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New realities change the condo landscape
Builders and buyers alike will face financing challenges this year
By Derek Raymaker – Globe and Mail
Making New Year’s predictions about the future of the housing market is always a mug’s game. But I’ll go out on a limb and suggest that 2009 will forever be known as the “year of the banker.”
Toronto condominiums in particular have defied gravity in terms of height, sales volume and price increases over the past five years. The sector has had no shortage of cheerleaders making the case for more towers, based on evidence that empty-nesters will demand more maintenance-free living options, and that first-time buyers — even young families — have been largely priced out of the detached-home market.
But even the most enthusiastic boosters of the “condofication” of the Greater Toronto Area will admit that 2009 will be a year of reckoning. More importantly, it will be a year when financial institutions hold all the cards and won’t be interested in taking risks they might have accepted even a year ago.
Scratch that: Make it a mere three months ago. At a gathering of the non-profit Urban Land Institute in late October, well over 100 developers, real estate brokers, planners, marketing specialists and other observers gathered in a trendy King Street lounge to get a glimpse of the future from a panel who’d been through downslides before.
Among them was Peter Freed of Freed Development Corp. “Sales have been very strong in 2008,” he said, but after a long pause, added: “up until last week.” Mr. Freed made the tongue-in-cheek observation in the grand tradition of gallows humour that only developers who survived the last recession in the early 1990s can appreciate.
Right now, there are more than 50 mid-rise or high-rise condo projects in the GTA that are operating in a precarious financial zone: They have launched sales and are taking deposits from buyers, but they are not under construction. This means financing for construction is not likely to be secured, and the major lenders have changed the rules considerably since the economic slowdown turned into a full-blown crisis, with leading banks imposing a full lockdown on available funds.
A year ago, most lenders were content to offer construction financing to condominium projects that had presold half of their available suites. And these lenders weren’t particularly picky about who those purchasers were and how much they put down on deposit.
Today, lenders are filtering developers’ sales reports and deposit information through rigorous analyses before construction financing is made available, according Garry DeGeer, executive vice-president of the mortgage broker Murray & Co., which helps arrange financing for developers.
“What they want to see is who is it who is buying and can they close,” Mr. DeGeer said in an interview. “Some lenders are not accepting offshore buyers [investors who purchase suites for rental income and who might not even live in the country].”
That means that lenders are far more comfortable funding buildings whose suites have been purchased largely by people who intend to live in them. But the 50% sales threshold is a faint memory, according to Mr. DeGeer. Now, lenders won’t even consider releasing funds unless 75% to 80% of suites have been sold. And even then, they are strongly encouraging developers to squeeze a 20% down payment out of buyers.
“Also, today, banks would say they need one or two partner banks to share the risk,” he added.
In the first couple of months of this year, you can expect some sales centres to quietly shut their doors and go on the backburner to wait for better times to return. Already last month, Minto Urban Communities put the shutters on its Minto King West project. That move came as a surprise after an intense advertising campaign leading up to the launch.
“I’ve been through three recessions,” Barry Lyon, a high-rise market research consultant who heads N. Barry Lyon and Associates, said in an interview. “It gets complicated right now because we’ve always had a very slow market in December and January.”
Other markets, such as in Vancouver and Calgary, have screeched to a much more dramatic halt than the Toronto condominium market, he added. “We’re much better off than them,” Mr. Lyon said. “We didn’t fall into that trap of kiting prices.
“We needed a correction to bring prices more in line and to bring our construction costs down.”
Besides the market favouring buyers for the first time in several years, most observers expect developers who are in a position to launch new projects this year will likely have to pare them down to make it easier to hit their preconstruction sales targets and satisfy the banks.
Some planned 400-unit buildings may be cut back to 200 units.
These decisions will depend greatly on what the developer originally paid for the land. If a site was purchased at the height of the market in 2007 — when, for instance, a parcel of downtown land for a single tower might have fetched between $10-million and $12-million — reducing the number of suites to suit lender conditions may not be feasible.
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