Tag Archives: Ben Myers

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Is buying pre-construction worth the risk?

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Is buying pre-construction worth the risk?

Who doesn’t love the word new? It’s one with many possibilities: I just got the new iPhone, I just started a new relationship, I’m excited about the new school year. You know you’re lying if you say you don’t love that new car smell.

The thought of owning a new home is extremely enticing and exciting. However, the market for new condominiums in the GTA is extremely competitive, and suites sell very fast. To purchase your dream home or ideal investment unit, you need to move fast, and that means purchasing off plans without physically walking through the unit, and waiting three to five years or more to take possession.

The desire to own something new is offset by the trepidation that comes with buying real estate from a brochure, and not knowing when (or even if) the building will complete. The development industry is a risky business, with the requirement for a significant number of the units to be sold to qualify for construction financing, and the unknowns that come with selling in one market and building in another. Just like many of the items you’re shopping for today, construction costs are going up, too.

Ultimately, it comes down to the question: Is it worth the risk? Unfortunately, there is no one-size fits-all response. A purchaser needs to consider the experience of the developer, the value proposition of the new building to a recently completed condo nearby, the expected occupancy date, the condo fee, parking cost, ceiling heights, interior finishes, common building amenities, balcony size, proximity to transit, future development plans nearby, other infrastructure investments on the way and more.

A pandemic has thrown another monkey wrench into the equation, as many GTA residents are reconsidering their housing needs. Interest in Toronto new home properties has declined, while interest in new developments in areas such as Whitby, Vaughan, Richmond Hill and Oakville has increased. Figures from rentals.ca and Bullpen Research & Consulting show that asking rents for downtown condos have declined by 15 per cent year-over-year. How does one forecast prices and rent in 2024 and 2025, when we can’t even forecast what those levels will be in the fall of 2020?

The resale housing market dropped significantly in April and May of this year during the COVID lockdown, but just recently set a record high for average pricing to the surprise of just about everyone. New condominium prices have increased for 25 consecutive years, including the 2008-09 global financial crisis, and the 2017 Toronto housing bubble and correction, and so far prices have survived the COVID-19 pandemic. All to the chagrin of many pundits and housing bears who predicted the demise of the industry for more than 15 years.

The truth is house prices can and will go down, the new condo project you buy into could get cancelled, and based off reasonable projections, the likelihood of renting a new downtown condominium that is cash flow positive from day one is pretty low. However, Canada is one of the most desirable countries in the world, and the tech sector in Toronto is blowing up. And when our borders open back up, expect a flood of new immigrants, and the return of the short-term rental market, specifically Airbnb. It’s unlikely a 25-year-old wants to live alone in a single-family home in Woodstock; they want to be where the action is in downtown Toronto.

Having followed the Toronto market for nearly 20 years, I do not believe supply can keep up with demand over the long term. However, I expect Toronto prices to continue to grow at a pace above-inflation on average over the next 10 years. There will be short-term fluctuations, and there will be price declines. But if someone purchases with a long-term hold mindset, does the research, and surrounds themselves with an experienced team (realtor and mortgage broker), buying a new home can be worth the risk.

Ben Myers is President of Bullpen Consulting, a boutique residential real estate advisory firm specializing in condominium and rental apartment market studies, forecasts and valuations for developers, lenders and land owners. bullpenconsulting.ca Twitter@benmyers29

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Is there a mass exodus from Toronto in our future?

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Is there a mass exodus from Toronto in our future?

 

Toronto

COVID-19 and this current health crisis has forced many of us to reconsider where and how we should be living, and where and how we should be working. The 400-sq.-ft. downtown condominium unit was perfect for your short walk to work, your access to nearby restaurants and nightclubs, and your short subway ride to your bestie’s house. Now, you’re working from home in a cramped space, your favourite restobar is shut down and you’re afraid to take public transit.

Where is the best place to live in the era of contagious viruses?

Every Torontonian has a slightly different version of this pandemic reconsideration story, with questions such as: Do I want to raise my kids downtown? Do I want to be crammed closely into elevators, streetcars, cubicles or tiny boutique fitness centres? Will a suburban lifestyle keep me and my family safer? Or, will a move to a much smaller municipality outside the GTA be better for our general well-being and health?

Massive shift

We have witnessed a massive shift over the last 20 years, with the complete revitalization of downtown Toronto, the building of new office buildings and especially new highrise condominiums. The city’s population has soared in recent years. Many buyers have chosen to live in downtown condos for lifestyle and environmental reasons, to be walking distance to cafes, shops, parks, friends, hospitals and employment – all while reducing the need for development on the outskirts of the GTA that eats up greenfield lands and increases the reliance on personal automobiles for transport. They don’t want to pay for a parking spot, a car lease, license fees or insurance for a vehicle that sits in a garage most of the day and pumps out pollution the rest of the time.

A second group of people are living in downtown condominiums and rental apartments for affordability reasons, while they would much prefer to live in a single-family detached home in an inner-suburban community with a big backyard and two parking spaces. However, that requires many years to save for, and based on recent trends, that number of years is rapidly increasing. They need to be as close to work as possible to save time and money, and centrally-located highrise buildings fit the need in the short term.

