Thursday, 15 September 2011

Toronto Real Estate Development: Big Headaches … Little Progress

Architect with Engineering Blueprints Watching Construction, MS Office ClipArtArchitect with Engineering Blueprints Watching Construction
Image Credit: MS Office ClipArt: Construction, Construction Sites, Cranes.

Why the vast majority of major development in the GTA is condo, and new rental housing developments are almost nowhere to be found?
Have you noticed all those cranes in the GTA? The vast majority of the developments are high-rise condos. And no wonder: the fastest way to guarantee cash flow and ROI is to sell off 80% of the building before you ever break ground. What investor wouldn’t like that risk profile?

When it comes to other types of massive developments or redevelopments, the rule of thumb is:
  • the first developer goes bankrupt,
  • the second developer maybe breaks even,
  • the third developer turns a profit.

Let’s break it down:

The first developer believes with economies of scale, know-how, experience, and deep pockets, they can “find the holy grail” where all others have failed. And, motivated by such thinking, inevitably fail. They run out of money (or can no longer stomach sinking tens of millions more than what their projections had planned for, knowing they will never see a return on their investment).

Like any dutiful vulture would, the second developer swoops in, snaps up a half-completed development at pennies on the dollar (thank-you very much) and then jumps two-feet first into the “killer-deal.” Killer is right, as the second developer promptly discovers how deep and deadly the sink-hole the project actually is. After throwing tens of millions more into it than expected, they also either sell off the headache or just barely break even. Either way, they are happy to climb out of the money-pit.

The third developer is the real shark. Smelling so much blood in the water, comes in and gobbles up a bona fide feast: a two-thirds or three-quarters completed development pennies on the dollar. They complete the development and are able to turn a profit (usually, although not without challenges).

So what are the first and second developers thinking? Is this the real reason why the vast majority of major development in the GTA is condo, and new rental housing developments are almost nowhere to be found? Is this why it’s next to impossible to conceive of huge urban beautification and renewal projects? It’s not surprising developers are gun-shy. With so much precedent, who would be crazy enough to be “first guy to take a bullet, this time ‘round?”

More interestingly, is there a solution? Can the “holy grail” of massive developments be found? Only time will tell. One thing is certain: clearly in the past developers have believed they’ve found the solution; and yet, we know they haven’t.

What big progress could be achieved, indeed, if someone could solve this puzzle in the world of real estate development? What amazing urban renewal and re-envisioning designs could see the light of day? For now, we wait for someone to figure out how to hit one out of the park at first bat.

Attila Lendvai
VP of Strategic Development
Wo-Built Inc. - Innovative Design and Build

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