I have vivid memories of being in a broker meeting many years ago talking about development land in Vancouver. Our team's comment was that it felt expensive. I mean, Toronto was expensive, and Vancouver was even more. Why? It has one-third the GDP of Toronto. The response we got was something like this: "Yeah, Vancouver may seem pricy, but you just need to get into the market. Then in 5 years you'll be happy you did."
Well it's been more than 5 years and now this is the market:
The market for development sites is being tested by a roughly 50-per-cent drop in value since 2022, according to Mark Goodman. The principal of Goodman Commercial Inc. said Broadway Plan sites, for example, were selling for about $200 per square foot buildable three years ago. Sellers can now expect closer to $100 per square foot buildable, he told BIV. Goodman currently has three Broadway Plan listings.
Of course, Toronto is in a similar situation today. If there's no market for new condominiums and apartment rents aren't growing, then high-density land values are going to feel the impact. But I do think it's interesting that, in some ways, our response was being anchored by our experience in Toronto. What we know, and have accepted, often becomes a baseline for assessing if something else feels expensive or cheap.
I sometimes see the same thing with long-time developers. They remember what they used to sell and/or rent apartments for, and have a harder time accepting today. But this is a positive thing if it compels greater deal scrutiny. Advice like "you just need to get into the market" is never sound. But if you were to take this approach, I would bet that today is a better time than 5 years ago.
Vancouver is in the same boat as Toronto. The Globe and Mail recently reported that the number of newly completed, unsold condominium suites in the city is expected to increase to 3,493 by the end of this year, which would be a 60% increase compared to the end of last year and one of the highest levels of unsold inventory in recent times.
The profound change, as we know, is that individual investors have largely left the market. Also in the article is some commentary from Ryan Berlin, who is head economist of Rennie Intelligence. According to Rennie's data, investors made up about 50% of their buyers from 2020 to 2023. In 2024, this number dropped to around 25%. And so far this year, the number is ~7%.
At the same time, the math is not mathing for developers:
Real estate appraiser David Eger, vice-president of Western Canada for Altus Group Ltd., gave the example of an older Vancouver apartment block within the Broadway Plan that is currently on the market for $12.2-million. To achieve a profit margin of 10 per cent of total costs to redevelop the site, the developer would have to pay drastically less, around $3-million for the property. That’s based on a rent of $5.50 per square foot, or $3,300 a month for a 600 square-foot unit.
In some ways, all of this is what housing critics wanted: "Too many speculative investors are buying new homes and outbidding actual end users." But now they're not. So where are all the end users? Aren't we in a housing crisis? This is the paradox of our current market. But I think the lesson is that a housing crisis does not necessarily equal a housing shortage in all segments of the market.
Another way to think about it is that the inventory that is now accumulating has lost product-market fit. The market used to be a lot of investors, but now it's not. So either the market needs to change again or the product needs to adapt to what the market wants today. And I suspect that, even in today's market, there would be strong demand for more affordable family-oriented housing.
The challenge is that our industry and our cost structures are not currently set up to deliver this kind of product. In software, it's relatively easy to pivot in search of product-market fit. But it's not so easy in real estate. Using the above example from appraiser David Eger, you'd need a negative land value (i.e. a subsidy) in order to be able to feasibly deliver more affordable family housing. That is, larger homes at a lower per square foot rent.
But I think this is how all city builders should be thinking right now. We should be viewing this point in the cycle as an opportunity. It's an opportunity to ask ourselves: what does the housing market want and how could we actually deliver it? Then it's time to get creative and figure out how to pivot our collective product. There are, of course, lots of levers we can pull.
Cover photo by Nate Foong on Unsplash
Toronto may not be selling that many new condominiums these days, but population growth remains high across the region. For the 12-month period ending July 2024, the Toronto census metropolitan area added approximately 269k people. And for the 12-month period ending July 2023, it added about 255k people. In the context of Canadian and American cities, this makes it the fastest growing metropolitan area for two years running (see above chart). Lower immigration targets are expected to bring this number down going forward, and so it'll be interesting to see what these numbers look like for the period ending this summer, but this is still over half a million people in two years. I think it's also noteworthy that our housing market turned and pre-construction sales slowed around the middle of 2022, and yet our population growth and immigration levels remained the highest in Canada and the US for at least another two years. Maybe this lag helps us recover sooner than some might expect.
Chart from the Centre for Urban Research and Land Development at TMU; cover photo by Mikayla Martorano on Unsplash
