Why today’s condo investors should be excited about the future with Ben Myers
Ben Myers is a long time industry veteran having worked as an analyst and developer for more than a decade. In this episode Ben and Andrew look ahead to the market in 2018 and discuss the incredible growth in the rental market, what upward and downward market pressures Ben is tracking for 2018, and some incredible population growth projections for the Golden Horseshoe.
BEN MYERS INTERVIEW HIGHLIGHTS
4:15 What’s going on with the rental market right now? What’s your take on that?
11:05 Things that are upward pressures on prices.
11:42 Things that are downward pressures on prices.
13:57 Stat quoted, “3.5 million people being added to the golden horseshoe by 2030.”
16:40 Population and new housing growth/completions, they’re dependent variables.
18:32 Anything else that you’re looking at or interested as we’re heading to 2018?
Andrew la Fleur: Okay, it’s my pleasure to welcome to the show, once again, Ben Myers. This time Ben is joining us officially as he’s starting a new company, Bullpen Research & Consulting. Ben’s the president of this new company that he has started. Ben, welcome back to the show and congrats on the new company.
Ben Myers: Oh, thanks Andrew. Thanks for having me back.
Andrew la Fleur: Yeah. I’ll let you get into it right away, in terms of you’ve got a lot of experience in the industry, always great to talk to you. So you’ve started your own, you’ve gone out on your own now and you’ve started your own consulting company. Maybe tell us a little bit about that. Why did you decide to do this and what … Tell us a little bit about your company and what you do.
Ben Myers: Yeah. I’ve been in talks with a guy in Ottawa about collaborating on things and he was expanding his business and he needed some help. I decided that he was so busy himself that I could do a similar thing in Toronto. Just the opportunity to work with a number of different developers and just get back to the straight research.
It’s funny, I always thought I wanted to be on the development side until I got into the development side and saw how stressful it was and all the things that could go wrong. I said, “You know what? I just want to get back to straight research.” Get an office, walking distance of my house, have the flexibility to take time off and flexibility to work while I’m on vacation or all kinds of things that have the flexibility of being on your own, and seeing where it will take me.
Hopefully do some work for developers, for land owners, for lenders, determining values of unit prices, [inaudible 00:02:04] values for land, making recommendations for unit sizes, prices, suite mix, build form. And also I’ll likely be connecting land owners with planners, with equity financing, with debt financing. Connecting developers with private equity.
So I’ll do a little bit of that on the development side, hopefully. There’s a little bit better fees on that side of the fence as the pure consulting avenue. But anyways, I’m just going to where it takes me and based on the first week and a half, there’s a lot of interest in my service.
Andrew la Fleur: That’s great. Always exciting starting your own company and going out own your own. Like you said, you’ve been on this side of the fence before, when you worked at Urbanation years ago before you were on the development side. So you’ve seen all sides of the industry. Obviously wish you much success in this new venture.
Before we jump into the conversation, let’s let you go ahead and plug your … People want to get ahold of you. How do they do that? What’s the best way for people to reach you if they want to hire you?
Ben Myers: Sure. The best way is just to go to my website. It’s bullpenconsulting.ca, email@example.com is my email. You can always send me a message on LinkedIn. Send me a direct message on Twitter. I’m all about the multiple avenues. Everyone like to communicate in a different way and has their favorite to do so, a preferred way to do so. I’m certainly available to chat about whatever project or site or opportunity that’s out there.
Andrew la Fleur: That’s great.
So let’s jump into the market here today. I was looking at your Twitter feed just this morning. Urbanation just released their rental stats for the fourth quarter, I believe. You were tweeting some comment series and some thoughts on that. What is going on with the rental market? The rental market is absolutely on fire. What is your take on the market right now?
Ben Myers: Yeah. It’s interesting. I’ve been talking to a lot of developers about what’s happening in the condo market. We’ve seen prices 30-40% up in the new condo market. Obviously you’ve seen that yourself, bringing investors to new condo launches. Stuff that sold for $800 per square foot a year ago is now in the market at $1100 a square foot. We’ve been talking about rents need to be in that $5 per square foot range in 2021 when these 30-35,000 new condominium units come to completion. It’s a high price per square foot based off of where recently completed new condo projects are on the market now, getting in that around the $4 per square foot range.
There’s a little bit of concern talking to developers out there about the ability of rents to increase at that pace over the next four to five years. Just looking at what’s happening in the market now, 9% year over yeah rental growth, has been pretty shocking. And then, I just pointed out another couple factors.
Obviously there’s last year’s mortgage rule changes that forced a lot of people that would have been just getting into the condo market, to stay in a rental market with the new stress test. The old stress test, or the one for just insured mortgages, it forced people into the rental market. And then we added rent control. Once you’re in a rental unit and you have rent control, there’s a little bit less incentive for you to want to jump into the ownership market.
