The studio-sized condo may be the most affordable type available and a staple of the investor market, but it’s an increasingly endangered species.
Of the record 32,000 preconstruction condos brought to market in 2017, only 425, or 1.3 per cent, were studios, says Shaun Hildebrand, senior vice-president with Urbanation Ltd. With more than 100,000 condo units currently in development in the Toronto area, 4 per cent are of studio size.
“I’ve been telling builders for the past year: ‘Build more studios’,” said Andrew la Fleur, a real estate agent with TrueCondos.com (and host of a real estate podcast of the same name). “Over 10 years of doing this, I’ve sold well over 100 maybe 200 [studios]. The main buyer of studios is still gonna be investors, but as prices have shot up so much in the past couple of years we’re seeing more interest by end users. Unfortunately, [studios] are becoming harder and harder to find.”
“Studio” has also become a dirty word to some. In one recent example, a 325-square-foot studio floor plan for the Sugar Wharf development on Lake Shore near Yonge was mocked on social media because it seemed to suggest a pullout sofa-bed positioned next to the kitchen counter might be a workable layout for a tenant.
Studios make less than 2 per cent of the 1,927-unit project, said Jared Menkes, executive vice-president of high-rise residential at Menkes Developments Ltd. Plans show a total of 33 “Coast” studios (which start at $451,990) in the first tower, extending from floors 12 to 45. Sales reps for the building also said those units have sold out, and expect the same to happen when the second tower opens for presales soon.
Clearly, there is still demand for the units, so why aren’t developers making more of them?
“Studios come and go,” Mr. Menkes. said. “We’re looking to create a sense of community. If I did a whole building of studios they would sell a lot quicker than if I did all three-beds. But as a good citizen – and I love this city – you want to provide units for all different kinds of people.”
Mr. Menkes once lived a studio himself and says that, depending on the neighbourhood sub-market, they can make sense. “Studios do have a role to play in the market, they are an affordable entry point, whether it’s home ownership or it’s a rental ownership.”
He argues that the best buy for the end-user market (where the condo owner lives in the unit they buy) is Sugar Wharf’s more numerous one-bedroom units; the most affordable of those is the 487 square foot “Beach,” costing $571,990. That’s $120,000 over the studio for an extra 162 feet and a bedroom door.
Even as the industry looks to create more family-friendly towers, the investor market remains a huge driver in condo sales. At least 48 per cent of buyers who took possession of new condos in the GTA in 2017 were investors, according to a recent report from CIBC World Markets. Inc. economist Benjamin Tal and Urbanation.
Worryingly, 44 per cent of those investors had such high carrying costs on their mortgages that they were in a negative cash position on any rents they charged, and 34.5 per cent of those faced a cash shortfall greater than $1,000 a month (another 20 per cent were losing between $500 and $1,000 a month).
“One of the reasons why I recommend studios: they provide you with excellent cash flow, the best cash-flow of any unit type, better than a one-bedroom, two bedroom,” said Mr. la Fleur of TrueCondos.com. “I wouldn’t recommend buying a studio in every market, it doesn’t make sense in Markham or Pickering. But if you can be anywhere near Ryerson or UofT, that’s a licence to print money.”
The data back that up: Between 2016 and 2017, studio condos had the highest average rent growth of any bedroom configuration (11 per cent) for a GTA average of $1,665 per month, according to Urbanation. Average condo rents in Toronto also continued to climb in the first quarter of 2018, rising 10.7 per cent to average $2,206.
Investors typically rely on rapid appreciation of their units to make a cash-flow-negative investment work out and, even there, studios shine. “In our Q1-2018 condo report, we noted that studios were the fastest-appreciating unit type in the resale market, increasing in price by 24 per cent year-over-year to an average of $381,000 (versus a condo market average growth rate of 10 per cent),” Mr. Hildebrand said.
There remains the question of how anyone is supposed to live in a sub-400-square foot space. Mr. Menkes suggests searching YouTube for examples of “microapartments” and Murphy beds; Mr. la Fleur suggests getting a loft bed (like a bunk-bed, but with space below for a couch or desk), pullout or futon.
But for investors, cramped spaces are a draw.
“The smaller the unit the higher the turnover, the more transient the tenant is likely to be,” Mr. la Fleur said. “Necessity is the mother of invention; people adapt.”