Real estate development is often described as a hyper local business. You need local relationships and you need to understand the nuances of your market so that you can identify opportunities and best manage your risks. This is all true. New buildings don't exist in a vacuum; they are the result of land use policies, politics, economic conditions, culture, and countless other very specific factors. So when capital invests with a local "sponsor", they are expecting that developer to have the knowledge and experience to navigate all of these local risk factors.

At the same time, the world is only getting smaller and more interconnected. The result is that there are many things that aren't actually different across markets. For example, I find it interesting that, today, you can speak to a developer on the other side of the world and for it to feel like they're living the same life: "yeah, so, office vacancies are up (though we're looking at conversions), residential demand is down (individual investors have left the market), but there's still demand for student housing and distribution centers." On some level, we are all living and operating in the same market.

So perhaps a better way to think about real estate development is that it's both local, and global. And you need to be able to operate at all of the different scales in between. You need to worry about what's happening down the street and the R-value of your wall assemblies in the context of your local climate, but you also need to think about the macro environment. And this is likely to become only more true as time goes on and as new technologies continue to bring us closer.

In years past, it was relatively simple for Toronto condominium developers to underwrite pre-construction sales (which, as most of you know, is a requirement for construction financing). Notwithstanding the temporary blips, like at the start of the pandemic, it was easy to feel generally confident that the sales would be there when you needed them. It was just a question of 1) pricing and 2) how quickly could you get there (i.e. get through the zoning and entitlement process).

This is not the case today. And it's happening in many (most?) markets, not just Toronto.

Today, the market clearing price for new condominiums is below the cost of actually building them. So no developer knows what the pricing should be, because no developer can price there and still have a feasible project. In addition, the question of timing is no longer dependent on approval timelines (though please don't take this to mean that approval timelines don't impact projects). At this point in the cycle, there are lots of zoned sites available. The question is now: When will the pre-construction condo market return?

It is impossible to know the answer to this. If you have a truly differentiated product catering to a specific buyer pool, then it is possible the answer could still be today. But if you look at the number of condominium suites under construction in the region (more than 85k) and the number of suites expected to finish construction this year (around 27k the last time I checked), most people are broadly assuming the answer is, at the very least, a few years from now.

Not surprisingly, this is having a meaningful impact on high-density land values. If you don't know when and for how much you can sell for at the back end, then it's pretty challenging to run a residual land value model today. Because it's a lot harder to have conviction in your assumptions. What this also means is that, if your assumption is the market will take years to return, then you need to add in this additional cost of time into your model.