The appeal of so-called shoebox condos — no larger than the size of two average living rooms — will face its first real test in Canada this year, with an influx of the compact homes set to hit the country’s largest real estate market
Investors are betting on big returns from young renters who can’t afford to buy in the red-hot real estate market and don’t mind living in a unit, about 500 square feet, where their dining table might have to fold down into a bed.Although developers are pitching micro condos as an affordable entry point into the market, brokers say it’s mostly investors — catering to a demographic of young professionals increasingly flocking to the downtown core — that’s driving demand.
Micro suites tend to fetch higher rents per square foot than larger units, as many renters are willing to live in a slightly smaller space in order to save a bit on costs and live closer to the city core.
There are nearly 3,000 micro condo units under construction in Toronto that are slated to be completed this year. If investors snatch them up, that could spur developers to build more of the micro units to satisfy demand from investors. This is something that the market and developers are going to be paying very close attention to in 2015.
The challenge comes in securing a mortgage for the micro units. Canada’s five biggest banks are hesitant to provide financing for units below a certain minimum square footage, concerned that investors will sell off the properties if the housing market starts to slide.
Because these units under 500 square feet are relatively new, no one’s tested the market to see how desirable they are. The major banks say the size of a property is only one of several factors in the decision to offer financing.
There are minimum square-footage guidelines that vary market to market, but the most important factor is the condo’s marketability. Marketability is determined by factors such as the building’s location, whether the unit has a separate bedroom and whether it comes with a parking spot.