What to do with the glut of unsold condos?

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including a plan to turn empty condos in Vancouver into affordable housing. Other governments and developers are also coming up with plans for all those empty condos, and we're going to hear a few of those ideas over the course of the next little bit. First, I'm joined in studio by Michael Fedgishin. He is the CEO of the Building Ontario Fund. It's an arm's length agency backed by the province of Ontario. He's with me now. Michael, good morning.

Morning, Matt. Thanks for having us. Thanks for being here. You announced a plan recently to buy up what, 2,200 unsold condos in the GTA and you want to convert them into rental housing. This is a partnership with a private investment company. How's it going to work? So the concept is quite simple.

We, through an open and competitive market call process, solicit proposals from the development community to sell unsold units in blocks to us. We purchase, as I said, around 2,200 of those units and convert them into a combination of market and affordable rentals. These are units that are just sitting empty now because, as I said, in the introduction, people can't afford to buy them or they just don't want to buy them? That's right. Right. What kind of units are they? These are a range of different sizes of condo units. They can range from, you know, small one-bedrooms and bachelors through to more family-sized units. So it's a variety that we're procuring

and as well as in a variety of geographies within the GTA. And the plan isn't to resell and the plan is to rent them out. That's right. Right. This is not just about one project. There's a real opportunity here

because I said as the scale of the number of empty apartments and there are investors across the city and beyond who think that this is a good investment without government help. You're getting government help with this and we're going to talk about that

in a moment. But have a listen to Anthony O'Brien of the Jesta Group. This is a group that recently announced plans to bulk by something like 500 condos. There's a really significant opportunity right now in Toronto, and that's the story today is terrible. As we know, it's been all over the press for years now,

the greatest lump almost in condo sales history. But what we see is a potential light at the end of the tunnel in a period of about three to five years from now. What do you see as the light at the end of the tunnel? We see it similarly, Matt. I think, you know, we have, We are going through a period of approaching two years of record low starts. And if you fast forward four or five years from now, that turns into record low completions and occupancies in supply.

And so we see the same opportunity that the Jester Group does. I think the difference with what we've done is, A, we've done it at a scale that, you know, is only really enabled by government involvement through the Billing Ontario Fund, but also we've achieved affordability objectives, which the private sector or purely private sector players that are doing, in market or not. I'll ask you about the affordability, but why do you need government backing? If the opportunity is so big in the Toronto market right now, why does high art capital, which is your partner here, need the government involved in this?

Well, as I said, it's about achieving a certain level of scale that can actually bring some confidence and meaningfully absorb some of these excess units, but also it requires government involvement and engagement to achieve those affordability objectives. So the market wouldn't be able to do this on its own. you need some sort of backstop by the government to be able to make this happen. Yeah. In our case, based on the underwriting we've done, the capital that Billing Ontario Fund has put into the fund is necessary to achieve the affordability objectives and frankly the scale that we have. So who will these units be four, do you think?

Yeah, we're targeting essential workers, you know, call it workforce housing. But these are generally people who don't qualify. their incomes are high enough that they don't qualify for some of the programs that currently exist, but aren't high enough to really be able to acquire this type of housing affordably. So these are the people who've been priced out of the communities that they're working in. That's right. So when you say that these will be affordable, what does affordable mean in this context? Yes, we're using a two-prong test.

And so in our case, it is the lesser of 25% off the prevailing local market rents. or based on a 30% income test, whichever is the lower. And that will allow those people who, as you call them, are essential workers, but have been priced out of the regions, that will allow them to be in those communities? That's the objective, yeah. Yeah. The NDP in the province of Ontario says that this is a bailout for developers. It says, the party says, if government is going to invest public funds,

it should be building and acquiring homes directly through a Homes, Ontario model, creating permanently affordable housing, not guaranteeing profits for private investors. What do you say to that? You have a smile on your face. I do. I do. This is a predictable and common refrain anytime government involves itself with the development community. But it's myopic. I mentioned earlier on that we have a competitive market call here. So the units that are coming to the high art fund are coming to that fund under competitive tension on pricing. So no one is getting rich here. I'll also remind listeners, that there are over 500,000 people in this province employed in the construction sector.

It's larger than the auto sector in Ontario. And about half of those, a little less than half of those, are employed directly in the residential construction sector. So there's lots of jobs at stake here. You know, with the lack of starts coming on that we've been experiencing and the lack of completions to come, we are quite concerned that the market will rebound in a way that's unattractive for affordability. And that if you imagine any scenario where immigration restrictions or international student restrictions are loosened or we've got beyond target economic growth, we could see a real supply problem in the future that we think are broader strategic objectives to address and have nothing to do, frankly, with bailing out developers.

But it's not just the NDP that's saying this on the other side of the political spectrum. The Fraser Institute says the same thing. Pierre Poilievre has said the same thing. These are developers who made, they made the wrong call. They bet on these small units that they thought investors would scoop up that didn't happen, and now they're left holding the bag. And the program like this will take the bag off their hands. Are they wrong in saying that? They're wrong in the sense that that is not the only objective of this program.

