Star: Condos are here to Stay - What's in store for housing 2011

[Mike in TO]

Crystal ball gazing

December 31, 2010
Tracy Hanes

Special to the Star

The condo will continue to be king among GTA new home buyers. But while highrise lifestyle will continue to be widely embraced in Toronto, it’s still problematic in the 905, where high land costs and development fees are stumbling blocks.

Those were the views of four leading GTA builders who shared their opinions with the Toronto Star in the publisher’s boardroom during a recent roundtable discussion moderated by Stephen Dupuis, CEO and president of the Building Industry and Land Development Association (BILD).

The four — Brian Johnston, president of Monarch Corp., Mark Reeve, partner in Urban Capital, Mimi Ng, vice president of marketing for Menkes Developments, and Paul Golini Jr., vice president of Empire Communities — also offered their take on other trends, including condos for families, the influence of the West Don Lands/East Bayfront on the Toronto condo scene and whether “green†features matter to buyers.

NEW NORMAL?

According to October figures from RealNet Canada Inc., seven out of 10 homes sold were highrise and for year to date, condos comprised 56 per cent of home sales in the GTA. Is there going to be a rebalancing or is that the new normal? Are consumer preferences changing?

• Johnston: “When my wife and I bought our first house it had a two-car garage and was on a 40-foot lot in Pickering. The dream has changed. Traffic is a real problem and how you’re going to get to work is an overriding concern. Condos are much better designed and not as large as they used to be. In the 1980s and ’90s, they used to be much larger and the finishes weren’t great. Condos are much better designed and the level of finishes has improved dramatically. But to keep prices affordable, suite sizes have shrunk. Condos are small but they are jewel boxes. People have to sacrifice big for better.â€

• Ng: “I think there are multiple factors and one is affordability. Our market is a very mature condo market and they understand the lifestyle and recognize the advantages. The maintenance-free aspect is huge and we’ve exploited this. The market is embracing the condo lifestyle and we’ve created a generation of move-up buyers who bought 500-square-foot units five years ago and now want 800 square feet. Our industry has been able to provide condo living in a full range of locations and it’s not just a downtown phenomenon. We are actually meeting market demand, with a whole variety of neighbourhoods catering to first-time buyers, move-up buyers, empty nesters and people who want to age in their neighbourhood and don’t want to leave their community.â€

• Reeve: “There’s excellent availability of product and a lot of great choice. The industry has matured over the last five to 10 years to a great degree in terms of style, design, interior finishes and architecture. We have landmark architecture, iconic architecture. We realized design drives sales.â€

• Golini: “We’re seeing the condo market represent maturity in housing when it comes to people’s preferences. Europeans have lived this lifestyle for thousands of years. I think that type of living is mainstream and we’re seeing great representations of sales, marketing, design and community design. The quality’s there.â€

CONDOS IN 905

More condominiums are selling in the 905. Are you as builders looking at 905 sites (to develop) and where is next hot spot?

• Golini: “Typically, the 905 is tough for us to make the numbers work because you’re working with fixed costs. You’re dealing with development costs and levies that don’t differentiate between the 416 (where most projects are multiple unit) and the 905. You have to be more creative in the 905. We’ve had some success in Richmond Hill and we’re launching in Oakville. It is becoming more acceptable in the 905 for those who don’t want to live downtown and are looking for their first home. It offers an affordability option in those submarkets.â€

• Johnston: “I’m not a big fan (of building condos) in the 905 area. It’s difficult to make the numbers work. Land costs are high because some of the land sellers believe what they receive should be close to what Toronto land owners receive and they don’t want to hear about your problem with development charges. I think there’s a lack of really good locations compared to the 416. I think condo sites should be unique, they should have views and have access to transit, views, shopping or parks.â€

• Reeve: “We’re exclusively 416 builders and we’ve been doing condos in Ottawa and Montreal also in the downtown. Inevitably, we will develop in the 905 and we’re working now on a very large site in Mississauga. As an industry, like it or not, we are all going to be there in a large way in 10 years.â€

• Ng: “The past decade or so we’ve been strictly 416 (for condo developments). With development charges, the numbers don’t work unless you have a really special site. In the future, we do have to go there. I think you are going to see a lot of activity in established areas like Mississauga, along the waterfront and probably around GO stations, where there are a lot of sleeper sites.â€

FAMILY LIVING

Are condos becoming more popular with families with children? Do they want to live there?

