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Toronto Condo Bubble About to Burst?

There seems to be a growing segment of the population and the media that feel that the condo market is about to see declining prices. I am getting more and more comments like, “I heard that prices are going to come down this year, so I’m going to wait until that happens then buy”. Based on this, I thought it was time for an update on the ever popular question of “How is the condo market doing?”.

I would like to specifically break down this quote from Benjamin Tal, Deputy Chief Economist for CIBC and resident MSM go-to guy for quotes on the real estate market in Canada. Tal is quoted as saying, “Prices are already softening, housing starts aren’t in the sky, MLS [multiple listing service] activity is starting to soften, so it suggests the market is already starting to level off”.

1. Prices are already softening. Really? Where exactly is this occurring? All I see are prices going up in the resale and pre-construction segments. There are far more buyers than sellers and average DOM (days on market) is still less than 30. Definite sellers market territory.
2. Housing starts aren’t in the sky. I’ve never understood why anyone bothers to look at housing starts as an indicator, other than on a year over year macro level. Housing starts go up and down with great volatility every month. Two new condo developments start selling today, one might break ground in 9 months, another in 19 months. One might take 18 months to build, another might be 26 months. Starting and selling and completing are three very different things. If someone can enlighten me on this metric I’d be much obliged.
3. MLS activity is starting to soften. I’m looking for a resale buyer who thinks this is true. Please contact me immediately if you feel that you have more than enough choices of quality, well priced listings fitting your search criteria! All I see when I’m on the ground every day with buyers is a shortage of listings and anything that hits the market with any sort of quality will sell over asking in multiple offers.

I would love to take Tal along with me as I search for properties (both condos and freeholds, pre-construction and resale, investors and end-users) for my buyer clients. I’m quite sure that after a day or two his opinion on the Toronto real estate market would change dramatically.

Please don’t get me wrong though-a slow down in our market would probably be a good thing after the run we’ve been on since March 2008. It would breathe some much needed life into the entire industry, however, I just don’t see it happening any time soon unless there is some dramatic shift in the market. I still stand by my comments I made in July 2011 on the market. Unless there is a rapid change in interest rates and/or a major economic catastrophe, the Toronto real estate market and the condo market in particular will continue on its current path which is presently appreciating at about 8% per year.

Those are my thoughts. What about you? Contact me or leave a comment.

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Top-5 Disadvantages of Living in a Brand New Condo

When I have my first conversation with a new buyer-client, I often hear them say, “I want something brand new, never lived in!”. While I can definitely resonate with the appeal of moving into a brand new space, there are some notable drawbacks with living in a brand new condo. Here are my top-5 Disadvantages of Living in a Brand New Condo:

1. Property Management Issues. New buildings have plenty of ‘kinks’ that need to be worked out. Property management can be stretched pretty thin and your individual needs may not be a priority if there are significant building issues going on. Also, the property management company in a brand new condo is one hired by the developer. Many condo boards feel the need to fire their property management group and hire their own independent third party to manage the building.
2. Incomplete common areas. This is big one especilaly if you are on a lower floor and you are facing a long occupancy period. The common areas and the amenities are the last thing the developer will complete. Worst case scenario: it could be months or even a year before you can use your gym, party room etc.
3. Tarion warranty visits. You do your PDI (pre-delivery-inspection) and you find all your unit’s deficiencies, then you move in a couple days later. Chances are there is a long list of items that will need to be remedied. These will be done piece-meal over several weeks or possibly months. You will have painters and plumbers and handymen of all kinds entering your unit on a regular basis until this work is done.
4. Maintenance fees have nowhere to go but up. The initial maintenance fees are set by teh developer, and almost universally they are set far too low. After the first year of a new building it’s quite common for fees to go up 10-15%, but it can be much higher. Moving into a brand new building means uncertainty of what the maintenance fees will be in the near future. Established buildings are generally more predictable when it comes to maintenance fee increases.
5. Hidden expenses. Buying a brand new condo means you will have to buy some things that most resale buyers take for granted. Things like window coverings and light fixtures are not included when buying from a builder, but they are essentially ‘must haves’ in any apartment. Depending on your preferences these can cost a few hundred dollars to tens of thousands of dollars; money that you will not necessarily get back when you resell your unit.

