Challenges and opportunities in the GTA condo market

As we approach the midpoint of 2024, halfway through the decade of the 2020s, it’s a fitting time to reflect on the thoughts and questions emerging during this period. With the decade commencing amidst one of the most significant public health crises in recent memory, it was inevitable that it would greatly impact the real estate overall, and the residential housing markets. Let’s use this backdrop, along with the multitude of events it has spurred, as a focal point to delve into the present dynamics of the GTA condo market.

New condominium apartment prices and land values often move in unison, but that started to change in 2021 and 2022 as the costs to build and government fees reduced the maximum amount that developers were willing to pay for land. The bigger influence over the last 18 months has been the rise in interest rates and the decline in new condo price growth expectations. As a result, lenders are re-evaluating the types of loans they’re willing to offer and the terms in which they offer them, prompting a re-examination of development strategies by developers. The early result has been fewer land sales, project launches and construction starts, which will lead to a supply deficit in three to four years.

Intricacies of development

Rates, fees and costs are exerting significant pressure not only on future development prospects but also on ongoing projects that have already commenced sales. A recent news report highlights the trend, stating that “Residential development projects nationwide are facing a growing risk of receivership. Elevated interest rates, escalating construction costs and delays, combined with a sluggish real estate market, are all factors contributing to the heightened financial strain experienced by these projects,” according to industry experts.

Lauren White, who serves as the executive vice-president at CBRE, shared insights during a recent appearance on the Toronto Under Construction (TUC) podcast. White emphasized that many receiverships can be attributed to mismanagement, particularly the failure to fully comprehend the length and intricacies of the development process.

During a recent discussion on the Toronto Under Construction (TUC) podcast, a panel of GTA lenders shed light on the challenging landscape faced by new condo projects. In 2023, only five out of the 32 new condo projects launched in Toronto managed to sell more than 65 per cent of their units, a benchmark often necessary to secure construction financing.

Consequently, 27 projects are grappling with the need to extend their land loans. The stark reality is reflected in the low sales figures of only 13,000 condos sold in 2023, significantly below expectations. As a result, a considerable portion of these 13,000 units may never come to fruition, with my firm, Bullpen Consulting, estimating that perhaps only 6,000 of those launched units actually commence construction this year.

In the short term, condo prices are flat or declining, reducing the number of investors and buyers overall, leading to more developers looking at building traditional rental apartments.

Foresight and adaptability

During a TUC podcast, Devon Cranston, president of Cranson Capital, highlighted the implications of low construction starts in 2024 (due to slow pre-construction condo sales) for future project completions in 2027. This anticipated shortage is expected to drive up rental rates significantly. Cranston emphasized that for those with a forward-thinking approach, the current period presents an opportune time to invest in rental properties.

The market dynamics and external forces are shaping the GTA condo and rental markets, unveiling a landscape both challenging and ripe with opportunity. In 2024 we’re feeling the lagging negative impact of the pandemic, rising interest rates and construction costs, leading to fewer condo project launches. Slower sales and lukewarm buyer interest has ushered in a period of introspection among developers and lenders, prompting a re-evaluation of strategies and loan offerings. The consequence of today’s uncertainty will be a looming supply deficit projected in the coming years.

Developers remain flexible, with a shift towards traditional rental apartments. Buyers and developers must pivot to meet the evolving needs of the market. The forecast for 2027 anticipates a scarcity in completed projects, setting the stage for a surge in rental rates. It may be hard for many retail investors to think about what the market will look like in three years, but hesitant buyers will miss their opportunity, as rates are not expected to stay this high forever.

Astute investors and developers equipped with foresight and adaptability are primed to thrive amidst the shifting tides of the real estate industry. Do your research and solicit advice from experienced professionals like real estate lawyers, mortgage brokers and sales agents. Good luck.