• Ng: “It is still a relatively small component of the population. A lot of it is affordability driven. We have two towers (Luxe) at Yonge and Finch and there are a lot of young families there. Condo marketing is typically very sexy, geared to young urban professionals but the reality is we do have people with young children who live in condominiums.â€

• Reeve: “In the 416, the demand is still young professionals, empty nesters, investors. Where it’s changed is the 905. In Mississauga, you see a lot of families. In the 905, it has become an alternative to lowrise. I think it’s become the alternative to lowrise in many respects and invariably we will see more and more families moving to condominiums.â€

• Johnston: “In our buildings, the last units to sell are the biggest units. The investors who are driving market to a great extent are not interested in large units because they are difficult to rent. It’s an inevitable trend. As prices continue to escalate you’ll see condos becoming larger because there are no single-family homes being built in Toronto other than million-dollar plus product. The market will tell us. This is where I get annoyed with certain politicians trying to dictate unit sizes. What we want to do is sell our product and we will respond to what the market tells us.â€

• Golini: “We will see families eventually living in the downtown core. In Richmond Hill, we have families purchasing, a large percentage of new immigrants.â€

WEST DON LANDS/EAST BAYFRONT

What impact will the development of the West Don Lands/East Bayfront have on the rest of the 416?

• Golini: “There’s a new planning approach. It’s now a community approach, a larger vision, instead of what we’ve seen in the city, which is project by project. Purchasers welcome that approach to community planning.â€

• Ng: “It’s really exciting, a fabulous opportunity for the city to create entirely new neighbourhoods close to the core. It’s hard to comprehend that in the time frame, there will be that much new product.â€

Reeve: “The east end is already a proven location with Corktown and the Distillery District. The new place to be is the east side of Yonge. Our River City project first phase sold quickly and there are other excellent projects coming along. The whole area is going to change and it’s going to be a wonderful neighbourhood to live in.â€

• Johnston: “I’m a big fan of the waterfront. One of the issues we’ve run into are more about retail services for condo owners and making sure they have a place to buy groceries. I observe a lot of public sector development and that tends to slow all that development down.â€

MIDRISE

When it comes to midrise, politicians are infatuated with it, developers aren’t. What about buyers?

• Ng: “They don’t demand it because they don’t see it. If I have a given piece of land, we can build a tower with green space around it or build a block of townhouses. Most people would rather have a tower and more greenspace. We don’t give people the full context.â€

• Golini: “We’re dictated by numbers and in the end, the proformas have to work. We have to respond to consumer wants and have to balance that with getting returns. We do see it as a trend and you will see more of it.â€

• Reeve: “People would rather live up high than low because they want the views. It’s location driven. If you’re next to a lowrise neighbourhood, you’re not going to do a 35-storey tower. It is more an empty nester product and they tend to be higher end, more traditionally designed.â€

• Johnston: “In smaller buildings, you lose a lot of the amenities. You are not going to get a fancy fitness centre or the theatre. There are trade-offs.â€

GREEN

Are condo buyers embracing “green�

• Ng: “I don’t think it’s a number one priority. They’ll embrace green as long as it doesn’t cost more.

