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Absorption Rates

I wanted to dig a little deeper for today's blog post and take a look at absorption rates in various condos. Looking at Festival Tower got me thinking about this subject. Festival Tower has a plethora of units available for sale, but hardly anything is actually selling. The building is stunning. The amenities are amazing, and the film festival that just finished put this tower in the international spotlight for a full 2 weeks. The building has been fully registered and finished for a few months now. I am at a loss as to why units are not moving here. There was so much hype about this building for the last 5 years, and now that it is finally finished, no one is buying?

Let's compare Festival Tower with other buildings downtown. I took a random sample of various buildings, all completed in the last 12 months. I tried to pick a few buildings to somewhat represent the whole spectrum of the downtown market from the lowest end to the highest end. Take a look at what I found:

Only 3 units have sold in the last 60 days at Festival Tower, and there are currently 42 units available for sale. At this rate, it would take 28 months to sell all available units! Similar story at The Ritz Carlton, where only 2 units have sold in the last 60 days and there are 30 units on the market (actually more since the developer has a few unsold that are not on MLS).

Compare this to a building like Parade in Cityplace, a known area for heavily investor-owned buildings. While there are a lot of units on the market in the building (36 currently), they are moving fast (18 sold in last 60 days)!

Obviously price point has a lot to do with this. There are far more buyers looking for condos in the $300K range than the $800K range. However, I am really starting to rethink the high-end of the market and wondering if there really is a market in this town for condos in the $800 per square foot and above price point.

You could possibly point to a building like Crystal Blu where the absorption rate is quite good and say there is a market but only in one area: Yorkville. One theory I have is people with money to burn on a condo will live in Yorkville, but anywhere else it's not worth the premium to get a high-end unit.

The point of this blog post is really not to say I have an answer to this question about where are all the high-end buyers, but rather I would like to start a conversation with my readers and clients on the matter. So let me know your thoughts. Contact me or leave a comment.






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23 Responses to “Absorption Rates”

  1. Jason Treacher

    Pardon my ignorance, but isn't it simple? Price is a function of supply and demand. Demand is low, and even with constant supply (not true, supply is increasing), price must come down. Just because the owner thinks the place is worth 800$ doesn't make it so.

  2. Andrew la Fleur

    @Jason,
    It always comes down to supply and demand forces, yes.
    The question is, how was the builder able to sell units for $800-900PSF a year or two ago when now no one is buying them at similar (or in some cases lower) prices today?

  3. Mike

    I've lived in two non-yorkville "high-end" condos in the past year. The Thompson Hotel 552 Wellington (previously owned) and Festival Tower (currently renting).

    The builders are able to sell at 800PSF because they have huge multi-million dollar marketing budgets and they are selling either a dream ("I can flip to some sucker at occupancy and get rich") or a lifestyle ("When I move in its going to be the hottest spot in the city...my life will be so much better and everyone will envy me").

    Once completed, the realtor is actually selling a tangible product...a home. And lets be honest, it doesn't matter how great the building execution is (Festival Tower) or how poor the execution is (Thompson Hotel...or anything by Freed for that matter), everything always seems better in the glossy brochures and decked out sales centres.

    Speaking specifically to your example of Festival Tower, here are some examples of real issues today that exist in that building that didn't exist in the sales centre.
    ~ 4 elevators for 45 floors with one always in service means long wait times.
    ~ Ugly un-sexy scaffolding at front of building to protect pedestrians from exploding balcony glass above.
    ~ Yes, the balcony glass is exploding...doesn't exactly scream quality product.
    ~ Approx. 12 units a floor, doesn't exactly give that exclusive feeling.
    ~ Most of above mentioned units are under 700sqft and occupied by students or junior level bay streeters...you know, the transient type.
    ~ Speaking of students, they are noisy and party on weekdays on their balconies keeping the neighbours with real jobs up.
    ~ Despite being registered a long time ago, many units are still unoccupied, the hallways and amenity areas are eerily quiet. Not a community atmosphere.
    ~ Surprise! Your high-end Miele appliances are so small, forget about hosting thanksgiving at your swank new condo...you won't be able to prepare food for more than 2 people at a time.
    ~ They didn't mention at the sales centre that there is a fire station across the street and that they don't care how tired you are the sirens are going off all night.

