Ten years ago when I was working on development pro formas (here in Toronto), we used to assume that we would launch condominium pre-sales, and then start working drawings once we hit somewhere around 50% sold. And for our hard costs, we would carry a modest inflation rate of say 2-3% per year.
Ten years ago when I was working on development pro formas (here in Toronto), we used to assume that we would launch condominium pre-sales, and then start working drawings once we hit somewhere around 50% sold. And for our hard costs, we would carry a modest inflation rate of say 2-3% per year.
The thinking at the time was that construction documents are expensive, let's not spend the money until we know that we have a good amount of sales under our belt. In Toronto, you can also use purchaser deposits toward project costs, so this is an equity efficient way of managing your cash flow.
But then this go-to-market strategy started becoming too risky, probably around 2017-2018. Sales were happening faster and costs started increasing a lot faster, and so now everyone wanted to minimize the lag between their pre-sales (your revenue) and when they procured construction (your costs).
So as an ideal and totally risk-averse approach, the objective was to be ready to start construction and to know what your hard costs would be before you even started selling condominiums. It didn't matter that you were going to spend a bunch of money on technical drawings, because it was still going to be many multiples less than your cost escalation exposure if you didn't do it. There was also a high degree of confidence that you would get the pre-sales once you did launch.
This is how things mostly worked during the pandemic. But strategies once again changed in the second half of 2022. Pre-sales slowed and people started wondering, "wait a minute, could hard costs actually come down?" The answer turned out to be yes and, this year, most people in the industry expect them to come down even further.
This is a good example of how quickly and dramatically things can change in development. In 2021, it was "we need lock in construction costs immediately or we might get hit with a 40% increase on glass." Now it is, "let's wait as long as possible because we're in a deflationary cost environment and I'm sure it'll be cheaper later."
To some extent, you can look to leading indicators like architecture billings and home pre-sales to determine what the future might look like. But it's far from perfect. I don't know anyone that accurately predicted what we just went through over the last number of years.
So as a developer, you just have to do your best to stay ahead of what's coming and manage your downside risk as best you can. In all cases, you're going to need to be creative and nimble. Because clearly a lot can change in the span of even a single development project.
Urbanation just released its Q3-2020 market update for the Greater Toronto Area and the data is very encouraging for the new condo market. Here are some of the highlights:
There were 6,730 new condominium unit sales in Q3. This represents a 30% year-over-year increase.
More of this growth happened in the suburbs (905) with 3,834 units sales vs. 2,536 unit sales in the City of Toronto (416).
Of the 6,694 units that launched for sale in Q3, about 3/4 of them sold. This is the highest absorption rate since Q4-2017.
The average selling price for a new condo launched in Q3 was $1,044 psf (GTA average). This is up 3.5% compared to last year.
New launches in the suburbs sold for an average of $915 psf. New launches in the City of Toronto sold for an average of $1,275 psf.
I reckon that many of the people purchasing right now are looking through and to the other side of this current macro environment. They recognize that things will get better and that the Toronto region will continue to thrive. That's certainly how I'm thinking about it.
For the full Urbanation news release, click here.
Photo by Warren Wong on Unsplash
Urbanation released its Q2-2020 condo market survey results earlier this week. This data represents the first full quarter of sales to be entirely impacted by COVID-19. Not surprisingly, sales activity was way down. But pricing and construction starts actually increased. Here are some of the highlights:
New condo apartment sales totaled 1,385 units across the Greater Toronto Area. This represents an 85% year-over-year decline and the lowest sales activity since Q1-2009. Only six projects launched during this quarter.
Most of the projects that did launch were outside of the core of Toronto. So that skewed pricing downward. In the first quarter of 2020, the average selling price for new launches was $1,159 psf. In Q2, this number was $889 psf -- again, reflecting a shift in geography.
But if you control for geography and compare year-over-year launch prices within the same submarkets, prices did in fact increase in Q2 compared to last year. At the same time, the average price for unsold units in Q2 increased by about 9% year-over-year to a record high of $1,087 psf. Unsold inventory also declined by about 19% from last year.
