If you are a condo news junkie like me, you probably have been enjoying the past few months because the level of interest in the Toronto condo market appears to be at an all time high. The big boys of Canadian media: The Toronto Star, Globe and Mail, and National Post all run stories about the Toronto Condo market just about every single day.

Yesterday Scotiabank released an alarming statement claiming that up to 25% of Toronto condos are empty and that we were in danger of becoming a “Ghost City”. Several of the major media outlets picked up on this juicy quote and ran articles on the subject.

Let’s look a closer look at some of the buzz words and phrases you may have seen used in these articles that are designed to cause a reaction in readers, to generate fear, and ultimately to get more eyeballs looking at their newspapers and websites:

“25% of condo units are sold but sitting vacant…other analysts say the figure may be too low”. Hmmm…One in four condos in Toronto is empty eh? Well, that would certainly explain why it’s so hard to find a rental apartment in this town (vacancy rates consistently around 1%), too many landlords who hate making money! This statement was so ridiculous it was laughable by anyone who has any exposure to the real estate market in Toronto, but this was the crux of these articles and the quote came from a report out of Scotiabank, who were quoting a figure they thought was from CMHC. CMHC denied they ever said that 25% of condos were empty and Scotiabank retracted their statement but the damage was already done and the newspapers were happy because they got their ten thousand clicks they wanted and they had already moved on to the next story.

“This is the ghost city phenomenon.” I like how the writers use quotes like this as if to imply that this is a well-known, widely understood concept and it is something that we’ve all feared would happen and now it finally has. You know, the ghost city phenomenon. Toronto=Chernobyl.

“Shades of Miami at the height of it’s collapsed condo bubble in 2007″. When in doubt, make reference to the mothership of fear-inducing condo bubble prophecy: Miami. Miami is the poster child for the worst case scenario in condo markets. By simply putting the word “Miami” in the article the writer guarantees they will get a reaction from their readers, and newspapers are in the reaction-generating business.

In conclusion, newspaper editors and writers are very smart people and they know what sells and what doesn’t. As a reader and particularly as a real estate investor, you need to learn how to cut through the rhetoric and get the truth on what is really happening in the market.

And now for something completely different: “Canada Housing Bubble Talk Dismissed”.

Questions or comments? Contact me.

There are starting to be signs that the condo market might be slowing down. I am seeing and hearing accounts of several newly released condo projects not getting near the sales numbers they were anticipating. But how can this be the case when just last month we saw near-record breaking sales happening at MEGA projects like INDX Condos and Massey Tower? Hundreds of units were sold in both projects within days. Now we are seeing top-tier developers launching high profile projects downtown and for some, sales are

I have 3 current theories as to why the pre-construction market might be slowing down right now:

1) There is Too Much Product on the Market. There is no question that several developers are rushing projects to market that they normally would not. Projects are going to market without residential zoning approvals in place, let alone approved planning applications to build hundreds of condo units. They are trying to take advantage of a hot market, but in doing so, they are shooting themselves in the foot because they are causing an over supply of product.

2) The Weather Sucks. It’s almost May and I’m still wearing my wool coat and the seat heater is in the ‘on’ position. It seems simplistic but I can tell you from years of experience ‘on the ground’ in real estate, the weather DOES make a noticeable difference in people’s buying behaviours. When the weather is good, the sun is out and the winter coats are left in the closet, people feel better and they suddenly want to buy! When the weather is cold and wet and damp (like it has been for the past couple weeks) people feel worse and they are not in the ‘buying mood’.

3) The Market Has Peaked.  The red-hot market of 2011 may have had some carry over into 2012, but now we are coming back down to earth as it were. This is certainly a possibility. Time will tell if this is just a blip or if we are in fact entering a different market atmosphere.

A perfect litmus test has just arrived that will give us a very good indication of the market and that is 88 Scott. The project is launching now to Platinum brokers. It bears many similarities with INDX and Massey Tower. All three are 50+ storey MEGA towers within spitting distance of Yonge street and the financial district and all are averaging around $700 per square foot. This tower should be a smashing success and should be 60%+ sold out within a few weeks. If 88 Scott does not sell well I believe that will be the indicator that the market has shifted.