This program is producing affordable housing now, available now, and producing rental stock that regular citizens, central workers, can access now. And so, yeah, development community made some mistakes and got out ahead of itself. There's no question about that market. And that creates a buying opportunity. We heard just on the clip you just played from Jesta. This creates a buying opportunity for private funds and for the Building Ontario Fund to take advantage of that market situation and turn it into something good. And something good for the people who can't afford to live in those communities otherwise. That's right.

And keep builders building and workers working. It's a key part of our economy. And, you know, in the option set of not doing anything about this or choosing to take action and trying to ameliorate the situation, I'll pick the latter any day of the week. Michael, thank you very much. Very welcome. Michael Fed-Chishin is the CEO of the Building Ontario Fund. Hey, it's Adam Grant from Ted's podcast, Rethinking with Adam Grant. This episode is sponsored by Am Better Health.

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going unsold in the Toronto area are tiny units that were built more with investors in mind, as we were saying, than the people who live in them. My next guest is trying to change that. Puyang Safapur is president of Devron Developments. He's with us as well in our Toronto studio. Good morning to you. Good morning. You wrote in McLean's magazine, the condo playbook was creating buildings that are not what real people

want for their families in the long term. How did we end up with so many unsold units in Toronto and Vancouver? That's a good question. to explain the situation that we're in, we have to kind of go to the root of the issue. And that is something that is, unfortunately, somewhat unique to Canada. And that's how we sell condos. And most of the rest of the world, buildings are built.

And when they're finished, people who want to live in them, prospective families, they come and see them, and they make a purchase decision. But unfortunately, the way we sell condos in Canada is completely, backwards where because of the need to sell approximately 60, 70% of the building, before you get financing to build the building, developers are forced to sell these suites to an investor buyer because that actual family usually can't anticipate buying their home three to five years out. Most people can't make a purchase like that for anything.

We don't buy anything like that. We don't buy phones like that, for example. buy phones. We don't buy anything else anticipating our need five years from now. Your family might grow in size and might shrink in size. You might move. You might exactly. Your job may take you to somewhere else in the city. So and then how can we how can we expect people to be able to or large percentage of population to be able to make decisions that far in advance? And because it is difficult to do that, it's difficult therefore to sell to the actual user. This system necessitated an investor buyer to come and play a role in the middle to basically, buy the suites from the developer to then later, three to five years later, when the actual

buildings complete, flip rent to the actual user. So what are you going to do differently? So what we've been trying to do differently is, so the system necessitates investor buyers, we've been trying to kind of almost work against the grain by designing buildings and selling them directly to the actual end user. Truthfully, it is more difficult. We've been doing it since back in 2013 after kind of hour. We started a second project.

we just realized this was not the way to go. This is this is not going to have a great outcome. What it means is building larger suites, better architecture, which maybe sounds like a small deal, but it isn't. Actually, people, when they buy homes, a large percentage of that decision-making process is emotional. So how that building makes you feel is important. Number of elevators, all those things. Those are the things that in accumulation make a home that's livable for the long-term.

for families and emulate what buildings look like in the rest of the rest of the world. Who's going to be able to afford these? Because one of the reasons why larger suites are scarce is because they're really expensive in many communities. So who's going to afford something like this? Yeah. So this can be a, I think, a common first reaction to the, to thinking that larger units are going to be inherently more expensive.

And there is obviously a component that, you know, if something's twice as big, and then it'll never be, it'll be more expensive. actually one major thing we don't realize is that buildings with smaller units are actually more expensive for the developer than buildings with larger units. Explain that. We're almost at a time, but explain how that actually makes sense. A building of 200 suites, as opposed to building with 100 suites, has a hundred more, twice the amount of kitchens, washrooms, electrical, mechanical, all of the costs that go into

a building. So it actually costs less money to build a building with larger units that has less It's less development charges. So there's, in a building of that size, potentially $20 million of savings that you can now use to put back into the building to build a higher quality building and to build larger units

at potentially the same or lower dollar per score foot than the building with more units. Can you change, we are at a time, but can you change that calculus that you laid out in the McLean's piece where in some ways we sacrificed livability for efficiency? Can that be flipped around so that people can actually afford

and buy the places that they want to live and that they want to stay in, that aren't just a glass box in the sky that's too small for their family? That's the mission we sincerely have been on for the past over a decade. And it is possible, again, by this system of that requires the profit to be made by an investor in the middle is actually squeezing affordability. So by selling directly to the end user instead of an investor with high brokerage fees, by selling directly the end user, but then investing that money back

into building a higher quality building at a lower total of per square foot cost. It's a win-win for everybody. And in our projects, that's what we try to get to is built units that are actually livable and bought by the end user. They're happy.