    In short, you can't have luxury at that density. Its simply impossible with so many other options for millionaires in this city.

  4. gary

    I'm a high end buyer, and for the life of me was shocked that in that area anyone would buy a condo for 800 dollars per square foot. The only way I would ever buy at this price is if the condo was in Yorkville and no where else! Not sure why this would be a surprise.

    gary

  5. Matthew

    If I was going buy into the $800K-$1M market, I'd probably look at a real house rather than condo. That's I think were some of those buyers are.

    The general rule is 2.5 times income for a mortgage, medium 2 person income in Ontario is approx. $90K. So it's not surprising that condos under $400k condos are selling at Cityplace, because the general rule works for the average Canadian family. Those "buyers" can't afford more, because there at their maximum borrowing limit.

    While investors are okay with the risk, the average people that actually have to make those mortgage payments are generally worried. Us average people have been following media; and it's telling us about another looming recession, which kinda makes us look at the US housing situation, not saying it's going to happen here, but it's a possibility. So us average people that have watched prices of a condo pre-built in 2000 go from 350 psf to well over 500 psf and who didn't buy, and are still renting, and will likely still be until the correction finally hits or there is some other event that happens and we (or shall I said "I") finally get off the sideline.

    But, again some of those "buyers" at this time just aren't going to follow the herd and sign those mortgage papers.

  6. Andrew la Fleur

    @Mike
    Thanks for the great comment and insights as an actual person living in Festival Tower right now.


  7. Daniels actually sold most of these units at $650 to $675 psf, only a few units sold anywhere near $800 psf from the developer and they were larger units on higher floors (and sold in a slower-supply enviroment).

    Many of the purchasers in these building seem to be looking for similiar index price lifts at their suites as other lower end projects that went from $450 to $600 psf over the same time frame, so they are looking for a $650 to $800 psf lift.

    Once you strip away the project's association with the Tiff Lightbox, the features and finishes in the building are not much different that several other new or recently completed projects within 10 or 15 minutes away, that sell for $550 to $650 psf.

    I'm not sure how many local luxury buyers bought at Shangra-La, Trump or Ritz, but Yorkville is the only viable luxury ($800 psf plus) market in Toronto right now in my opinion and Festival Tower units will continue to languish if they are listed above $800 psf.

  8. Andrew la Fleur

    @Ben
    Thanks for stopping in.
    Good points. Those who bought in 2006 or 2007 are quite content because they only paid in the $600s PSF. The relatively few who bought in 2009-2010 and paid $800+PSF feel it is their 'right' to get a $100-$150PSF premium over what they paid because other buildings have gone up that much since. However, as you say, when strip it down, Festival Tower is basically just another condo building in the eyes of most buyers. Buyers are quite willing to pay $800PSF at a mid-range building like 18 Yorkville - because it's in Yorkville. But so far the market is sending a pretty clear message the same rules do not apply to King Street. The entertainment district is not quite "The Next Yorkville" yet!

    Implications for buyers at the many other pre-con buildings in the entertainment district that have been selling in the $700+PSF range...??? Maybe it's time for another blog post...

  9. MJ

    I bought a unit at Cinema Tower ("Festival phase 2") in the 700's psf. I almost did not buy due to Festival units not selling. I decided to buy at the price (aside from me liking the building) because of the area's potential. The city's plans for the area will have it looking and feeling a lot different in a few years. And at that point people will wish they could buy for 800psf!


  10. It's about timing. The vision of the Entertainment District hasn't changed all that much since the 2009 Master Plan was unfolded. To become the next Yorkville (which I think will happen) it will take time for the neighbourhood to develop and settle. Festival Tower and M5V are the early "luxury condo" settlers snatching up great locations which will pay dividents down the road. However, condo end users cannot see the development far down the pipeline as some of us who are in the know can. All they can see is what exist today and it's no Yorkville. So it is not surprising to see that buyers are not willing to pay high prices for a location that hasn't changed much in terms of commercial.