Questions or comments? Contact me or leave your thoughts/opinions below.

The Residences of the Ritz Carlton was the first of what I like to call the ‘Big Four’ (5-star condo-hotels, the others being Trump, Shangri-La and of course the Four Seasons) to finish. This was a monumental event in the Toronto condo industry as it represents the first truly 5-star hotel to come to our aspiring global powerhouse of a city. Having a 5-star hotel it seems, is a signal that you’ve arrived as a city and it’s an important step if you want to have a chance at becoming the next London, New York, or Hong Kong. Along with the arrival of these hotel condos was supposed to also be stratospheric real estate prices, the like of which Toronto had never seen. $1000 per square foot was the psychological price barrier that we were about to smash through. Well, it hasn’t happened. Not even close.

Some interesting stats on The Ritz Carlton:

• There have been 7 MLS sales in the building since it registered in July 2011. That’s an average of 1 sale per month.
• There are currently 30 units available on the MLS and likely many more that the developer has available that are not on the MLS. This means there is at least 2.5 years worth of inventory available in the building. This is the exact same as it was back in September 2011 when I wrote this.
• Average price per square foot of the first 4 sales in the building after registration: $902
• Average price per square foot for the most recent 3 sales: $749
• Average days on the market for the first 4 sales in the building: 28
• Average days on the market for the most recent 3 sales: 142
• Average sale price:original asking price for first 4 sales in the building: 92%
• Average sale price: original asking price for the last 3 sales in the building: 82%
• Average sale price for all 7 units sold: $1,384,254
• Highest sale price $1,673,775

Rental Statistics:

• Average rental rates: about $3.84 per square foot.
• Highest lease rate achieved: $19,000/month
• Lowest lease rate achieved: $4500/month
• Average Days on Market for a rental listing: 64
• Average Sale:List Price for a rental: 93%

Other non-Yorkville buildings that have recently achieved greater than $750 per square foot AND sale price over $1M:

• 770 Bay Street, Lumiere, Penthouse sold recently for $958 PSF
• 80 John Street, Festival Tower, High floor unit sold recently for $824PSF
• 224 King West, Theatre Park (pre-construction), high floor unit sold for $814PSF
• 65 Harbour Square, 30-year old building, High floor unit sold recently for $773PSF

What we know for sure:

• The Ritz has under-performed compared to the market. Anyone who bought at the Ritz during pre-construction and sold today is making a decent profit. Many early buyers got units for around $650 PSF, selling right now at around $750 PSF which represents approximately a 15% increase in 6 years. However, according to Urbanation, index pricing in the downtown west sub-market that the Ritz belongs to has increased at approximately 10% per year since 2005.
• Prices at The Ritz are not going up any time soon. I’ve already mentioned that there is at least 2.5 years worth of inventory currently at the Ritz. The situation is compounded by the fact that Trump is almost finished, and Shangri-La and Four Seasons will both be complete in about a year. The supply levels for 5-star condo hotels is about to go through the roof. I don’t see how prices at the Ritz could possibly go up anytime soon.
• Right now the Ritz is either a great buy or a terrible buy depending on your perspective. The Ritz is truly a beautiful building and the suites are finished with very high quality materials. When you compare what you can get in this building for $750 PSF versus other ordinary buildings selling for more than that, it’s a no-brainer where you should buy. However, from an investment perspective it’s ‘buyer beware’ when buying into any building with 2.5+ years worth of inventory.

Questions we still don’t have answers to

• Why are sales so slow? Why are buyers in the $1M+ range staying away from the Ritz? I posted a few popular theories previously here.
• What will happen when Trump comes online? Will the same story play out at Trump? Will the two buildings compete with each other directly for buyers or not? Will the situation get worse?
• How much unsold inventory is the developer sitting on? There are rumors out there that the developer still has A LOT of units to sell, and these units are for the most part NOT on MLS. Can they afford to continue to carry them for another year or two while they wait for the dust to settle or will they be forced at some point to flood the market? Could they rent out these suites to ride out the storm?

