Navigating the current GTA condo market – a guide for new buyers and investors

The GTA condo market has experienced significant fluctuations in recent years, but the recent drop in activity has not been witnessed for more than 15 years. For new condo buyers and investors, understanding the current landscape is crucial for making informed decisions, and seeing where opportunities exist.

Over the past six months, the GTA’s new condominium market has faced substantial challenges, with sales activity reaching lows reminiscent of the 2009 financial crisis. The market has been soft overall since the interest rate hike cycle started in April of 2022.

Developers optimistic

One of the more shocking occurrences coming out of the financial crisis was how quickly the resale market condo market rebounded in the second quarter of 2019. The new condo market quickly followed, resulting in more than 10,000 new condo sales in the latter half of that year. However, the present scenario is different due to a pronounced disparity between the prices of new condos and comparable resale units. It may take time before those two data points start to converge.

Bullpen Research & Consulting is forecasting approximately 10,000 new condo sales in the GTA for 2024. This would mark one of the lowest transaction levels since the early 2000s. Nonetheless, developers remain optimistic, with many poised to launch projects as soon as interest rates decrease – they have spent money to get their ducks in a row.

In the first quarter of 2024, major developers such as Liberty Development Corp, CentreCourt, SmartCentres, Aspen Ridge Homes, and The Pemberton Group have acquired high-density lands. According to CBRE on a recent Toronto Under Construction podcast, smaller developers are finding it increasingly difficult to secure favourable land debt terms, leaving larger players dominant in the market. Look for those developers to be the first to jump back in with launches when borrowing costs drop.

Cautious approach

Looking at data from the latest GTA High-Rise Land Insights Report from Bullpen Consulting and Batory Management, nearly half of the land transactions in Q1-2024 involved development assemblies started in previous years, reflecting developers’ cautious approach to the market right now, but a sign the market may be severely undersupplied when the market returns.

Many of the land sites sold have existing income-generating properties such as retail plazas and residential rentals to mitigate the risk of prolonged pre-development periods, but also allow the developer to wait until the market is ripe before launching a new condo development. The factor impacting many projects is that capital availability is shrinking, and sales absorption timelines are extending, so there are plenty of developments currently in the “wait and see” phase.

The development cycle in the GTA is lengthening, exacerbated by extended entitlement processes, longer pre-construction sales periods and stricter scrutiny following several failed projects. High borrowing costs, labour expenses and elevated Development Charges further complicate the situation. Developers who purchased land at market peaks face limited flexibility to reduce prices and must either wait for market conditions to improve or adjust their project strategies significantly.

Bullpen forecasts a gradual deflation in new condo prices over the next six to nine months, followed by a period of price stability similar to conditions in 2013 and 2014. A market resurgence is anticipated when current construction projects are completed, interest rates decline and demand for high-end apartments exceeds supply. This recovery could take some time. However, the GTA new condo market has been extremely resilient over the past 25 years.

Investors should consider several key factors:

1. Price disparity: The significant price gap between new and resale units could impact investment returns. Investors need to evaluate the long-term value proposition carefully.
2. Market timing: With many developers holding off on launching new projects, timing investments to align with market recoveries could yield better returns.
3. Developer strategy: Understanding developers’ strategies, including their readiness to offer significant incentives and inducements.
4. Capital availability: As capital becomes scarcer and borrowing costs remain high, investors should be cautious about over-leveraging and seek opportunities with favourable financing terms or closing dates.
5. Geographic focus: Transit-friendly locations and areas undergoing significant infrastructure improvements may offer better long-term growth prospects. Developers such as KingSett Capital are strategically investing in such locations, anticipating future demand spikes (see Bloor West, Weston, Warden Station, The Golden Mile).

On the Toronto Under Construction podcast, Colin Baryliuk, chief investment officer at KingSett Capital, shared insights into the current market dynamics. Baryliuk emphasized the importance of having a robust exit strategy and adapting to market shifts.

Baryliuk also highlighted the critical role of government incentives in facilitating purpose-built rental developments. Programs such as the HST rebate and initiatives from Canada Mortgage and Housing Corp. are making such projects more viable, despite high construction costs and extended lease-up periods. Many developers are now suggesting that these changes should extend to condominium projects, and politicians are listening, watch closely for those potential changes.

For new condo buyers and investors in the GTA, the current market presents both challenges and opportunities. Careful analysis of market trends, strategic timing of investments, and understanding developer strategies are essential for navigating this complex environment. Surround yourself with experts, such as an experienced realtor and a mortgage broker. Good luck.