    These investors who bough Festival Tower are caught in the timeline. They demand prices which competes with areas closer to Yorkville today, but the market is not in agreement. However, those units that did sell were getting profits of $50,000 to $90,000 which is quite stellar!
    But this area should be treated as a long term investment, not a 3 or 4 year cash out.

  11. Matt68

    @ Mike

    All I can say is: Thank you. I also heard that TIFF was lacking and owners were disappointed.

    As an owner of two units in Toronto - a penthouse in a Cityplace building on Front St. and a smaller unit at Thompson, I have had to explain countless times to the dropping jaws of friends and countless self--profressed 'real estate" experts that my unit in Cityplace is actually much better-built and much more pleasant than the one in Thompson. Of course, because Cityplace has a loveit-hateit reputation (ie. people who live there, generally love it - people who dont, hate it) , I wasnt expecting to be living in a 5-star hotel either when I moved in.

    Of course, it all depends on which unit you buy and your expectations, but it always makes my eyes roll when the Thompson gets billed as some distinguishing high-end development. Has anyone actually lived there? The walls are so thin on my floor that you can here the conversations of anyone walking down the hallway. Also, many of the finishes are tacky and cheap. In fact, I cant really tell any strong tangible differences between my Cityplace unit vs. Thompson, in terms of luxury. (of course, the CP unit is renovated).

    Despite the marketing of some condos in Toronto, as higher-end luxury, I find the differences extremely minut, aside prejudices.

    When you see Parade selling like bananas, its not just because its price alone. Its because its a good price relative to the location. When you consider Parade is a mere 5 minute walk from Thompson / 15 minutes from TIFF, why wouldnt any sound investor take the risk? The only risk with CP units (on the west side of Spadina) is that the neighborhood is a little cut-off and doesnt attract visitors unless they are seeing a ball-game at Rogers Centre. The city will not allow extensive retail which will bring traffic. But the neighborhood will never be impoverished because it is attached to the city's skyline - love it or hate it. Fox and Fiddle opened and the place is always rammed with people. Go figure.

  12. Andrew la Fleur

    @Matt68
    thanks for sharing your experiences in the condo market. the front street city place buildings are probably my favourites of them all. any updates on the lawsuit related to the foundation problem?

  13. Matt68

    @ Andrew

    I heard some rumbling about that issue you are discussing. So after you sent this comment, I googled and found a CBC newflash which mentioned how Concord is being sued regarding the foundation involving two buildings. The buildings with the issues appear to be Optima and Matrix. Apparenty, there have also been issues with falling glass in Matrix.

    I own in APEX which is situated right on the corner of Spadina and Front. Far as I know, we have none of those issues. Our balconies were inspected by engineers after one balcony had fallen glass at those other buildings and no issues were reported. All balconies were deemed safe. So it seems to be a seperate problem.

    Whats interesting is in the same newscast the reporter mentions that Concord had to pay to add an addition to the driveway ramp for a building - this (I believe) was APEX. But they make it out to sound like the entire development is having some big issue. The driveway was such a miniscule issue, Im surprised it would be newsworthy at all. They simply added literally one foot or two feet at most to the side of the driveway along the driveway ramp, to make it slighly easier for drivers going in and out of the garage. Not any big deal to me.

    Its part of the problem with how Cityplace is painted with a very broadbrush. Every building is different but when one or two buildings have an issue, every building in Cityplace suddenly is percieved as having an issue. The TIFF building has already had two issues with falling glass but few are calling the place a disaster.

    Anyways, the way I see it, Cityplace gets alot of flack because it symbolizes the Toronto condo boom in alot of ways and its altering the skyline for better or worse. Ive heard bad things about some CP buildings but the APEX building that I live in, I have had no big issues with at all and other residents I know are surprised that there is any negative perception of CP, in general. I have plenty of condo experience also and APEX, as far as Im concerned, stacks up well with any other relatively new condo building in the city.

  14. jamie

    Great comments all around. Has anyone noticed that cityplace on front St. Now requires a 20% downpayment in order to get approved for financing? Is this the writingon the wall?

    Toronto is so very inexpensive compared to other cities of its caliber. However whenever you see a boom like this there is generally a bumpy landing.

  15. Andrew la Fleur

    @Jamie
    That requirement is due to a building issue that is unique to that building. Email me if you want more info

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