Toronto condo projects on hold as sales plunge

National Post/Tyler AndersonToronto condo king Brad Lamb said Thursday developers are facing a decision about whether to mothball a project by turning their development site into a parking lot or small office building.

Just five projects launched in Toronto in Q3-2012, as developers choose to review their pricing assumptions and unit mix

Architect Frank Gehry is designing three condo towers in Toronto that would be North America’s tallest residences. His latest contribution to his home town comes as the Canadian government is trying to cool the market after home prices surged 85% in the past decade.

The three sculpture-like towers, funded by theater promoter David Mirvish, will rise as high as 85 floors beside a century-old theater and near the Gehry-designed Art Gallery of Ontario. The skyscrapers, with a combined 2,600 residential units, will compete with hundreds of other projects in a city with more residential buildings under construction than anywhere else in North America.

Even Toronto condo king Brad Lamb, long a strong advocate of the high-rise sector, sees the writing on the wall.

He doesn’t think any sort of catastrophe is in the making but concedes builders have woken up to a new reality in the city when it comes to constructing new towers.

“Here’s what’s happening: Projects under construction are well sold and going ahead, there’s no issue. But projects waiting to get their [sales] numbers to start construction are slightly delayed as they get the units they have to [sell] to get going. We are selling but at a slower pace,” said Mr. Lamb, a broker in the city who is also developer.

His observations come as new data from condominium research firm Urbanation Inc. show there were 3,317 condominium apartment sales in the third quarter, a 30% drop from just a quarter earlier. The research firm says developers started putting off new buildings after unsold inventory hit a record high in the second quarter.

Brent Lewin/BloombergUrbanation, a research firm that tracks condominium sales, says developers started putting off new buildings after unsold inventory hit a record high in the second quarter.

Mr. Lamb said developers are facing a decision about whether to mothball a project by turning their development site into a parking lot or small office building. “What we did with one site is rent all the space out for 10 years,” Mr. Lamb said.

It’s not just Mr. Lamb. The trend seemed to catch fire in the third quarter to the point it affected sales.

“With slowing sales and a record level of unsold inventory in the market in the second quarter, condominium developers reacted quickly by delaying their project launches, especially in the ‘416’ area,” said Ben Myers, executive vice-president of Urbanation, adding that just five projects launched in Toronto in the third quarter.

The question is whether prices will go next. Already the average unsold unit in the Toronto census area was being offered at $573 a square foot at the end of the third quarter, up just 2% year over year.

Unsold inventory in what was the former city of Toronto is being offered at $670 a square foot, up from $668 a square foot from a year ago.

The good news is the lack of new supply is helping to reduce supply as unsold inventory hit a record 18,123 in the second quarter of 2012. It dropped to 17,182 in the third quarter. Urbanation says the share of unsold inventory in the Toronto (metro area) remains below the 10-year average of 22%.

The market for the resale market continues to soften. There were 5,050 sales of existing units in the third quarter, a 32% decline from 3,413 units sold in the second quarter. Prices are also flat, with the average unit selling for $407 a square foot, the same as the second quarter.

It is exactly what we had been expecting, some cancellations . . . Supply starting to react to demand, that is a functioning market and the way it should be

Investors might have resorted to smaller units to combat the high prices, Mr. Myers said. The average size of unit sold shrank from 910 square feet to 891 square feet, reducing the average end sale price to $362,000 from $370,000.

“The change in the mortgage insurance rules may have forced many buyers to settle for smaller units than they had previously desired,” he said. “The number of resale transactions for units priced over $400,000 fell 40% compared to last quarter, while there was a 38% quarterly drop in units traded over 1,000 square feet.”

Benjamin Tal, deputy chief economist at CIBC World Markets, said the pullback in sales and decisions by builders to hold off construction is probably good for the market.

“It is exactly what we had been expecting, some cancellations,” Mr. Tal said. “Supply starting to react to demand, that is a functioning market and the way it should be.”

In the interim, condominiums in the pipeline continue to get built. There were 207 projects with 56,336 units under construction in the metro area. It was the eighth straight quarter in which apartment construction starts have outpaced completions.

Mr. Tal expects downward pressure on price. “Demand will fall faster than supply; supply is not as flexible as demand,” said Mr. Tal, adding prices have already started to fall in the luxury segment of the condo market.

The economist said people need to remember that the high level of unsold inventory is restricted to the condo market. “It will probably be more severe than the rest of the housing market, especially in the big cities of Toronto and Vancouver.”