to just how much prices have risen in Toronto’s condominium market.
But unlike in the detached home market in many of Canada’s l argest ci t i es, where it has long been the practice to keep driving until you can find something you can afford, condo developers seem to have adopted a philosophy of shrinking units until they can meet consumer budgets and bite-sized investor appetite.
Condominium sizes have been shrinking for the past decade, at least until the past two years. The average condominium in the Greater Toronto Area was 892 square feet in May 2007, based on remaining inventory at the time, but shrunk to 789 square feet by May 2015, according to data supplied by Altus Group to the Building Industry and Land Development Association (BILD).
Some analysts suggest the reversal during the past two years is because of both downsizing boomers looking to move into highrises after selling their detached homes as well as a market response to expensive ground- level housing. BILD said the average highrise unit climbed to 793 square feet in May 2016 and to 814 square feet this year.
Speculation is rife in the industry that one of the unintended consequences of Ontario’s new stronger rent control rules, which target buildings constructed after 1991 — and, therefore, new condos — is that developers will push for smaller units because their tenants don’t stay long term since they will eventually want to form families and need more space.
Once they move out, a landlord can boost the rent above Ontario’s new limit, which is up to inflation and is capped at 2.5 per cent.
Benjamin Tal, deputy chief economist at CIBC World Markets, believes this natural way to increase rents is one reason the government extended rent control.
“I ’ ve heard t his f rom developers that ( building smaller units) is one way to get your tenants to turn over,” he said. “However, the new type of tenants could be families and older people so the turnover could go down to an extent.”
Shaun Hildebrand, senior vice- president at condo research firm Urbanation Inc., said his firm breaks down the condo sector between end- user resales and rental units and there is clear pattern that the latter units are smaller and shrinking.
The average rental unit in the first quarter of 2017 was 724 square feet, while the average resale unit was 888 square feet, down from 816 square feet in the first quarter of 2010.
Brian Johnston, chief operating officer at Toronto- based Mattamy Homes, said one of his first thoughts when the new rent control rules came in is what it would do to larger units aimed at families.
“You don’t want a family condo because they may be in it 10-15 years. If you’re renting out, you might not want a tenant to be too comfortable,” said Johnston, adding he would understand if that was the view of landlords. “The industry was pushing for increasing rental increases above the rate of inflation.”
At the same time, the rising price gap between detached homes and condominiums, which reached an alltime high in 2017, has pushed more and more families to look for cheaper alternatives to detached homes.
“The pendulum has been swinging into larger and larger units and they will continue to when it comes to end users,” Johnston said.
Simplistically, it makes sense that landlords would want tenants who will turnover quickly and those who rent small units fit that description, said Derek Lobo, the broker of record at SVN Rock Advisors Inc., a Burlington, Ont.-based company that specializes in multi- family assets.
“But if you are going to rent out that apartment for the first time, you are going to get the most you can the very first time,” said Lobo, explaining that landlords looking for financing to build a rental apartment complex need what’s called take-out financing to begin construction and that’s based on today’s expected rental income, not what an owner might get in three years.
“You don’t have time to raise rents over one, two, three years,” he said.
Lobo predicts rental market supply growth is going to split into two.
“Smaller apartments are going to get smaller and larger apartments are going to get larger. Older wealthier people want those larger apartments. They want to get rid of their house. Those people will not go down in quality,” he said. “Young people are on the other end of t he spectrum. Young people live in the neighbourhood and old people live in their apartment.”
Jim Ritchie, senior- vicepresident of sales and marketing at condo developer Tridel Corp., said the shift toward larger units has already happened, but market statistics are a lagging indicator.
“Product that i s being completed was obviously sold three to four years ago,” he said. “A shift now in the marketplace would not be reflected now.”
Ritchie doesn’t buy into the notion that developers are going to gravitate toward building smaller units, especially when it comes to servicing people who want to buy and live in the unit.
“If you benchmark against a single home that’s $1.5 million, that’s not affordable. People will look for alternatives that are out there,” he said. “If we want to compete in that space, we need to grow the product size, which we have been doing.”
He points out that the most popular units in Tridel’s l atest development in downtown Toronto ranged from 1,200 to 1,500 square feet.
Vancouver has long had rent controls that covered the entire market and also allows rents to be raised above the limit once a tenant moves, but University of British Columbia professor Tsur Somerville, who specializes in real estate, said the shrinking size of condo units there is mostly a response to rising prices.
“I really think the rational response ( for landlords) is to rent to people who you think will eventually buy, like young professionals,” he said. “The issue is that as expectations change, the dynamics of supply change. When things get so expensive for a home and further away from ( central cores), they start thinking about moving ( i nto condominiums). That process is happening in Vancouver.”
As a result, the long- term demand for larger units may stay strong as baby boomers exit their houses. But Doug Norris, chief demographer of Environics Analytics, doesn’t think micro condominiums or smaller units are going away any time soon either because of land prices.
“I don’t think ( millennials) will stay in those small units. They’ll move back to the suburbs to build families,” he said. “But generation Z is of equal size to millennials. From now on, you will get a pretty stable inflow into the housing market of young adults.”
What does it mean for would-be first-time renters?
Architect Clewes, who has been in the industry for 30 years, said sacrifices are made when he’s designing the smaller units, though he notes the Ontario Building Code stipulates room sizes so you can only whittle them down so far.
“It’s really a studio apartment, so you are combining a living area with a sleeping area,” he said. “In a bottomline situation, you can have a pullout Murphy bed. You have a small dinning room. A reasonable kitchen, but you are going to have a lot smaller appliances.”
SMALLER APARTMENTS ARE GOING TO GET SMALLER AND LARGER APARTMENTS ARE GOING TO GET LARGER .... YOUNG PEOPLE LIVE IN THE NEIGHBOURHOOD AND OLD PEOPLE LIVE IN THEIR APARTMENT. — DEREK LOBO, SVN ROCK ADVISORS INC.