What do you think? If you have something to contribute to the topic, leave me a comment or contact me directly. Also, the stats in this post is begging to be put into “infographic” form. If someone out there reading wants to help me with that, let me know.

Harbour Square. built around 1980. Photo courtesy downtownphotos.ca

I just got an email from a National Post writer who is writing a story about older condos and especially the trend of buying and older condo and renovating it to today’s standards. Below is an email that I sent to the writer. I have no idea if some or any of this will be published in the article but as I was writing it I realized it would make for a pretty good blog post, especially for the buyers out there who are thinking about buying a unit at an older (15 years or more) building. It’s somewhat scattered as it was an email but take a look and let me know what you think.

Background:
I have been working with a young couple,they are first time buyers. They have been priced out of the housing market in Toronto as it is basically impossible now to find a move-in ready house for less than $400K in a decent neighbourhood. They have turned to condos and are focusing on the west end around high park, junction, roncesvalles, lake shore area. This week we were in a bidding war for a renovated condo that was in a 40-year old building. This building has 8′ ceilings (standard for new buildings is usually 9′), no central heating/air conditioning systems, originally no ensuite laundry in the suites, no granite countertops or stainless steel appliances, the lobby and amenities areas are all original (think: Grandma’s apartment building), and YET, the unit received 6 offers! Similar listings in nearby old buildings have been sitting on the market for weeks with no offers. Why did this happen? several factors:

1. Unit was renovated with beautiful and on-trend hardwood floors throughout. kitchen/living/dining was made open concept. hardware in kitchen and bathrooms were updated. appliances were nothing amazing but they were only a few years old.
2. Hallways and elevators in the building had been very recently renovated making it feel like a building from 2012 when you are walking down the halls. lobby is scheduled for renovation this year to match.
3. SIZE. older units offer such tremendous size and such amazing value on a price per square foot basis that many buyers who are not into the shoe-box cookie cutter condos that are being built today are turning towards these older buildings, especially the renovated suites in them as a great alternative.

Some Numbers
Most units in this complex were selling last year for around $280K. This unit was priced at $320K and sold for $356K!
-average price per square foot for newly built (less than 2 year old) condos is about $550 right now in the city
-average price per square foot for a renovated old condo (more than 20 years old) will vary widely but in this particular area they can be had for around $300 per square foot in some cases!
Tips/Advice for Buyers

• When buying a renovated suite, it is fairly common knowledge amongst Realtors that you should include a clause in the contract that says that the seller warrants all renos were done with the consent of the condo board, BUT what most people don’t realize is that if renovations are not also done with PERMITS, the buyer opens themselves up to the risk that the city could come in at some point in the future and make you ‘undo’ all those renos if they are not done to proper code. Although extremely rare, it is something to consider. Get advice from a lawyer and understand that this may not be covered by title insurance.
• Understand that older buildings tend to have lower appreciation rates than newer buildings. condos are commodities at the end of the day (unlike houses) and when a building passes it’s best before date, even a complete gut-job of a reno with high-end materials will only get you so much back and will not change the fact that the building is old. buildings less than 5 years old have been appreciating at around 8-10%. old buildings I find tend to appreciate at around half that rate. another factor for this is because maintenance fees in old buildings tend to be much higher than new. once they pass about $500/month for a 1 bedroom or $600/month for a 2 bedroom I find that buyer interest in that condo drops off dramatically thus reducing it’s value.
• From a strictly financial perspective I’ve found that it can be worthwhile to buy an old suite and renovate it but in most cases you will not get rich flipping condos. There is a ceiling. Most of the time in my experience you would be better off (from a financial perspective) buying new, doing nothing to it and selling before the building is 10 years old. still there is more to real estate than just numbers. People buy for many reasons and with the older buildings it’s usually about the SIZE.
• The sweet spot in this market is finding an older building in a solid location that has low maintenance fees. these older buildings can out perform some of the newer ones occasionally. A good example would 77/99 harbour square which is probably the best located condo on the entire waterfront and fees are relatively in check. appreciation rates have kept up with newer buildings nearby like the Waterclub-8york, 208 and 218 queen quay. Renovated suites there always draw a lot of interest and anything facing the lake has bidding war potential.

