I received an email from a gentleman last week, let’s call him Paul. Paul is a homeowner and a condo investor who I’ve worked with since 2007.
He actively follows current real estate trends via reading my blog, attending seminars and other available learning resources. On this occasion, he had some concerns about a Toronto Star article he read last week, and wondered if I had any feedback.
The article described two preconstruction condo projects that were recently cancelled by developers and, subsequently, converted into rental apartment complexes.
The first project, Kingsclub was slated to be a 639-suite complex by Urban Corp., in the King & Dufferin area. Sales began as early as 2011.
On the news of cancellation, purchasers were refunded their deposits (plus interest) and their sales agreement with the builder were rendered null & void.
As one might imagine, buyers were surprised & disheartened at the news, which came quite unexpectedly.
The second project slated to be built was a 49-storey, 441-unit downtown condo and townhouse complex called The Selby.
It too was cancelled and converted to a rental project, but unlike Kingsclub, the cancellation occurred prior to sales being finalized. Rumors have been swirling that a deep-pocketed institutional investor acquired the site.
The questions Paul had are as follows:
- Why the trend?
- What’s the impact on the rental market for owners/investors?
- What’s there to gain for builders?
1. Describing these two events, as a “trend” would not be accurate.
We would need to see a considerably higher number of builders getting on board and, more importantly, over a sustained period of time.
The merging of these factors are essential for this to be deemed a significant in the overall market scheme. That hasn’t happened yet.
2. It’s way too early to relate these isolated occurrences as having any real impact or bearing on the rental market for owners/investors. There are however, a few facts worth keeping in mind:
- Condos currently represent 99% of new rental supply in the GTA
- We’ve seen rents grow by about 20% over the past five years.
- In 2014, an astonishing 22,765 condo units were leased via the Toronto MLS system (excluding privately arranged rentals via sites such as kijiji/craigslist)
Further, it’s no secret that despite the demand, newer purpose-built rental apartments in the city’s core are very few in numbers.
As a result, condos have become the quintessential go-to-option in sealing that gap.
This is a major plus for investors as it shows the inherent strength and stability of the city’s rental. For end-users, the ratio of renters to owners will depend on a project’s per square foot pricing during the pre-construction phase.
Higher per sq. foot priced buildings usually attract a higher ratio of owners to renters as the carrying costs (mortgage, maintenance fees, taxes etc.) are more prohibitive, lessening the appealing to cashflow sensitive investor/landlords.
3. What’s there to gain for builders in going the rental conversion route?
Well, it depends on the individual builder/developer in question. Clearly the numbers had to make sense going the conversion direction versus the sticking to the original plan.
I would consider this a fairly risky move on the PR front. If the transition isn’t handled well, a builder’s reputation could suffer, affecting current projects in the pipeline as well as potentially stymieing the sales success of future projects.
It’s fair to surmise that the current status quo serves the developer/builder community very well. Recall that 2014 was the third best year for GTA New condo sales behind 2011 & 2007.
Are these two conversion episodes signs of a trend or fad? As always, the numbers tell the best picture. According to Urbanation, a leading condo analytics consulting firm:
- A total of 21,605 new condominium apartments were sold across the Greater Toronto Area during 2014.
- Inventory levels in active development projects were reduced by 10% during the year to a total of 17,972 unsold units.
- Measured against absorptions, the level of supply on the market fell to 10 months by the end of 2014, down from 16.5 months a year earlier and marking a return to balanced conditions.
- A record 20,809 condo apartment units were completed in 2014, bringing down the under construction count to 52,446 units from a high of close to 59,000 units a year ago.
- Remaining units under construction were 86% pre-sold at the end of the year.
- An additional 28,447 units were in pre-construction projects, of which 69% were pre-sold