Questions or comments about living in a new condo? Debating between going with a resale unit or buying new? Please contact me.

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Warning Signs in the Ultra-Luxury Market

There are some signs of cracks forming in the foundation of the ultra-luxury condo market in Toronto.

Two months ago I wrote a blog post about the Absorption Rates at some downtown condos, and how units at brand new, high-end buildings are not selling. At that time, there was a 30 month supply of inventory on the MLS for the Ritz Carlton. Today, the situation at the Ritz is actually slightly worse. There have been 2 sales in the last 60 days and there are 33 units available for sale meaning there is 33-months’ worth of inventory.

This statistic alone would not be comforting for anyone watching the luxury condo market closely, however, it gets worse. There have been 5 sales at the Ritz Carlton registered on the MLS since the building registered in the summer. The first 3 sales were in the summer and they averaged around $914 per square foot. Then a unit sold in September for $865PSF. Now just last week a unit sold for…wait for it…$728PSF! An incredible number when you consider the developer was marketing units there at $1200+PSF just 1 year ago. Also incredible when you consider ordinary buildings that do not have a 5-star International Hotel chain in them are selling for close to the same price per square foot.

Why is this happening? A few theories I have heard:

1. Toronto is fundamentally not a high-rise city, at least not yet. Those with $5M+ in assets still prefer good old Rosedale or Forest Hill over downtown. Eventually this may change, but right now it looks like it has not.
2. There is just not enough money in Toronto. All these suites at the Big-4 (Ritz, Trump, Shangri-La, Four Seasons) were sold to speculators thinking they could flip them to local buyers after completion, but there just aren’t enough buyers to go around for all 4 of these projects finishing around the same time (2o11-2012).
3. Toronto is not New York or Hong Kong. Brands like Ritz, Trump, Shangri-La have no cachet here (what about the made-in-Canada Four Seasons brand?). Hat tip to @BrianPersaud for this point.

Implications:

1. If you bought a condo at $1000+ per square foot and it is not located in Yorkville, you should be worried. If you bought a condo at $1500+ per square foot I honestly think you are in serious trouble.
2. It’s still better to buy 3 condos at $300K each for investment than it is to buy 1 at $1M.
3. If you are trying to sell a unit in one of the Big-4 this year or next year, be patient! You may be better off renting out your property for a few years until the dust settles and all 4 of the Big-4 are completed and registered. This will also allow time for the buildings to distinguish themselves from the average Toronto condo in the minds of condo buyers.
4. If you are a buyer looking in the luxury market, especially an international buyer, you this is a great time. You can pick up one of the nicest properties in Toronto for only slightly more per square foot than the average middle of the road stuff! Time to go shopping! (contact me

Questions or comments? What do you think is going on in the luxury market in Toronto? Please contact me or leave your thoughts in the comments section below.

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Cap Rates and Condos

I had a condo buyer email me recently and tell me they were looking to buy a resale condo with a 6-7% cap rate. This would be a somewhat rare but achievable cap rate if you were buying a multi-unit freehold property in the core of Toronto, however, for a condo, this kind of cap rate is unheard of. Cap rates for condos downtown would be something more like 3%.

Cap rate, or capitalization rate, is basically a measure of return on an investment property you would get if you bought the property with all cash (no debt/no mortgage). It is calculated by dividing the annual income a property generates AFTER expenses by the purchase price of the property. So if a property that costs $300,000 generates $2000/month after expenses, then the cap rate would be 8%.