• Reeve: “People are asking about it in our sales office. It’s our future and we have to embrace it one way or another.â€

• Johnston: “I don’t think it’s a priority. There are too many labels, frankly. The thing I struggle th is where is the hard data on consumers saving money? I don’t see it yet. We’re not there yet.â€

• Golini: “I don’t think green is driving the consumer preferences when it comes to making a buying decision, but it adds to the value proposition. But mandatory green building standards are here to stay and we need to work with them. There’s a need for education and communicating with the buyer, just like with a hybrid car, they need to be educated on how to drive it.â€

 

[Torontovibe]

Speaking of condo's, I figured a few of you guys might be interested in this video.
[video=youtube;t6l612ss6_w]http://www.youtube.com/watch?v=t6l612ss6_w[/video]

 

[taal]

The bit about the 905 is more interesting then it seems at first ... it hints to why we see little in the way of offices and they see more ... you make more money from condos in Toronto compared to commercial space - I don't think the same can be said about the 905.
It's interesting that they have more development charges as well (that doesn't exist in Toronto) yet it's still profitable to build office space, that really speaks magnitudes to the tax difference and land values.

And of course it's better to build in the 416 (condos) for the same above reasons (and taxes are lower ... although that doesn't really factor in as it doesn't effect what a developer can make really).

 

[Mike in TO]

It's interesting that they have more development charges as well (that doesn't exist in Toronto) yet it's still profitable to build office space, that really speaks magnitudes to the tax difference and land values.

Taal, up to Jan 31, 2011 Toronto development charges for a two bedroom and larger condo unit is $7,613 and for a one bedroom or bachelor is $4,731. The charges will go up on February 1st to $9,040 for two bedrooms or more and $5,823 for a one bedroom or bachelor unit. These charges are certainly less then the 905 where they've gotten kind of silly even for multi unit buildings (a single family home in Milton or Oakville is in the $60k per unit range) and parkland dedication for multi unit is also a major issue in the 905 which discourages intensification. Despite being lower then the 905, development charges are a fairly significant revenue source for the City of Toronto in addition to numerous other taxes, fees and charges as well as the growth in the annual property tax assessment base.

 

[Glen]

Taal, up to Jan 31, 2011 Toronto development charges for a two bedroom and larger condo unit is $7,613 and for a one bedroom or bachelor is $4,731. The charges will go up on February 1st to $9,040 for two bedrooms or more and $5,823 for a one bedroom or bachelor unit. These charges are certainly less then the 905 where they've gotten kind of silly even for multi unit buildings (a single family home in Milton or Oakville is in the $60k per unit range) and parkland dedication for multi unit is also a major issue in the 905 which discourages intensification. Despite being lower then the 905, development charges are a fairly significant revenue source for the City of Toronto in addition to numerous other taxes, fees and charges as well as the growth in the annual property tax assessment base.

All to often development fees are looked at from the revenue point of view. Development charges are (at least supposed to be) revenue neutral. They reflect the the capital cost of the added infrastructure needed to support new development.

The new Development Charges Act, 1997 contains clear direction on how development charges will be calculated. The essential steps that are necessary to create a development charge by-law are explicitly described in the Act. The municipality must determine the:


•anticipated amount, types and location of development
•increase in need for service attributable to growth, where council has indicated an intention to ensure such an increase in need will be met
•eligible capital costs of services attributable to growth, based on a definition of "capital" costs that includes the costs of acquiring, leasing, constructing or improving the necessary land, buildings and structures; certain eligible capital facilities (rolling stock with seven plus years' lifetime, furniture and equipment not including computer equipment, and library materials for circulation); interest on money borrowed for such purposes; costs of associated studies and the cost of development charges background studies
•the average service level attained over the last 10 years, defined in the regulation to be the average level of all similar facilities where these have been provided in the municipality (i.e., not just a selection of similar reference facilities that were built to the highest service levels in previous years); average service level however can be adjusted to take into account legislated standards.
•actual increase in capital costs, less any attributable existing surplus capacity
•the portion of the increased capital costs that will benefit growth as opposed to being triggered by growth
In addition, the municipality must reduce the capital cost estimate by:


•any applicable grants, subsidies or contributions to the municipality toward the capital costs concerned
•the 10 per cent discount from growth related capital costs, unless listed as one of the services not requiring the 10 per cent discount

Or from the legislation itself..........

Determination of development charges

5. (1) The following is the method that must be used, in developing a development charge by-law, to determine the development charges that may be imposed:

1. The anticipated amount, type and location of development, for which development charges can be imposed, must be estimated.

