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Market Watch

Why aren’t developers offering three bedroom condominiums?

Wednesday August 30, 2017

There was a lengthy debate on Twitter last week regarding the lack of three bedroom condominiums being offered by developers in Toronto. There is a real simple answer as to why they are not: people don’t buy them.

There is only so much land available for ground-oriented housing (single, semis and row) in Toronto, and as you can imagine, the only way to accommodate more families in the City is to have them embrace higher-density living in multi-floor condo and rental apartments. Many young families have resisted this reality, instead engaging in endless bidding wars for the saddest looking Toronto single-family homes, or packing up and moving to Bowmanville, East Gwillimbury, Brantford or Guelph. Even the spike in new and resale ground-oriented house prices this year hasn’t significantly moved the needle on pre-construction sales of three bedroom units.

With the exception of two or three developers in Toronto, every new condominium will require construction financing. Lenders like to see that at least 60% to 70% of the total revenue in the development has been sold, that the purchasers have made a down payment of at least 15% of the unit selling price (35% for foreign buyers), and lenders typically don’t count the multiple sales to the same buyer, or any sales to corporations. Based on this financing constraint, developers want to achieve a few different objectives when determining their optimal suite mix: maximize sales absorption and revenue, minimize construction costs.

On a cost per-square-foot basis it is more expensive to produce two 500 square foot (sf) units as opposed to one 1,000 sf unit, but smaller units sell much faster and typically transact for a much higher price per-square-foot. Investors love smaller units, as they’re easy to rent out and easy to resell. If market conditions change, more expensive units are always more difficult (and often impossible) to move. Better to design your suite mix with too many small units than too many big ones. However, it should be noted that many developers offer “combo” suites as well, where a purchaser can combine two suites to make a larger one, and that typically isn’t reflected in the Official Plan and Zoning By-law applications that outline the proposed suite mix.

A perfect example of the slower absorption of “family-sized” units is a site in North York: five minute bus ride from the subway, top developer, multi-phase project with a plethora of amenities. They have been offering 30 three bedroom units since they launched in October of 2013. The building will occupy in early 2018 and just seven of the 30 three bedroom units are sold, the last one occurring in November 2013. The well laid-out 940 sf suite is priced at $540,000 or $570 psf, the cheapest unit on a per-square-foot basis in the project. I also pointed to a more generously sized unit in Leaside at 1,234 sf for $760,000 that has been unsold for several years.

On Twitter people were quick to point out that the units were too small, that the living space wasn’t big enough, that there was not enough storage, the condo fees were likely too high, the closing date was too far out, the architecture was crappy, the down payment for new housing is higher than resale, it was located on a busy street, that only one parking spot was available, and there is no kid-friendly amenities.

Needless to say, they made my point for me. There are many more reasons than the ones listed above why people haven’t bought three bedroom pre-construction units. Slower absorption means greater risk to developers. Small units become the obvious choice.

Unless a developer self-finances their project, or is one of the “big boys” with significant financial clout with lenders and/or equity partners, smaller developers have limited ability to make a social choice to offer more large units at below-market per-square-foot prices if they ever want to see their project become a reality.

Toronto clearly needs more three bedroom units, but as David Hulchanski wrote in 1997, “The market does not respond to social need.” If you want to see more three bedroom suites in high-rise buildings, lobby your government to provide incentives for developers to do so, or march into that sales office with your cheque book and buy one.

TAGS:Ben Myers, Condo Market, Condominium, Toronto Condominiums, Toronto Real Estate