Real estate development is a risky endeavor and so a big part of this business is managing those risks. There's planning risk, market risk, construction risk, bad-drawing risk, and the list goes on. But it's also important to keep in mind that the risks you worry about the most will invariably change throughout the course of each real estate cycle.
For example, early on my career, we worried a lot less about construction cost escalations. We'd plug in a 2-3% annual increase into the pro forma and then move on the next line item. Of course, during the pandemic, this is almost all we worried about. What's our exposure? Do we have enough of an allowance? How are our subcontractor contracts drafted?
This particular panic has subsided since then, but now there's new panic: closing risk. We've spoken about this before, but given the number of condominium completions expected this year, I think it's going to remain top of mind for at least another 18 months (in the Greater Toronto and Hamilton Area).
The simple point I'd like to make today is that it's important to worry about risks, but it's equally important to worry about the risks that don't seem like risks at all today, which is admittedly trickier. Because you just never know. It's hard, for instance, to predict exactly when your largest trading partner might suddenly start an arbitrary trade war.
But it can happen, as we've learned.
Cover photo by Tiomothy Swope on Unsplash
The turning point for the Toronto housing market, including pre-construction condominiums, was, I would say, in the spring/summer of 2022. This is when the market turned and sentiment changed dramatically. What that means is that we are about to enter year three of this downturn. Time flies when you're grinding away. How long it lasts is anyone's guess, but new sales and completions are a good place to look.
Last year, the GTHA saw approximately 29,800 condominium homes complete according to Urbanation. This is slightly above Zonda's estimate of 27,228. Whatever the exact number, it was a high number of completions. And this year, the forecast is for something similar. But given how precipitously new home sales have fallen off, it's only a matter of time before completions do the same.
Here's what Zonda Urban is currently forecasting:
Real estate development is a risky endeavor and so a big part of this business is managing those risks. There's planning risk, market risk, construction risk, bad-drawing risk, and the list goes on. But it's also important to keep in mind that the risks you worry about the most will invariably change throughout the course of each real estate cycle.
For example, early on my career, we worried a lot less about construction cost escalations. We'd plug in a 2-3% annual increase into the pro forma and then move on the next line item. Of course, during the pandemic, this is almost all we worried about. What's our exposure? Do we have enough of an allowance? How are our subcontractor contracts drafted?
This particular panic has subsided since then, but now there's new panic: closing risk. We've spoken about this before, but given the number of condominium completions expected this year, I think it's going to remain top of mind for at least another 18 months (in the Greater Toronto and Hamilton Area).
The simple point I'd like to make today is that it's important to worry about risks, but it's equally important to worry about the risks that don't seem like risks at all today, which is admittedly trickier. Because you just never know. It's hard, for instance, to predict exactly when your largest trading partner might suddenly start an arbitrary trade war.
But it can happen, as we've learned.
Cover photo by Tiomothy Swope on Unsplash
The turning point for the Toronto housing market, including pre-construction condominiums, was, I would say, in the spring/summer of 2022. This is when the market turned and sentiment changed dramatically. What that means is that we are about to enter year three of this downturn. Time flies when you're grinding away. How long it lasts is anyone's guess, but new sales and completions are a good place to look.
Last year, the GTHA saw approximately 29,800 condominium homes complete according to Urbanation. This is slightly above Zonda's estimate of 27,228. Whatever the exact number, it was a high number of completions. And this year, the forecast is for something similar. But given how precipitously new home sales have fallen off, it's only a matter of time before completions do the same.
Here's what Zonda Urban is currently forecasting:
They are expecting 2027-2028 to be fairly normal. The above figures would be just under the 10-year average. But then completions fall off a cliff starting in 2029 and go down to basically nothing in 2030 — 411 condominium homes could be a single project!
My sense is that this cliff is going to occur earlier. 2027 will be five years since the market turned. That's enough time for many, if not most, pre-sales to get through construction. It's also important to point out the obvious fact that some large percentage of the above completions need to be categorized as new rental housing. So this looming housing shortage will impact both buyers and renters.
Cover photo by Patrick Tomasso on Unsplash
They are expecting 2027-2028 to be fairly normal. The above figures would be just under the 10-year average. But then completions fall off a cliff starting in 2029 and go down to basically nothing in 2030 — 411 condominium homes could be a single project!
My sense is that this cliff is going to occur earlier. 2027 will be five years since the market turned. That's enough time for many, if not most, pre-sales to get through construction. It's also important to point out the obvious fact that some large percentage of the above completions need to be categorized as new rental housing. So this looming housing shortage will impact both buyers and renters.
Cover photo by Patrick Tomasso on Unsplash
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