Toronto housing developers can cancel building up to 5,000 condo units as borrowing and building costs rise, according to an analysis by leading research group Urbanation Inc.
Construction costs have risen across the country. Building a high-rise building in Toronto is now 21 percent more expensive than in the same quarter last year, according to Statistics Canada’s construction price index. And as the Bank of Canada benchmark interest rate has risen 125 basis points in the past four months, construction loans are also getting more expensive.
Such an increase in costs can get a developer in trouble as projects typically cannot receive construction loans until most of their units have already been sold to pre-construction buyers. The time between pre-construction and commissioning is usually about five years. If costs rise during that period, a developer cannot easily raise prices to compensate because many of their apartments are pre-sold. Instead, higher costs eat away at profit margins. When projects become unprofitable, they are often canceled.
According to Urbanation’s research, about 5,000 preconstruction units sold for less than $1,000 per square foot last year, which would make them economically unfeasible to build under current financial conditions. “A lot of those could cancel,” said Urbanation president Shaun Hildebrand.
If developers in Toronto start canceling projects, buyers who made deposits on pre-construction apartments will get their money back, as required by Ontario law. But those who signed sales agreements years ago might find that they now have to pay higher prices for comparable units.
Tarion, the county’s consumer protection organization, says on its website that developers must specify conditions under which their projects can be terminated. Those conditions may include a developer failing to secure the necessary financing, or failing to meet the minimum number of pre-construction sales required for a building to go ahead.
The rise in the cost of building apartments in the Toronto area had already started before the pandemic disrupted supply chains and pushed up prices of building materials such as wood. Construction costs have risen 50 percent from early 2017 to today, according to commercial real estate data firm Altus Group.
The last time Toronto experienced a wave of condo cancellations was in 2018, when developers canceled 4,687 units due to rising construction costs, according to Urbanation.
“If the cost increase is 10 to 14 percent, you could lose your profit in less than a year,” said David Schoonjans, senior director of cost and project management at Altus. Developers who launched projects in 2019 and have not yet done any groundbreaking work, according to Altus data, are facing a 30 percent increase over construction costs at the time.
Even as global supply chain problems disappear and goods move faster, says Mr Schoonjans, the Toronto area will continue to face rising costs due to the sheer number of new-build homes in the area.
Housing projects hit an all-time high across the country last year, and the Toronto area saw a record number of apartments built. As a result, the demand for experienced carpenters and other construction workers has increased.
“The market is so overloaded and schedules are extended and missed,” says Schoonjans. “There is simply more work than there is capacity to do it, and that would be the case even without the pandemic.”
Real estate developers could raise the prices of units in future projects in anticipation of higher costs, but buyers may not be willing to spend much more than they already are. According to Urbanation, the average cost of a pre-construction condo in Toronto is already close to $1,400 per square foot.
The majority of condominium buyers are investors, each requiring a tenant to pay at least $3,000 per month to the mortgage payment on a 500-square-foot unit purchased with a 20 percent down payment at the typical five-year fixed rate, which is about 5 percent. That doesn’t include condo fees or other home ownership costs, such as taxes and maintenance.
Urbanation says developers planned to launch projects totaling 12,900 condo units in the Toronto area in the second quarter of this year. As of mid-June, according to Urbanation’s figures, 8,606 units had been brought to market in the quarter.
Your time is precious. Have the Top Business Headlines newsletter delivered to your inbox with ease in the morning or evening. Sign up today†