2. The increase in the need for service attributable to the anticipated development must be estimated for each service to which the development charge by-law would relate.

3. The estimate under paragraph 2 may include an increase in need only if the council of the municipality has indicated that it intends to ensure that such an increase in need will be met. The determination as to whether a council has indicated such an intention may be governed by the regulations.

4. The estimate under paragraph 2 must not include an increase that would result in the level of service exceeding the average level of that service provided in the municipality over the 10-year period immediately preceding the preparation of the background study required under section 10. How the level of service and average level of service is determined may be governed by the regulations. The estimate also must not include an increase in the need for service that relates to a time after the 10-year period immediately following the preparation of the background study unless the service is set out in subsection (5).

5. The increase in the need for service attributable to the anticipated development must be reduced by the part of that increase that can be met using the municipality’s excess capacity, other than excess capacity that the council of the municipality has indicated an intention would be paid for by new development. How excess capacity is determined and how to determine whether a council has indicated an intention that excess capacity would be paid for by new development may be governed by the regulations.

6. The increase in the need for service must be reduced by the extent to which an increase in service to meet the increased need would benefit existing development. The extent to which an increase in service would benefit existing development may be governed by the regulations.

7. The capital costs necessary to provide the increased services must be estimated. The capital costs must be reduced by the reductions set out in subsection (2). What is included as a capital cost is set out in subsection (3). How the capital costs are estimated may be governed by the regulations.

8. The capital costs must be reduced by 10 per cent. This paragraph does not apply to services set out in subsection (5).

9. Rules must be developed to determine if a development charge is payable in any particular case and to determine the amount of the charge, subject to the limitations set out in subsection (6).

10. The rules may provide for full or partial exemptions for types of development and for the phasing in of development charges. The rules may also provide for the indexing of development charges based on the prescribed index. 1997, c. 27, s. 5 (1).

---------

It should also be noted that while new development does increase the assessment base, in the case of residential it increases the operating expense even more. It is a net loss for the city.

 

[taal]

Taal, up to Jan 31, 2011 Toronto development charges for a two bedroom and larger condo unit is $7,613 and for a one bedroom or bachelor is $4,731. The charges will go up on February 1st to $9,040 for two bedrooms or more and $5,823 for a one bedroom or bachelor unit. These charges are certainly less then the 905 where they've gotten kind of silly even for multi unit buildings (a single family home in Milton or Oakville is in the $60k per unit range) and parkland dedication for multi unit is also a major issue in the 905 which discourages intensification. Despite being lower then the 905, development charges are a fairly significant revenue source for the City of Toronto in addition to numerous other taxes, fees and charges as well as the growth in the annual property tax assessment base.

Curious, how does this all factor into making office space more desirable in the 905 (from a developers point of view) ? Is it just the tax difference ? - Aren't taxes simply charged to the tenants as 'operating costs' i.e. usually rents have two portions (the fixed rent) + (operation costs) which include among other thing taxes ?

If that's the case developers should like developing in the 416 just as much as the 905 - but then the difference may be they cannot find tenants (outside of the core) to populate any new space. Just curious if there are any other factors ?

I also recall land value in the 905 is considerably higher then one would expect (and a lot of areas in Toronto have lower land value) ?

 

[Glen]

Curious, how does this all factor into making office space more desirable in the 905 (from a developers point of view) ? Is it just the tax difference ? - Aren't taxes simply charged to the tenants as 'operating costs' i.e. usually rents have two portions (the fixed rent) + (operation costs) which include among other thing taxes ?

If that's the case developers should like developing in the 416 just as much as the 905 - but then the difference may be they cannot find tenants (outside of the core) to populate any new space. Just curious if there are any other factors ?

I also recall land value in the 905 is considerably higher then one would expect (and a lot of areas in Toronto have lower land value) ?

Gross rents are similar, it is the net rents that differ. This is because of the taxes. As such an office building in Toronto will produce less net revenue for the owner, and be valued accordingly.

