Paul Brent – Property Biz Canada

Cautious and optimistic or the more standard “cautiously optimistic” best describes the condos market outlook of Toronto builder Monarch Homes, which currently has more than 10 condominium tower under development in the GTA.

“We have definitely been on a very long and healthy run as far as condo sales” go, said Brad Carr, who was promoted to the post of President of Monarch last month. Carr, who joined Monarch in 2001 as Manager of Land Acquisitions, was promoted to Senior Vice-President of Low-Rise Operations in 2004. He replaced Brian Johnston, who went to Mattamy Homes as Chief Operating Officer.

While many critics focus on the sheer number of units being built and the spiraling prices that they are fetching – with the not so subtle implication that what goes up must come down and likely sooner rather than later, Carr contended that the fundamentals mean that the good times will roll longer than many think.

Comment: And the assumption that rising prices must drop makes no sense. All prices rise over time, it is inflation.

“When you look at the underlying shifts in terms of the movement of the units from the low-rise sector to the high-rise sector and the total ability of the Greater Toronto Area to absorb a certain number of houses, or let’s call it different forms of shelter, we are actually a lower point today than we were five, six years ago.”

Comment: Everyone ignores the changing housing trends, the different demographics. People want to live downtown now, more than in the suburbs. The dream is not a house for everyone anymore. And many people come to Toronto from countries where stacked living is the norm.

Carr dismisses the run-up in condo prices as a supply and demand issue rather than what some attribute to investor speculation, historic low interest rates or Asian assets seeking a “safe” home. “We are actually as an industry delivering less houses to the market in totality now than we were before,” he said.

The glass mushrooms of condo towers sprouting up across the GTA are getting a growth spurt in part by a shrinking number of townhomes and single-family homes as well as a dearth of new apartment stock, he said. “We are really also constructing a rental replacement. There is just isn’t purpose built rental being built and there hasn’t been really been any built for a couple of decades.”

Cast a Cautious Eye Across the City Maps

After laying out the business case for more condos in the GTA, Carr does strike a note of caution and adds that location is as important for builders as it is so much more famously for home buyers.

“We are definitely cautious in terms of where we put our buildings,” he said. “We feel that well located buildings at good value will continue to sell well. We have got to be careful that we don’t move too far afield from what drives really good location but at the same time it is not like we are stopping to invest or starting to call the market.”

Condo developers have been major beneficiaries of the easy money policies of the Canadian and U.S. central banks and Carr is taking them at their word that rates aren’t going to start marching north to any degree anytime soon, i.e. much before sometime into 2014.

“If that is the case, then definitely the time is now because again if you look at the overall affordability of our product relative to price and interest rates, monthly carry (costs) are still pretty attractive.”

One of the loudest and most prominent condo doomsayers is federal Finance Minister Jim Flaherty, who describes the Toronto condo market as overheated and has changed mortgage rules in an attempt to curb Canadians’ appetite for real estate debt. “I also talk to developers, and I hear from some of them who are in the business of building condos that they don’t really have a plan, they’re just going to keep building them until people stop buying them. …It will lead to a crash,” he told the Globe and Mail recently.

Comment: Building until people stop buying will not lead to a crash, it will lead to fewer condos being built. People will gradually stop, it is not like everyone gets together and decides one day to stop dead. Fewer buyers mean fewer projects and thus fewer units being built. Eventually things will settle at some sort of equilibrium. And we may even be there right now… We had 129 projects being built in 2006, so we are not that much higher now. This is not something new, condos have been going up for almost a decade now.

Average Costs Give Below Average Viewpoint

Carr argued that the focus on average condo costs in media reports is dangerous and misleading for a huge market like the GTA. “Our market has become so micro in terms of different types of product in different locations for different types of uses that I actually try and stay away from averages. Each product, each entity, really needs to be analyzed kind of in its little neighbourhood in the market.”

Comment: True dat!

With prices ranging roughly from $500 a square foot to $1000 a sq. ft. in the Toronto market, the Monarch president sees product “that is overpriced and there is product that is great value” and it is really up to buyers to make that determination.

Comment: And you even have some lower-end buildings getting down in the $300s per foot, while there are luxury properties commanding $1,200 or $1,400 or even more per foot. The average price for the average property in the CityPlace to Liberty Village spread is in the $500-650/sf range.

Monarch’s development strategy has been to locate its buildings either on subway lines or near the waterfront. “We find that those are kind of the two strongest areas where the demand continues for high rise condo.”

Because Monarch is competing with other condo developers and companies in the commercial real estate space for prime sites, securing the right land at the right price is the developer’s “number one challenge,” said Carr.

“We talked already about the supply and demand (for condo units) and the supply and demand for land is definitely out of whack as well in that there are a lot of developers chasing the same sites and that by its very nature tends to drive the price beyond maybe where it should be,” he said.

That is nothing new, however. “The reality is 10 years ago if you had asked me what the number one challenge was we have as a company it would be buying land and I’m sure if you are asking me 10 years from now it will be buying land. It is the raw material that as a developer we seek and it is the most difficult to find.”

What has changed is a rush of traditional low-rise developers moving into the high-rise part of the market. “That definitely has made that particular part of (development) more of a challenge.”

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did not
write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
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