What are cap rates like for Toronto condos? Take for example the listing that I have at 16 Yonge Street right now. The numbers break down like this

• Asking Price $329,900
• Current tenant pays $1575/month
• Expenses: Maintenance fee $327/month, taxes approximately $167/month, insurance approximately $20/month = $514/month

So if you do the math it works out to ($1575 – $514)*12 / $329,900 = 3.8% cap rate. This is actually a very good cap rate as the rent:price ratio for this unit is quite high compared to most downtown condos, and the maintenance fees and taxes are relatively low. To acheive a cap rate of 6%, the rent would have to be increased to about $2200/month if the expenses stayed the same. Finding a condo that you can buy for $329,900 that will rent out for $2200/month is basically impossible in Toronto.

So why are cap rates typically much lower for condos than for multi-unit properties (i.e. duplexes and triplexes in the core of Toronto)? One simple reason is that with condos, there is almost zero maintenance a landlord has to do. You can very realistically own a rental condo for 5-7 years and spend literally nothing on maintenance and repairs. Try doing that with a freehold property! Low cap rates is one trade off for the relative convenience and simplicity of condo ownership.

But the fundamental reason behind the low cap rates is that condo investment in Toronto is driven by an expectation that prices will increase (appreciation) versus a desire for cash-flow (income). Prices have kept appreciating over the last 15 years in Toronto and thus cap rates have pretty much always been quite low for condos. If prices start to decrease, or rents go up faster than prices, cap rates will start to rise.

Questions or comments about investing in resale condos? Please contact me.

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Festival Tower Update: Units Starting to Move

My last blog post I wrote about the Absorption Rates of various downtown condos got a lot of attention and even inspired my friend John Pasalis from MoveSmartly.com to write a great post about the condo market. The issue I wrote about was the fact that some condos, like Festival Tower for example, are loaded with listings for sale but units are not actually selling. It’s been nearly 2 months since then and I thought it was time for an update.

The good news is that after nearly 3 months of no sales, there have been a couple sales at Festival Tower in the last week. A 1 bedroom + den with no parking sold for $435K (approximately $693 per square foot), but the sale that really got my attention was a studio that just went for $365K. To my knowledge, this represents the highest selling price for a studio apartment in the city over the past year, and possibly EVER (for resales, not pre-construction). At this price the buyer paid approximately $750 per square foot. Very impressive and shows that studio apartments can sometimes be fantastic investments as these units were originally selling in the mid $500s per square foot.

In addition, there are currently 3 units that are all sold conditionally (meaning they will likely be sold firm soon). All 3 are in the $414K-$452K range and all are 1 bed/1 bath units. Once these sales start to go through, values will pretty much be set in the building and the dominoes should start to fall. I will continue to watch with intrigue to see where values go in this building over the 6 months.

The big question is still this: will Festival Tower command a premium over other newly completed (or about to be completed) buildings in the area? The few sales we have seen so far seem to indicate that there will be a premium, but how much will that premium be exactly is still unknown.

Questions or comments? Please contact me any time.

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Maple Leaf Square: Highest Proportion of Out to Lunch Sellers in Toronto?

Some buildings downtown you will almost never see a listing in them. Why? Because units come on the market and sell so quickly that at any given time there is nothing available. On the other hand, there are some buildings where ‘insane seller syndrome’ runs rampant. These are the buildings where there are always dozens of units available, and many of these listings sit on the market for months and months at a time with no buyers. The key reason: they are over priced.

One building in particular always seems to have an abundance of ‘out to lunch’ sellers trying to pawn their listings off on an unsuspecting buyer at outrageously inflated prices. That building is Maple Leaf Square (55 and 65 Bremner).

Exhibit A: a small 2 bedroom unit is on the market at $469K with no parking, or $499K if parking is included. The listing has been on the market for almost 3 months. Several of the same floor plan have sold in the past year. Average selling price including parking was $465K (6 sold units). This seller is approximately $35K over market value or 7.5% over market value.

