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Today we present another guest post from Dean Macaskill, Senior Vice President at Lennard Commercial Realty. Dean has worked as a commercial realtor since 1980 and has years of industry insight into the Toronto real estate market. Having been through three cycles in the business, he has seen the highs and lows. He shares some of his insider information and insights with UrbanToronto on a semi-regular basis.
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As the cold and snow have been threatening us since the end of the 3rd quarter, I thought it a good time to reflect on where we sit in the 4th quarter with respect to high rise land sector sales before we batten down the hatches for the year.
As a bit of a refresher, in my 3rd quarter report, I sounded the alarm bells as only 19 properties traded hands in the high rise land sector between July 1 and September 30. This was a record low level of transactions in a sector that normally posts between 45 and 55 sales over $1 million. In as much as a recession is calculated by 3 to 6 months of negative economic results, this same metric could be used in assessing the health of the commercial real estate market or at least a subset within that set.
So where do we sit today with three weeks left to go in the quarter? To date, there have been 28 high rise land sales since October 1, a great improvement over Q3. Three of those trades have been substantial, over $50 million each compared to a high in Q3 of just over $40 million. So that’s the good news and maybe you wipe the sweat off your brow and say we dodged a bullet. Yet 28 sales are still down on the norm, almost by half if you use 50 trades per quarter as your marker. Before we run for cover, there are a few weeks left and the number of trades that tend to occur in the last week of the year can be substantial. So it might be best to have some concern but maybe not enough to put off holiday purchases.
What is troublesome is the decline in high rise unit sales. New unit condominium sales were just over 4,000 units last quarter while year to date sales were around 14,000. Compared to 2017, unit sales by the end of the third quarter were an astounding 25,839, based upon Urbanation’s 3rd Quarter report. The Bank of Canada held firm on interest rates this week but a ¼ point rise the last time around didn’t add to buyer confidence. I’m also following insolvency stats and noting that some developers are going down, suffocating from too much debt while some less scrupulous mortgage funds are going under and taking your parent’s retirement funds with them.
Counter to these concerns, the Ford government lifted rent controls on new-build apartment buildings, so that should put the wind back in the sails of developers that may have been sitting on the fence with whether to continue with apartment development or sell the units. I’m on the side of the ledger that believes in lifting controls so that you encourage development. I was taught basic economics in high school that preached the gospel of supply and demand and I still believe in it. For those hoping for rent relief, if the rules of economics apply and knowing how many developers flock to build the new “thing”, we should see an oversupply of units that will work toward equilibrium and maybe an oversupply that could reduce rents. At the moment, we are in catch up mode. A seminar put on by Urbanation a week ago outlined where we stood in keeping pace with the market for rental product. They indicated that the market needs, approximately, 20,000 new units a year to meet demand. Currently, we are falling short of that but a rather large margin. They estimated that, approximately, 3,000 units were being added to the yearly inventory by condo unit investors and about 10,000 units were purpose built. One can hope that supply will, at the very least, eventually catch up to demand and potentially exceed it.
So good news on the rental front but now let’s temper that with the ever-changing world of city planning. I just read a recent report on Midtown, specifically Yonge and Eglinton, which might be a template for other, rapidly developing nodes. King West comes to mind as I write this. One line that I read in the report indicated a required setback between buildings of 30 metres. So when you have a market that is running out of development options and you’re assembling postage stamp sites, you might have to stand back and question if that’s such a good move as that little, 10,000 square foot site may not allow you to develop the property if you must maintain a 30 metre distance from your neighbour. That piece of dirt will likely remain a single family home or become a park dedication for a larger development nearby.
So, if you’re still not dissuaded from buying, despite all of the arrows being flung at you, let’s add mom and pop owners to the mix. If you’re in the know, then you likely have a good idea as to what you can pay for a site after reviewing recent approvals in the area, shadow effects of the site within the neighbourhood, the time to gain approvals and, most importantly, a guess on how LPAT will view your proposal since the OMB isn’t around anymore to settle the matter. Armed with this information, you approach the owners at their kitchen table and they kick you to the curb because you’re insulting them with your offer. Such offer is not really an insult, it’s based upon a factual calculation of what the site can yield but this owner likely has no knowledge of the planning process, senses you’re a slick developer or is using a slick agent, to rob them of their retirement funds. I have lived this brain damage that you go through trying to educate some owners as to the worth of their property. With ever-increasing barriers being erected to make it even harder to develop a site, values likely should be trending down as opposed to up.
So, I truly sense we are hitting that imaginary “wall” where unapproved sites will tend to sit while there will always be strong demand for shovel-ready developments. Construction costs continue to escalate, affordable units are to be included in virtually every new development and taxes have reached close to 25% of the cost of a unit. Yet we have a housing shortage despite the number of construction cranes in every corner of this city and we still can’t keep up with the demand for new housing.
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