Hong Kong Image courtesy of http://photoeverywhere.co.uk

More and more people I talk to who are inside the condo industry have a growing apprehension towards the direction of condo development right now. Specifically they are worried about the long term impact of what I call the “Mega Tower”. I define a “Mega Tower” loosely as a building with:

• 40+ storeys
• more than 10 units per floor
• largest unit tends to be about 800 sq ft
• average unit size is about 550 sq ft (just 3 years ago it was probably more like 750 sq ft)
• average price is about $375K
• 90-95% of the suites are purchased by investors

When I talk to my colleagues in the industry in New York they think it’s absolutely crazy that our condos here have gotten so small. In NYC, the average apartment size is still around 1000 sq ft. On the flip side though, people who grew up in European cities, or Hong Kong say it’s about time that we start shrinking the condo. In Hong Kong for example, entire multi-generational families will live in 700 sq ft apartments and that’s considered normal.

The worry or apprehension that some developers and industry insiders are feeling is surrounding the question of what will happen when all these buildings get finished in 2014-2016? How will the resale market respond to such buildings? Will the rental market continue to remain strong enough to absorb all these investor-owned units? Will the negative cash-flow situation come to a head if rents don’t continue to rise? Ultimately, should we aim to be a city more like Hong Kong, or more like New York?

I know some developers and architects are planning projects that will be quite different to what we are seeing everywhere today. They are going to launch towers with much larger suites, many 2 and 3 bedroom suites, and much higher price points. A throwback to the good old days of 2006 if you will! They feel that there will be  backlash at some point against the current “Mega Tower” concept, and there will be a shortage of larger units in the years to come downtown.

My opinion though is that nothing will change in the short term. As long as people keep buying into these mega towers in the tens of thousands every year, the trend will continue. Developers are primarily in the business of selling condos, not building cities (although that is a secondary motive for many of them). Their goal is to sell out 65%-75% of their buildings as fast as possible, and right now, the best way to do that is to make as many small units as possible.

The great news is that the rental market is still unbelievably strong.  As I’ve mentioned recently on this blog, all signs are pointing to increased rents moving forward, and no one is building rental housing in this town so condos are it. Still, how much of our market is relying on increases in appreciation versus cash flow? Most of my clients are long-term investors who look to buy and hold properties, but I know that many buyers still have no intention of being landlords, rather they just are looking for the quickest flip possible.

These are some of my thoughts, I’d love to hear yours. Leave a comment or contact me.

Right up there with ‘How’s the market?’ is the question, ‘Who is buying all these condos?’. I decided to tackle this question today with this blog post about the top-5 things to know about today’s pre-construction condo buyer.

1. They are most likely Asian. This may sound strange but white people are not buying new condos. It’s simply a fact that the overwhelming majority of buyers of new condo developments, especially the big towers (30+ storeys), are new Canadians from Asian descent.  They are not overseas buyers. The overseas buyer portion of the market has been grossly over-estimated in my opinion in the mainstream media.
2. They live in the 905. Most of the buyers of condos in the downtown are not from Toronto, rather they are from Markham, Richmond Hill, Brampton and Mississauga. Why aren’t Torontonians buying Toronto condos? My theory on this is that homes are cheaper in the ‘burbs, thus people are buying houses there and wondering what to do with their left-over cash so they buy more real estate as investment. Torontonians are mortgaged to the gills so they must have no money left at the end of the month to buy condos. It’s a theory…
3. They are investors. This one is pretty obvious by now. Most of the buyers at the big towers are 90-95% investors (as opposed to end-users who plan to live in the suite themselves).
4. They are fast. When a new condo launches they don’t need to think about it or consider which floor plan has the best walk-in closet. They just buy. They know that buying early in the Platinum level launch stage is basically a can’t-miss proposition. Prices will definitely go up.
5. They have done it before and they will do it again. More and more buyers are repeat buyers. The sophistication of the average new condo buyer has gone up significantly over the last few years. They know how the game is played and the gloves are off. The first thing that many of my clients do after they buy a new condo is start looking for the next one. They are always on the hunt for the next great opportunity.

Questions or comments? Please contact me.

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.

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.

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.