On the construction front, a total of 7,388 units started construction in Q2. This is a 45% increase from Q2-2019. A lot of this growth is coming from the suburbs, where presumably there are fewer supply constraints.
Given the resiliency that the market has been showing, Urbanation expects to see an increase in new project launches in Q3.
Chart: Urbanation
The thinking at the time was that construction documents are expensive, let's not spend the money until we know that we have a good amount of sales under our belt. In Toronto, you can also use purchaser deposits toward project costs, so this is an equity efficient way of managing your cash flow.
But then this go-to-market strategy started becoming too risky, probably around 2017-2018. Sales were happening faster and costs started increasing a lot faster, and so now everyone wanted to minimize the lag between their pre-sales (your revenue) and when they procured construction (your costs).
So as an ideal and totally risk-averse approach, the objective was to be ready to start construction and to know what your hard costs would be before you even started selling condominiums. It didn't matter that you were going to spend a bunch of money on technical drawings, because it was still going to be many multiples less than your cost escalation exposure if you didn't do it. There was also a high degree of confidence that you would get the pre-sales once you did launch.
This is how things mostly worked during the pandemic. But strategies once again changed in the second half of 2022. Pre-sales slowed and people started wondering, "wait a minute, could hard costs actually come down?" The answer turned out to be yes and, this year, most people in the industry expect them to come down even further.
This is a good example of how quickly and dramatically things can change in development. In 2021, it was "we need lock in construction costs immediately or we might get hit with a 40% increase on glass." Now it is, "let's wait as long as possible because we're in a deflationary cost environment and I'm sure it'll be cheaper later."
To some extent, you can look to leading indicators like architecture billings and home pre-sales to determine what the future might look like. But it's far from perfect. I don't know anyone that accurately predicted what we just went through over the last number of years.
So as a developer, you just have to do your best to stay ahead of what's coming and manage your downside risk as best you can. In all cases, you're going to need to be creative and nimble. Because clearly a lot can change in the span of even a single development project.
Urbanation just released its Q3-2020 market update for the Greater Toronto Area and the data is very encouraging for the new condo market. Here are some of the highlights:
There were 6,730 new condominium unit sales in Q3. This represents a 30% year-over-year increase.
More of this growth happened in the suburbs (905) with 3,834 units sales vs. 2,536 unit sales in the City of Toronto (416).
Of the 6,694 units that launched for sale in Q3, about 3/4 of them sold. This is the highest absorption rate since Q4-2017.
The average selling price for a new condo launched in Q3 was $1,044 psf (GTA average). This is up 3.5% compared to last year.
New launches in the suburbs sold for an average of $915 psf. New launches in the City of Toronto sold for an average of $1,275 psf.
I reckon that many of the people purchasing right now are looking through and to the other side of this current macro environment. They recognize that things will get better and that the Toronto region will continue to thrive. That's certainly how I'm thinking about it.
For the full Urbanation news release, click here.
Photo by Warren Wong on Unsplash
Urbanation released its Q2-2020 condo market survey results earlier this week. This data represents the first full quarter of sales to be entirely impacted by COVID-19. Not surprisingly, sales activity was way down. But pricing and construction starts actually increased. Here are some of the highlights:
New condo apartment sales totaled 1,385 units across the Greater Toronto Area. This represents an 85% year-over-year decline and the lowest sales activity since Q1-2009. Only six projects launched during this quarter.
Most of the projects that did launch were outside of the core of Toronto. So that skewed pricing downward. In the first quarter of 2020, the average selling price for new launches was $1,159 psf. In Q2, this number was $889 psf -- again, reflecting a shift in geography.
But if you control for geography and compare year-over-year launch prices within the same submarkets, prices did in fact increase in Q2 compared to last year. At the same time, the average price for unsold units in Q2 increased by about 9% year-over-year to a record high of $1,087 psf. Unsold inventory also declined by about 19% from last year.
On the construction front, a total of 7,388 units started construction in Q2. This is a 45% increase from Q2-2019. A lot of this growth is coming from the suburbs, where presumably there are fewer supply constraints.
Given the resiliency that the market has been showing, Urbanation expects to see an increase in new project launches in Q3.
Chart: Urbanation
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