Time to Rethink the Mega Tower?

Hong Kong Image courtesy of http://photoeverywhere.co.uk

More and more people I talk to who are inside the condo industry have a growing apprehension towards the direction of condo development right now. Specifically they are worried about the long term impact of what I call the “Mega Tower”. I define a “Mega Tower” loosely as a building with:

• 40+ storeys
• more than 10 units per floor
• largest unit tends to be about 800 sq ft
• average unit size is about 550 sq ft (just 3 years ago it was probably more like 750 sq ft)
• average price is about $375K
• 90-95% of the suites are purchased by investors

When I talk to my colleagues in the industry in New York they think it’s absolutely crazy that our condos here have gotten so small. In NYC, the average apartment size is still around 1000 sq ft. On the flip side though, people who grew up in European cities, or Hong Kong say it’s about time that we start shrinking the condo. In Hong Kong for example, entire multi-generational families will live in 700 sq ft apartments and that’s considered normal.

The worry or apprehension that some developers and industry insiders are feeling is surrounding the question of what will happen when all these buildings get finished in 2014-2016? How will the resale market respond to such buildings? Will the rental market continue to remain strong enough to absorb all these investor-owned units? Will the negative cash-flow situation come to a head if rents don’t continue to rise? Ultimately, should we aim to be a city more like Hong Kong, or more like New York?

I know some developers and architects are planning projects that will be quite different to what we are seeing everywhere today. They are going to launch towers with much larger suites, many 2 and 3 bedroom suites, and much higher price points. A throwback to the good old days of 2006 if you will! They feel that there will be  backlash at some point against the current “Mega Tower” concept, and there will be a shortage of larger units in the years to come downtown.

My opinion though is that nothing will change in the short term. As long as people keep buying into these mega towers in the tens of thousands every year, the trend will continue. Developers are primarily in the business of selling condos, not building cities (although that is a secondary motive for many of them). Their goal is to sell out 65%-75% of their buildings as fast as possible, and right now, the best way to do that is to make as many small units as possible.

The great news is that the rental market is still unbelievably strong.  As I’ve mentioned recently on this blog, all signs are pointing to increased rents moving forward, and no one is building rental housing in this town so condos are it. Still, how much of our market is relying on increases in appreciation versus cash flow? Most of my clients are long-term investors who look to buy and hold properties, but I know that many buyers still have no intention of being landlords, rather they just are looking for the quickest flip possible.

These are some of my thoughts, I’d love to hear yours. Leave a comment or contact me.