Developers building more small condos, despite people clamouring for more space

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Developers are pumping out studios and one-bedroom condos in the Toronto region, even as demand for the smaller units has plummeted during the pandemic.

Ever since the COVID-19 pandemic forced many office workers to work from home, demand for bigger living spaces and backyards has exploded, with house sales jumping in most of Canada. But the fact that homebuyers want more room hasn’t changed developer plans, at least so far.

Of the new condo project launches in the Toronto region this year, studios and one-bedrooms account for 61 per cent of the new units, according to new data from Urbanation Inc. Two-bedrooms make up 32 per cent, while three-bedrooms, penthouses and other larger spaces make up the balance.

That 61-per-cent share is higher than in 2019 and 2018, as well as the record year for project launches in 2017. That year, smaller units made up 48 per cent of new product; the residential resale market was surging, developers went on a building spree and the price of a condo (per square foot) rose a whopping 30 per cent amid speculative buying.

Today, cost is the main reason developers continue to build smaller units. With construction and development expenses rising, a pre-construction studio in the downtown entertainment district will run in the high $500,000 range, a one-bedroom mid-$600,000 and a two-bedroom in the high $800,000 to low $900,000, according to some developers.

“At the end of the day, the price point and sticker price is what drives our market,” said Scott McLellan, a senior vice-president with Plazacorp, which is building condos in the Toronto region. The majority of Plazacorp’s units are studios and one-bedrooms.

A flurry of condo projects is now being completed, just as the work-from-home movement has made it easier to live outside major employment centres like Toronto, and caused a major shift in homebuying.

Condos in the city of Toronto have been the only type of property to lose value in a period marked by booming sales and increasing values. The average selling price of a condo fell 3 per cent to $640,208 in the 12 months to November, according to the Toronto Regional Real Estate Board. Meanwhile, the average selling price of a condo in the Toronto suburbs rose 5 per cent, and prices of detached and semi-detached houses, as well as townhouses, rose between 7 per cent to 19 per cent in the Toronto region.

A closer look at the numbers from Urbanation show that prices for studios and one-bedrooms in the Toronto region are the ones that have taken the biggest hit from the first quarter to the third this year.

The average selling price for a studio has declined 7 per cent to $441,047, with its price per square foot down 9 per cent to $1,075. For a one-bedroom, the average selling price has dropped 4 per cent to $539,666 over the same period. Its price per square foot is down 5 per cent to $883. Meanwhile, the average selling price of a two-bedroom has climbed 0.1 per cent to $701,288. Its price per square foot is up 1 per cent to $727.

Although municipal governments across the country have encouraged developers to build larger units in a bid to accommodate different family types, Toronto developers said the economics do not work to get the building off the ground. A developer is typically required to sell 75 per cent of its condo project’s units to get the financing needed to start construction. And a large number of preconstruction buyers are investors, who are also looking for cheaper units.

“I don’t find investors are buying bigger units,” said Cara Hirsch, founder of Hirsch + Associates, which helps real estate companies develop and sell their pre-construction condo buildings. “The biggest thing is the price point. They want bigger spaces but they can’t afford to buy bigger spaces.”

One developer, MOD Developments Inc., designed some of its units with walls that could be knocked out to create a larger space. But no buyer has done that.

“Sometimes the city is unrealistic,” said MOD’s chief executive Gary Switzer. “At the end, it becomes a question of dollars,” he said, adding that families with children don’t typically spend $1-million on preconstruction condos in a high rise.

The bulk of this year’s new condo projects were launched over July, August and September, when sales of houses in Toronto, most of Ontario, Quebec and British Columbia were soaring.

Demand for properties with a home office and outdoor space has driven up house prices in the city, the suburbs and vacation areas such as the Muskokas in Ontario, Sunshine Coast in B.C., the Eastern Townships in Quebec and Lac Ste. Anne, Alta.

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