I covered this a while ago using the TEDCO report .......

There are countless reports that finger taxes as the determining factor. Furthermore, commercial land in most of Toronto is cheaper (with some exceptions). The city of Toronto contracted Hemson Consulting to look into the issue they found .........

The comparison is for developing a 10 story , 100,000 sq. ft. office on 3.8 acres of land. The hard construction cost are the same for each location. The largest differentials are land and development fees. In Mississauga, the land is 250,000 more and the development fees are 800,000 more. The net cost per sq. ft. to develop is $164.06 in Toronto vs. $186.34 in Mississauga. Net rental rates (before TMI) are $13/per sq. ft. in the Toronto vs. $17 in Mississauga. Gross rents are not listed but are probably close to one another.

The taxes are an interesting matter. Despite Toronto's rate being much higher, nearly twice the amount, it does not generate twice the revenue. The higher taxes get capitalized into the value of the building. Toronto's higher rates are applied on lower assessment values. Which is why, despite the savings in developing in Toronto, the market value of the building is less. It might also explain why there is a difference in the gross rents. In Toronto they must be lower so as the tenant can afford the higher taxes. Leaving net rates about the same.

So developers look at it from this perspective, even though land and development fees cost more in Mississauga, the cost can be recuperated and a profit can be made. Not so in Toronto. In the proformas, it shows that building such an office in the city is not feasible. In Mississauga, despite paying far more for land and an additional 800,000 in development fees, a developer is can make a profit. Conversely in Toronto with cheaper land and development fees, such an office would be worth less (~4 million less) and not be profitable.

You might also want to take a look at industrial properties near the city borders like this comparison...

 

[taal]

Gross rents are similar, it is the net rents that differ. This is because of the taxes. As such an office building in Toronto will produce less net revenue for the owner, and be valued accordingly.

I covered this a while ago using the TEDCO report .......

There are countless reports that finger taxes as the determining factor. Furthermore, commercial land in most of Toronto is cheaper (with some exceptions). The city of Toronto contracted Hemson Consulting to look into the issue they found .........

The comparison is for developing a 10 story , 100,000 sq. ft. office on 3.8 acres of land. The hard construction cost are the same for each location. The largest differentials are land and development fees. In Mississauga, the land is 250,000 more and the development fees are 800,000 more. The net cost per sq. ft. to develop is $164.06 in Toronto vs. $186.34 in Mississauga. Net rental rates (before TMI) are $13/per sq. ft. in the Toronto vs. $17 in Mississauga. Gross rents are not listed but are probably close to one another.

The taxes are an interesting matter. Despite Toronto's rate being much higher, nearly twice the amount, it does not generate twice the revenue. The higher taxes get capitalized into the value of the building. Toronto's higher rates are applied on lower assessment values. Which is why, despite the savings in developing in Toronto, the market value of the building is less. It might also explain why there is a difference in the gross rents. In Toronto they must be lower so as the tenant can afford the higher taxes. Leaving net rates about the same.

So developers look at it from this perspective, even though land and development fees cost more in Mississauga, the cost can be recuperated and a profit can be made. Not so in Toronto. In the proformas, it shows that building such an office in the city is not feasible. In Mississauga, despite paying far more for land and an additional 800,000 in development fees, a developer is can make a profit. Conversely in Toronto with cheaper land and development fees, such an office would be worth less (~4 million less) and not be profitable.

You might also want to take a look at industrial properties near the city borders like this comparison...

The one thing I'm still not quite understanding - how does this factor into the 'development' aspect - i.e. the tenants end up paying the higher rents (i.e. the tax) - not the developer of the office building or the owner i.e. both should care less (and actually as you point out stand to make more due to the lower development fees). Is the issue they need to lower the rental rates (i.e. due to tax) otherwise no one would lease ? In that case I can see that owning the property wouldn't yield as much.

But given land is less and there are less development fees they should have room to charge a little less rent in Toronto and still come out even. But I guess not 1.7 X less (which is the tax difference):
T = Toronto, M = Markham.
T = 3.59
M = 2.14

T/ M = 1.68X

Note that Markham has just about the lowest - Mississauga is closer to 2.35).