Now, add on top of that a stress test for uninsured units. So now, there’s a lot of people that are currently owning condominiums that would like to a townhouse or a semi, that can’t do so. Or maybe they’re just ina 700 square foot condo and they want a 1000 square foot condo, and now they can’t qualify for that unit.
So it’s going to cause this log jam at the bottom of the market. Then the people that, maybe would have been able to qualify, now they can’t buy because prices are pushed up because of additional demand in the lower part, or the lower value tier of the marketplace.
It’s really going to, I think, continues to drive rents up. I don’t know there’s going to be a huge influx of new supply in the marketplace in 2018. 2016 was when there was a huge jump in condo sales, like 28,000 in 2016 and then end up somewhere around 35,000 in 2017.
There won’t be the really huge influx of supply into the marketplace until 2020 likely. We may continue to see this type of rental growth, at least in the immediate future as these new mortgage rule changes, the rent control, continue to impact the short term marketplace for rental condominiums.
Andrew la Fleur: Yeah, Absolutely.
In some ways it’s the same story I’ve seem for years and years where the skeptics of the condo market, those who say it’s going to crash. You know who I’m talking about. You deal with them every day. One of their biggest arguments year after year is, “Look at all theses condos that are selling. There’s no way that they’re going to be cash flow positive. All these investors are going to lose money because rents are not going to cover the cost.”
But what inevitably happens is rental rates continue to grow and by the time these units are done, not only are they cash flow positive, they are massively cash flow positive. This is a pattern we’ve seen over and over and over again.
It’s happening again where the prices of the condos have gone up dramatically, as you mentioned, 20-30% in some cases in some sub-markets over the past year. But the rental rates are increasing also at historic highs and they’ve been increasing at historic highs now well over a year. By the time this trend continues, which like you said there’s no reason to think it won’t at this point.
Once again, history is going to repeat itself and the market just keeps chugging along.
Ben Myers: Yeah.
I continue to be as bullish as I generally have been. I continue to be surprised at how well the market’s doing. We’ll see what the mortgage rules do and potential for three interest rate increases in the market in 2018, but again every forecast that’s been out there in terms of interest rate hikes has been incorrect.
I think 2017 was the first time an economist said there was going to be no interest rate increases and then we had the overnight rate hike. It was kind of funny that finally the economist had given up on increases in rates because inflation was staying so low and then they turned out to be wrong again, unfortunately for the folks that are trying to plan around these things.
Again, we’ll wait and see. Immigration continues to be at record highs. Employment growth is very, very strong. People want to be in cities. They want to be where the action is. They want to be where the jobs are, where the opportunities are. And Toronto is that city.
Andrew la Fleur: As we’re starting 2018, on that note, lets play a little game like pros and cons, ups and downs. What are you seeing as the major upward pressures, forces that would be upward pressures on pricing in the market, and what are you seeing as things that are potentially downward pressures on prices in the market?
First of all, looking at the upside. What are the key factors as we’re looking ahead to 2018, things that you say these are upward pressures on prices?
Ben Myers: Yeah. Just straight demand. Like I said, immigration and strong job growth. People living in their parent’s basement and still taking on roommates. They’re getting raises and they’re getting good jobs, and they’re moving up. They wanting to get into the ownership market.
I think that’s, obviously been driving the market for a long time.
Negatives? Obviously there’s the mortgage rule changes that’ll prevent people from leveraging themselves a little bit higher. We’ve got foreign buyers tax that will take some buyers out of the marketplace. Interest rates will deter people and what I’ve talk a little bit about is the 2018 will be the year of data misinterpretation.
Essentially, we saw the drop in the market. I mentioned it several times. We were in a bubble and in early 2018 there was no other way of getting around it. For the longest time I said Toronto was not in a housing bubble. I stressed it over and over again. You saw that I was correct. Then early 2018 happened and we saw prices essentially go up 25% in a matter of three or four months.
Well that’s a bubble. That’s definitely a bubble. Prices went up on average to what, 922,000 in the Greater Toronto area. Prices may end up being 722,000 in April of 2018. That’s going to look very bad when the year over year comparisons are made, and all the housing bears are going to say, “Oh, look at this. The housing market’s crashing.” And you’re going to see the articles appear in the United States, “Toronto’s finally feeling the pain.”
Then people who are not paying attention to the marketplace, or not close to it, are going to read those headlines and they’re going to say, “Well, I’m not going to buy, because look what’s happening in the marketplace.”
I think there’s going to be some downward pressure on people in that sense, but again you look at what’s for sale early in the year and there’s not a lot for sale. Despite the fact that there might be some uncertainty in terms of buying, there’s uncertainty in terms of selling as well. That’ll prevent really huge declines just because there’s not a lot of product out there right now.
