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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Have we reached the cliff? In my August editorial, I outlined the limited number of land sales by mid-quarter in the high rise sector. I counted 10 transactions at that time. That may not be too unusual as I often find that closings increase closer to the end of the quarter so I just made a cautionary note in my mind that transactions may be off. So I waited till today, September 25, to see where things stand. Surely sales volumes are up closer to the norm of 45 to 55 transactions. Well, not really. With 5 days left in the quarter, I noted only 19 deals so far. In fact, there have been no recorded sales in the past 7 days. Needless to say, unless every real estate lawyer in this city is working on a closing for the end of the month, we may have reached a turning point in the land side of the condominium/high-rise sector.
Oh, and just to make sure, I checked the other sectors that I follow. The office sector shows 65 trades so far, over the norm of 45 to 50. The retail sector is pushing 100 deals, a little lower than normal but not far off while industrial records 124 trades so far, a normal flow for a quarter. So it doesn’t appear that our commercial sector has shut down so why are high-rise sales down?
Firstly, developers have been pretty good at finding opportunities at times when we felt that there can’t be any land left to acquire, so I will discount lack of product as a potential answer. What I have found in my general canvass of developers over the past few weeks was a rather uniform response. Firstly, the measures put in by the government to cool the real estate market have done their trick. First time buyers are having a hard time meeting the stress test for a mortgage, which requires them to manage mortgage rates 2% higher than market. With rising interest rates on the horizon, I read in the news last week that Tim Hudak, now in charge of the Ontario Real Estate Association, was lobbying government officials to do away with the test. Further, the foreign buyer’s tax hasn’t helped sales volumes either, although Montreal might be winning because of this tax levied in Toronto and Vancouver is sending these buyers further east.
From a developer’s perspective, we’re getting closer to where LPAT will be taking on new development applications as they whittle through the ones that were in line for an OMB hearing. As the outcome of an application is a great unknown, developers are keeping their cash in their pockets until a guinea pig runs through the process.
Let’s also add in the cost of construction. It’s getting hard to hit the market at anything less than $1,000 per square foot anywhere south of Lawrence along the subway line. Add to that number tariffs from the US on building materials, increased development charges, and the endless delays to get a building permit. You begin to understand why we have now had a major project shelved in Vaughan this year when the developer’s proforma is far different than it was two year’s ago when the sales centre opened.
But what’s really holding cash in developer’s pockets are the expectations of vendors. And it’s not just in this sector, it’s a disease throughout the Toronto commercial real estate market, especially if you’re a vendor and don’t understand the term IRR. I recently made an off-market offer on a large, development site in the east end of the city. The owner was seeking a price, at that time, of $65 million. The best my buyer could do, and they were stretching, was $50 million. This was before LPAT was announced. So, being the dutiful agent, I approached the vendor again to see if there might be a change of heart with respect to his pricing expectations given this major news. He agreed that things had definitely changed, the price was now $100 million! From his perspective, this was only good news and that his anticipated site density would only improve. How one could read that conclusion from the mandate of LPAT is totally beyond my comprehension. Yet, ladies and gentlemen, that’s a normal day for an agent trying to put two parties together to strike a deal. Care to walk in my shoes?
I was around through the 1980s and 1990s. I saw the blood on the streets then and life looks eerily similar today. The difference I note now is that investors appear to be holding back on writing cheques and are being more conservative. This might save the industry from the cliff.