I think this is set to change in 2014 though as the provincial component should be reduced - i.e. for Toronto to Match Markham's the total tax rate would be reduced by 0.372 i.e.
T (2014) = 3.22
M (2014) = 2.14
T/M = 1.5X

Still pretty bad ... you were suppose to talk to our new mayor no ?

 

[Glen]

The one thing I'm still not quite understanding - how does this factor into the 'development' aspect - i.e. the tenants end up paying the higher rents (i.e. the tax) - not the developer of the office building or the owner i.e. both should care less (and actually as you point out stand to make more due to the lower development fees). Is the issue they need to lower the rental rates (i.e. due to tax) otherwise no one would lease ? In that case I can see that owning the property wouldn't yield as much.

Gross rents are price elastic towards tax. That is to say that if taxes go up and services remain the same, net rents will lower leaving gross rents unchanged. You also must keep in mind that many of the higher expenses outside of Toronto, like land costs, development charges, are one time charges. The property tax differential is continual of it burden is multiplied.

If you really want to see the shortsightedness of Toronto's policies, go over the proformas in the Hemson Report and tally up the total revenue for each municipality in the Consumers Rd. vs. Airport Corporate Centre. Over the three year development time frame Mississauga will generate $ 992,645 in revenue. Toronto would generate $110,153. Toronto's higher tax rate will not allow the city to recapture the difference (not in any reasonable time frame anyway) because the assessed value of the property would be lower in Toronto.

 

[taal]

Gross rents are price elastic towards tax. That is to say that if taxes go up and services remain the same, net rents will lower leaving gross rents unchanged. You also must keep in mind that many of the higher expenses outside of Toronto, like land costs, development charges, are one time charges. The property tax differential is continual of it burden is multiplied.

If you really want to see the shortsightedness of Toronto's policies, go over the proformas in the Hemson Report and tally up the total revenue for each municipality in the Consumers Rd. vs. Airport Corporate Centre. Over the three year development time frame Mississauga will generate $ 992,645 in revenue. Toronto would generate $110,153. Toronto's higher tax rate will not allow the city to recapture the difference (not in any reasonable time frame anyway) because the assessed value of the property would be lower in Toronto.

'Gross rents are price elastic towards tax. That is to say that if taxes go up and services remain the same, net rents will lower leaving gross rents unchanged'
hmm, that seems odd- why is that ? I thought when contracts are signed only the net rental (ignore my ignorance when it comes to terms here) i.e. portion without tax or operational cost is fixed - everything else can vary - likely per year as that's the only time taxes will change anyway ... so if taxes go up one year they may more rent. Or your saying for the length of the contract that doesn't happen ?


Here's another question, which came first ? - to gain more revenue, the city needed to raise commercial rates at some point in the past (by a large amount) - after a while the effect of this was land values go down - so technically for the city to raise just as much cash from commercial properties they need to increase the tax even further ? Is it a cycle that we're stuck in ?

 

[Glen]

'Gross rents are price elastic towards tax. That is to say that if taxes go up and services remain the same, net rents will lower leaving gross rents unchanged'
hmm, that seems odd- why is that ? I thought when contracts are signed only the net rental (ignore my ignorance when it comes to terms here) i.e. portion without tax or operational cost is fixed - everything else can vary - likely per year as that's the only time taxes will change anyway ... so if taxes go up one year they may more rent. Or your saying for the length of the contract that doesn't happen ?

No, commercial tenants are very aware of the tax burden as it can up to 50% of the gross rent. At lease commencement they would inquire about the rates and account for any expected changes.

Here's another question, which came first ? - to gain more revenue, the city needed to raise commercial rates at some point in the past (by a large amount) - after a while the effect of this was land values go down - so technically for the city to raise just as much cash from commercial properties they need to increase the tax even further ? Is it a cycle that we're stuck in ?

Partly, but the move to CVA and the failure to fix the ratios during that time are the real reason.