I attended the GoReal Private Equity Real Estate Forum on May 10, 2018. Although I missed the first speaker I was there in tie for condo developers panel with Sam Mizrahi, Stuart Wilson, David Minor and Brad Lamb. It was a spirited discussion on the state of the market in Toronto and the GTA. They noted that their is a 35,000 unit shortage this year and they are concerned that this will not be made up.
Cost to Build is Going Up
Selling price of condos has reached $1250/sf and is expected to climb to $1400/sf next year. Costs are up over 30% in the last 18 to 24 months. Cost acceleration is due to increased development fees and levies, increased time to market, increased material costs and a skilled labor shortage. As well land prices continue to escalate in the key development areas in central Toronto. Land is now considered a speculation play. The increased costs are squeezing margins to below 20-25% which in turn is increasing the economic risks of projects.
The foreign buyers tax is hurting the pre-purchase market. Doug Lamb mentioned how this funding helps get the projects off the ground and this money is drying up. As well the restrictions on borrowing are considered one of the great blunders by the Feds. This combination is making Toronto a expensive and riskier market. Several projects have been cancelled as the economics no longer work and the panel expects up to 25-30 projects to be shelved this year in the GTA. It is impossible to build in Toronto for less than $600/sf.
A lot of scorn on the City of Toronto and the Provincial Wynne Liberals. The City has been quietly deeming buildings historic structures in the middle of blocks while government land and housing policies are pushing up costs and time to completion. The general consensus is that building is going to slow in Toronto proper. They are looking outside Toronto to the west to Hamilton, North to Vaughan and east to Pickering.
Apartment Build Market
The single purpose market is growing with the top market being KWC with Waterloo seeing 72 new buildings. London was next with 30 new building. London is a big rental city while much of the development in Waterloo is geared to student housing. Building in Toronto is $300-400,000 per door while outside $200-300,000 per unit complete. Until recent changes in the rental laws in Ontario Pension funds would invest but now with caps on increases these investment funds are drying up as the rent cap creates investment uncertainty. Greg Romundt of Centurion Asset Management outlined a financing model for single purpose building:
- 85% debt on building
- 15% equity of which 75% is invested by Centurian
- 3-5% by builder
This models works when builder has a track record of build and or operation. The market for buying single purpose building also slowing up as there is lots of product for sale but the cap is too low and therefore the numbers do not work. Success in single purpose is cheap land. Surface parking and 4 story wood construction.
General feeling is that single purpose building appeal to people more than condo rentals as they are focused on meeting the needs of this market. Rental needs are changing and they mentioned that buildings in the US are reducing kitchen size and offering restaurants in the building to provide meals. One Bloor East will be offering this type of amenity and service model. On a final note Sam Mizrahi the developer behind One Bloor East is extremely excited about this 90 story live, play work facility. All the retail has been leased, building is over 75% sold and they are moving forward.