Finding soft landings in a shifting landscape
Trends in the residential condominium market have been changing significantly in Toronto and Vancouver in recent years. Calls for more affordable new housing in the downtown areas of these two cities are almost an impossibility due to staggering land costs, rising construction costs, the lengthy approvals process, rising government fees, and other mandatory planning and design requirements.
In downtown Toronto, public Real Estate Investment Trusts (REITs) and large private equity firms are partnering with residential and commercial developers on mega-projects with a mix of uses. Condominium units in many of these projects will top $1,300-per-square-foot (psf), and rental apartments will likely be offered at $5 to $6-psf per month. Small developers will disappear from the downtown market, as will mom and pop investors, first-time buyers, and mid-market product.
Richard Wittstock, principal of Vancouver-based Domus Homes Group, notes that “In our downtown core, almost no one is building mid-market condos for investors or young singles anymore. Those dominated in the ‘90s and ‘00s, but now the neighbourhood is mature and everything is higher-end, and much is extremely so.” He points the finger at municipalities for accelerating that shift by “demanding ever-increasing complexity and exterior finishes on a building (even a rental).” These cladding requirements naturally translate to higher-end finishes on the interior as well, ultimately requiring extremely high prices and rents to make the numbers work.
Toronto’s new TOCore plan requires a certain percentage of suites in each new residential building (with 80 or more units downtown) to have large two bedroom and three bedroom suites. The intention of this plan is to attract more families downtown with these more generously-sized suites. This ‘complete communities’ concept has been pushed by Vancouver-area planners as well, and according to Wittstock, “Cities have been pushing for larger units for families, but these are really all being bought by empty nesters. Seeing lots of 1,300-1,400-sq.-ft. units with super high end finishes in the $2.0 million plus price, perfect for wealthy downsizers.”
With considerable barriers of entry due to land costs, and additional risks associated with prescribed upscale exterior features and finishes, and suite mix requirements that may not match market demand, many developers will look outside core markets for their next development opportunity. Many larger developers have shied away from boutique sites in neighbourhood settings due to a lack of economies of scale and local opposition. However, with skyrocketing pricing for single-family housing, perhaps these types of developments could prove fruitful again.
When looking at a sample of resale condominium apartment transactions over $1.5 million in the Greater Toronto Area, buildings with six or fewer storeys saw units trade for the lowest days on market, and the highest percentage-of-listing price. These two measures are indicative of a high level of demand in relation to supply. When looking at how much more the unit sold for in comparison to their assessed value, these low-rise condominium apartment buildings captured a significantly higher average premium.
The highest demand among these Toronto luxury condo resales were units between 1,400 and 1,800 square feet, and these units were generally priced in the $1,050 to $1,200-psf range. Two bedroom suites were the most popular, followed by two bedroom plus den suites.
Wittstock noticed a trend of Vancouver baby boomers trading down from large single-detached homes about 10 years ago in Yaletown, and even further back in Cole Harbour. As boomers hit 70 years old, there will be more demand for luxury move-down projects outside of the Yorkville and south Oakville neighbourhoods in the Greater Toronto Area, and a smart developer will capitalize on this future trend
As market movements, government regulation and financing conditions change, developers will have to think outside the box, as opportunities for cookie-cutter mid-market condominiums on old parking lots no longer exist.
Ben Myers is president of Bullpen Research & Consulting, a boutique real estate advisory firm that works with land owners, developers, and lenders to better inform them of the current and future macroeconomic and site-specific housing market conditions that can impact their active or proposed development projects.