Exhibit B: a small 1+Den with no parking is on the market at $429K. The listing has been on the market for a total of about 300 days at various different price points. Average selling price of the exact same unit over the last year is $353K (4 sold units). This seller is approximately $76K or 21% over market value. One listing of the same floor plan was priced as high as $455K this year!

These are just a couple of examples. Having been working with a buyer-client who is trying to get a unit in this building it’s very frustrating and a serious time waster for all trying to negotiate with someone who is completely out of touch with reality. In the summer I submitted an offer for this buyer-client on a unit that was listed at $399K. The offer was for $355K. The seller acted like he was insulted and his agent was just as incredulous. Several months later and 100+ days on the market that unit never sold. Meanwhile 2 other units of the same floor plan and very similar floor level sold for $349K and $357K respectively.

What is it about Maple Leaf Square that seems to foster this insanity among sellers? I don’t know but I suspect there are a lot of investors who paid all cash for their units who really don’t care if they sell them at all, however, if someone wants to offer them an outrageous price above what all other units are selling for they will gladly take it!

Questions or comments? Please contact me.

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Lockers More Important Than Ever

Over the past 2 years in particular, the size of condos in Toronto have been getting progessively smaller. The shrinking size of condos has allowed developers to continue to keep the actual prices of the units at a reasonable level, even while the average price per square foot has basically doubled in the last 7-8 years.

We’ve seen 270 sq ft studios, 395 sq ft 1 bedrooms , 580 sq ft 2 bedrooms, and 859 sq ft 3 bedrooms. All of these units would have been considered asinine and unsaleable as recently as 2006, but now they are in just about every building south of Dundas.

One big question many buyers are asking is: where am I supposed to put all my stuff? Storage lockers are more important than ever for storage, however, I am finding lately that they are becoming harder and harder to get. It used to be that developers would finalize parking spaces and locker spaces before they ever went to market, and buyers would be able to buy both at the time they signed their agreement for their unit. Now, locker spaces and parking garage areas are often still in the ‘design stage’ when projects go to market and developers don’t have exact numbers of how many they will be able to sell, so they don’t sell them in the initial launch stages. When they do become available to buy, there is often a shortage and only certain units can actually buy lockers.

Why is this happening? Two key reasons in my opinion:

1. Developers are usually in a rush to get their projects to market and investors don’t usually care about parking or lockers
2. Developers seem to be sacrificing locker space and parking space in order to maximize the number of units they can put in a building (maximize profits) as well as minimize the construction of underground levels (minimize costs)

I’m all for minimalistic living, but 400 sq ft and no locker is pushing it! I’m concerned some of these buildings will not be all the ‘liveable’ when completed. One building that launched recently is said to only have 10 lockers for around 200 units! Quick investment idea: buy a condo, gut it and split it up into storage lockers and rent them out to people in the buildings where lockers are at a premium!

Questions or comments? Please contact me.

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What Makes a Good Location Good?

Location is the most important factor when considering any real estate investment. You can change many things about a property, but you can’t change its location, therefore it’s vitally important for any condo buyer to understand exactly what makes a good location good. Why do some condos appreciate at higher rates and command higher resale prices compared to others that are often located just steps away?

Just being downtown is not enough with today’s buyers. Buyers want to experience the best of urban living.  Today’s urbanites are more sophisticated than ever. They know the difference one block in the wrong direction can make on quality of life and resale-ability down the road. They know the impact of having a Starbucks in your building can make versus having a Coffee Time.

The best locations are those that combine two key factors:

1) Highly visible. Being in a highly visible location is critical to attracting people, businesses, services, and even government dollars to fund things like transit and infrastructure. You need to be seen from the street by pedestrians, people in their cars and on transit. You need to be in a spot that is well-known and familiar with the average person in Toronto. This is why condos located immediately on the crossroads of two major streets are always tremendously popular with buyers (One Bloor at Bloor and Yonge, The Hudson at King and Spadina, L Tower at Front and Yonge, etc.). This is also why condos located busy pedestrian and transit-friendly streets like King or Queen tend to out perform those located on one-way, transit-less streets like Richmond or Adelaide.