The people who live in those buildings are happy. We're happy because we feel like what we're actually contributing to is real housing that people need and the city can build a foundation on rather than short-term housing that we've unfortunately built unintentionally for the past two decades.

Really interesting. Puyang, thank you very much. Thanks for having me. Puyen Safepur is the president of Devron developments. Carolyn Weitzman is a senior housing researcher and adjunct professor at the University of Toronto School of City. She's also with us in our very busy Toronto studio. Good morning to you. Good morning, Matt. Why is it that there are so many empty condos in Toronto and Vancouver in the middle of a housing crisis? Well, I think Puyen has talked about some of the systemic issues. It's too expensive. It's too small. It's been built as an investor product, not a place for people to live. in for any long period of time. So people, investors are starting to freak out a bit because they're worried that they might not even be able to rent these very small apartments at the very high prices they need to command in order to cover a mortgage.

So it's a classic market failure. And so is it as simple, I mean, there's a lot of parts to that, but is it as simple in some ways as developers just not building what people actually wanted? They're building what investors want. Yeah. Not what people need. Residents, not what people need. Good point.

So what about buying up vacant condos, like what the Building Ontario Fund is doing, and turning them into affordable rental units. Is that an answer to this? It may be part of the answer, but I think Puyang has been talking to some of the larger systemic issues. It's not just a quick fix. So, for instance, in the 2024 budget, the federal government committed itself to buying up apartments to keep them affordable. But that program was for the one million apartments that are over 50 years old and in many cases are larger and in many cases are much less expensive. There's a lot of risk

associated with these condos. For one thing, you're just buying a few units in a building that may have unknown maintenance fees and also may be very difficult to manage with a mixture of renters owned by question mark the government, question Marco Rubio nonprofit and private investors or people who've bought these condos in order to live in who may not want affordable housing under the same roof. So a good acquisitions program would be looking to keep housing affordable because we've been losing so much affordable housing. It would look at what kinds of units people need the most. So what do we do with the, if that's not the answer, or that's not? Part of the mix, certainly, but not the end goal. What do we do?

Because the reality is there are these empty units and there's a housing crisis. People are trying to figure out where to live and whether it's the essential workers that Michael was talking about or other people. And they can't afford to be where they want to be. And yet they see these empty buildings. Well, it's partly, you know, who are we talking about with the affordable housing crisis? If we're talking about minimum wage workers, whether you're working at a restaurant or you're a personal care worker, you can afford about $1,000 a month. Will these units be renting for $1,000 a month?

Almost certainly not. If you are a moderate income household, let's say a construction worker or a teacher, you'd be looking at a place, and if you're in a couple, you don't want a studio necessarily, you want at least a one bedroom. If you're a single mom,

you might want a two-bedroom for $1,600 a month. Again, I'd be asking whether these condos would be renting for $1,600 a month, given that their price on the market would be between $600,000 and a million dollars, which usually would command rents of $2,000 to $3,000 a month. So who is this affordable to? And these are really important questions, really important questions for us as a society, a really important question for governments. What do you make of the government intervention, what the prime minister announced in, British Columbia when he and David E.B. held a news conference saying that they're going to turn empty condos in Vancouver into affordable housing.

Well, I think some of my colleagues in B.C. were a little bit wryly pointing out that a $775 million intervention and actually building new non-market housing had been cut at the same time that $3 billion was going towards empty condos. again, how do we use these resources that we have, collective resources, most effectively? What do you make of the criticism that this is a bailout? And again, Pierre Poilievre and others have said, these are developers who bet on the wrong horse. They thought that they could create and sell

these small units to investors, make a lot of money. It turns out that the market did not agree and that they are being compensated in some ways for a bad decision. Matt, I think the most important thing is to look at outcomes. Are the outcomes to create more homes that are affordable to key workers? Are the outcomes to end homelessness, which is tripled in BC, pretty close to tripled in Toronto? Are the outcomes to make middle class affordability more attainable? I think we need to be a lot clearer on what kinds of outcomes. we're trying to reach. And I'd say that's true of housing policy in general. What's the problem

we're trying to fix here? And I just mention that a crane in the air or a hole in the ground is the same, whether it's a non-profit crane in the air or hole in the ground, or whether it's a condo developer, crane in the air, or a hole in the ground. So what kind of development, what kinds of homes do we need most? We are out of time, but is your sense that those who are, you know, digging the holes in the ground and putting the cranes up, do they understand the heart of that problem? Yes, because they can't find places to live in Toronto and Vancouver. So I'd say, talk to the construction workers. And they know exactly what's going on. They know where they can live and where they can't live. Carolyn, this is really interesting.

Thank you very much. Thank you, Matt. Carolyn Weitzman is a senior housing researcher and adjunct professor at the University of Toronto School of Cities. She was with me in our Toronto studio. You've been listening to the current podcast. My name is Matt Galloway. Thanks for listening. I'll talk to you soon. For more CBC podcasts, go to cBC.ca slash podcasts.