Andrew la Fleur: One of the things you tweeted recently, you were at an event at Ryerson Housing, a related event at Ryerson, and I was looking at your tweets about that. One of the things that jumped off the page for me was as stat that was quoted, 3.5 million people being added to the golden horseshoe by 2030.
3.5 million, that’s a massive number. I don’t know if you can elaborate on that or who said that, or what the context of that stat was, but that’s the biggest number that I’ve seen in terms of population forecasts. And obviously if you’re a real estate investors, you love seeing a number like that.
Ben Myers: Yeah.
I wrote it down and then I said that seems really high. It was the Commissioner of Planning for [mis 00:14:29] [trohechy 00:14:30] was there just talking about some of the changes to the OMB, the Places to Grow Act, and changes to intensification targets, and all those fun things that are impacting the new housing market. He had shown that stat and only when you tweeted back at me saying, “Well, that’s 250,000 a year.” I said, “Oh my goodness.”
I hadn’t run the math on it. That’s unbelievable population growth and obviously a lot of that is immigration related. A lot of that is people living longer. That’s going to be absolutely huge in terms of driving up the value of resale, because we know the market’s not going to be able to deliver those levels of homes to support that level of population growth.
Will they end up hitting those projections? I don’t know, but I think it just show that the Toronto region and the Greater Golden Horseshoe is still in huge demand.
Andrew la Fleur: Yeah, absolutely. Regardless of what the projection numbers are, it continues to be the story we’ve seen for years and years is population growth is really driving it. As I stress time and time again, we take it for granted, but this is the growth that the GTA and the Golden Horseshoe is experiencing. It’s not a normal amount of growth compared to other cities in North American. We are unique in that sense.
When we look at ourselves versus other cities and people say, “Oh, look at prices in Toronto are going up like crazy. It’s a bubble or it’s unsustainable.” Sure we are different from other cities because we have population growth that is different from most other places in the western world.
Ben Myers: Yeah. And the problem that people often have as well is that population growth and new housing growth or completions, they’re dependent variables, right? Unless you have units for people to move in, they’re less likely to move there.
If I got offered a job that paid $500,000 in Manhattan. I got to live in something that cost $3,500 per square foot. It may not be as lucrative as yo might think. I think a lot of people who are bring offered jobs in a Manhattan or a San Francisco, even with very high incomes are thinking twice about it.
Maybe they’re going to come to Toronto. May they’re going to go to Austin. Maybe they’re going to go to Nashville. Or maybe they’re going to go to Denver, or Seattle, or somewhere that has slightly cheaper real estate but still the same opportunities.
Certainly, I’ve heard from a lot of people and read it in magazines and stuff, that top international talent is saying the things that Donald Trump is saying, the protectionism and just straight racism coming out of the United States and saying, “No, I don’t want a part of that. I want to be in Canada. I want to be where they’re more accepting of diverse cultures and diverse people.”
We’re attracting some of that top talent here. They can get a condominium for $600 a square foot. Significantly different than what they might get in other major global cities.
Andrew la Fleur: Yeah, it’s a great point. It’s certainly the world is increasingly becoming a global village and people have options of where they want to live and where they want to work.
Anything else that you’re looking at or interested in as we’re heading into 2018, anything else you’re tracking in particular or market trends that you’re seeing as something to watch for?
Ben Myers: It might not be particularly interesting to some of the investors but next week I’m putting ut a report called “The GTA Land Insights Report”. Essentially, I am taking the land sales and with my planning partner from Vettori Management, we are projecting what those land sales will be in terms of the product type that going to come on to the market. What is the application that’s going to be on that land.
I’m taking that land transaction and putting a value on it. What I think that, if it was a condominium project today, what it would sell for. So, we can take those numbers and project where the market’s going to be in a year, year and a half. If you start doing that, you’re looking at the GTA being on average $1000 a square foot in a couple years, in terms of where all the new projects are going to be watching.
This is GTA wide, not just Toronto. Obviously we’re seeing $1100 per square foot projects launch in the Yonge Street Corridor and [Yorkdom 00:19:51] and such. But a GTA average of $1000 a square foot in a year and a half, two years.
It’s an interesting way of trying to forecast future values in the marketplace.
Anyways, it’s probably going to take a lot more than one quarter’s worth of data to start making predictions for pricing a year or two ut, but it’s going to be an interesting time series that I’m going to create with my partner, there. I’ll see where it goes. Should be an interesting 2018, that’s for sure.
Andrew la Fleur: That’s great. Awesome.
We’ll be looking forward to checking out that report.
Thank you, Ben, once again for your time on the show today. Congrats on the start of your new company. Wish you all the best in 2018.
Ben Myers: Thanks a lot, Andrew. Talk soon.
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