2) Highly visited. Just because a condo is located in a highly visible location, does not mean it will be a highly visited location. A great example of this is Cityplace. Everyone knows where Cityplace is, and the towers dominate the skyline when you are coming in from the west on the Gardiner, however, no one except the people who live in Cityplace ever go to Cityplace. This is one reason why prices in this area continue to lag significantly behind that of other nearby neighbourhoods.

Recently a fairly high profile project launched in the heart of the downtown to much fanfare. Many Realtors were pushing this project as a great investment to their clients, however, I quietly told my clients to ‘pass’ on this project even though the building was located a few minutes walk from the multiple subway stations. Why? It was essentially located on a side street of a side street. Most people including Realtors had to Google the address and still didn’t know where it was! The location of this building is neither highly visible or highly visited, thus I advised my clients to hold out for other projects.

Questions or comments? Thinking about buying a condo this fall and want to be sure you pick one with a great location? Contact me.

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Wall Street Journal Chimes in on the Toronto Condo Market

I guess this makes it official: everyone is talking about the Toronto condo market. I was interviewed a couple weeks ago for an article on our condo market by a writer for the Wall Street Journal, and today that article hit wsj.com. Read the entire article here. See what people on Twitter are saying about the article here.

The article certainly has a bearish slant to it, with the basic thesis being: the market has been booming for so long it therefore must crash. Certainly not something we haven’t heard before many times over the last decade, but should this article give individual investors pause as to whether or not they should be buying a condo in Toronto right now?

I was asked my opinion on the market and the prospects for a ‘correction’. What I told the writer was the same thing I’ve been saying on this blog for a while now: the likelihood for a correction in the short term is very low, the fundamentals right now are strong. However, even the most bullish investor must admit that a key driver to this market has been the lower-than-low interest rates we have had over the last few years. If rates continue to stay low, demand will continue to be strong, prices will continue to rise, and thus, the potential for a correction will grow. In other words, no market can rise at 6-8% per year ad infinitum, but as long as money is cheap, the market will likely keep its momentum.

I would love to hear your comments. Leave one below or email me.

Graphic above taken from the wsj.com article.

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Newer is Better, Right?

With several dozen new condos expected to launch over the next 60-90 days in Toronto, the question for investors is quickly becoming: Which one(s) do I invest in? If you believe the prevailing message of the condo marketing machine, newer is always better. That is, getting into a condo at the earliest stage is always better than buying at a condo whose launch period has passed. I have to disagree.

The condo industry is driven by hype, and when something is shiny and new, and relatively unknown, hype is never in short supply. And of course, once something is a known commodity and the ‘newness’ of it starts to fade. Developers know this and many have taken to the practice of multiple launches in the form of VIP launches, preview openings, grand openings, etc. However, just because a project is no longer the latest and greatest, doesn’t mean investors should write it off as an investment opportunity.

This week this point was illustrated perfectly when I observed a new condo being launched to much fanfare and excitement while another existing project quietly released some new units. In my analysis, the new project is not worth investing in while the old one provided an excellent buying opportunity.   In fact, two of the best buying opportunities in my opinion so far in 2011 for downtown condos have been from “old” projects who have offered a “new” promotion. One was at 12 Degrees, and the other was just this past week at DNA3 when they released 2 additional floors of suites.

So what is the best condo to invest in? The answer is the one that offers the best value compared to everything else on the market. I measure value by comparing the location, price, and features of one project vs. the next. Sometimes the newest condos offer the best value, because prices are often lowest at initial launch, but often times these new launches only serve to further highlight that existing projects offer better prospects for return on investment.

Questions or comments? Ready to buy a condo this fall? Contact me.

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