Mass exodus?

Because of COVID-19, some experts are predicting a mass exodus out of Toronto, as people flee for less expensive housing and more rural and isolated locations to escape this deadly virus. If you’re thinking about buying in Toronto, how worried should you be about prices falling due to a major decline in demand as residents pack up and leave?

We will certainly see some of the older residents in the lifestyle group sell their suites and move to the smaller quaint and walkable downtown areas in places such as Peterborough, Brighton, Cobourg, St. Catharines and Niagara-on-the- Lake. However, expect most to stay due to proximity to family and friends, and the unwillingness to start over in a new place, finding doctors and dentists – and even finding the best pizza slice.

The second group, the ones living in Toronto for affordability reasons only, have less ability to move. If you can afford only a $600,000 condo, you have to travel pretty far to get a single-family house for that price, and you better be a handy person for all the work you’ll have to do on it. Secondly, the work-from-home situation isn’t likely to be permanent for most employers, so we hope you like sitting in traffic.

Desirable city

Anyway you slice it, the predicted demise of Toronto is premature. It is one of the most desirable cities in the world to live in. When the borders reopen, expect there to be a backlog of people looking to come here, especially with the social and political unrest south of the border, not to mention the unruly spread of COVID-19.

Don’t be a short-term speculator. Buy for the long term, add value to the property you buy via design, renovations and additions – but stay within your budget. The grass isn’t always greener on the other side, and people’s love of Toronto will ultimately trump their fear of the virus. Good luck.

Ben Myers is President of Bullpen Consulting, a boutique residential real estate advisory firm specializing in condominium and rental apartment market studies, forecasts and valuations for developers, lenders and land owners. bullpenconsulting.ca Twitter@benmyers29

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Should you keep waiting to buy that new condo?

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Should you keep waiting to buy that new condo?

It’s July 2020, the world is still reeling from the health and economic impacts of COVID-19, and you’re spending a lot more time at home. You may find yourself more annoyed with the things your place doesn’t have, but is this really a good time to buy a new home?

The conditions in the resale market often precede movements in the new home segment, so let’s start there. The resale market in the Greater Toronto Area (GTA) has started to pick up, and the anecdotal commentary from realtors is that demand has clearly returned. However, supply is begining to increase, too, and it looks like listings are coming.

Evan Siddal, CEO of Canada Mortgage and Housing Corp. (CMHC), warned anyone who will listen that we shouldn’t be reading too much into the pricing during a low volume, low supply market. Pricing is always sticky in the short term as sellers cling to pre-pandemic prices, and are often reluctant to accept the new market reality.

CMHC recently forecast a decline in resale house prices in Canada of between nine and 18 per cent over an 18-month period, with a more muted drop in the GTA. Principal Market Analyst Dana Senagama says CMHC’s forecast for the Toronto Census Metropolitan Area calls for an increase of one to six per cent in the resale market in 2020, but there could be a drop of as much as 12 per cent next year. They didn’t factor in the recent mortgage insurance rules changes, either.

We will likely begin to see more listings in the resale market as government financial assistance programs expire, and lenders’ mortgage deferral periods run out. This could impact the resale condominium market more severely, as the decline in tourism and out-of-town contract work has resulted in many owners of short-term rentals listing them for sale and rent. This has had a negative impact on rental rates, especially in downtown Toronto.

Considering all that, how much stock do you put in the resale housing market, when you’re looking at purchasing a new condominium which may not be ready to occupy until 2025 or 2026? If you’re buying for an investment, are these pandemicimpacted figures you’re seeing an indication of what is to come? Or a temporary blip?

If you’re an investor, the recent data looks grim. The latest findings from rentals.ca and Bullpen Consulting show that rent declines for leased condos have been the deepest for twobedroom and larger suites. In addition, three brokers told a recent webinar hosted by In2ition Realty that two-bedroom demand was non-existent. Expensive units and a decline in desire to take on roommates at this time is killing that market. Working from home with a roommate isn’t popular. But, a vaccine could be approved next year and everything could go back to normal.

This may seem like semantics, but the condo rental market is not oversupplied right now – it is suffering from under demand. People are afraid to move, others who want to come from other countries for work and school cannot, and even recent graduates are starting jobs by working at home at their parent’s residence. There is a freeze on movement – retirees not moving down, new households not forming and delinquent tenants not evicted. We are not in a normal market, not even close.

If you put my feet to the fire, I’ll say the GTA new home market begins to recover in the second half of 2020. There have already been a couple successful new condo projects launched in the past three months.

These new-home buyers are clearly focusing on the long term. Toronto is a dynamic city and people will come here, businesses will come here. Turmoil south of the border regarding the virus and the divisive political climate will only help us when we open the borders again.

If you’re buying with a five- to 10-year hold anticipated, rates are good, and developers are offering some intriguing incentives. My advice is to surround yourself with a knowledgeable team, beginning with a realtor and a mortgage broker, buy what you can afford, and buy for the long term. Good luck.

Ben Myers is President of Bullpen Consulting, a boutique residential real estate advisory firm specializing in condominium and rental apartment market studies, forecasts and valuations for developers, lenders and land owners. bullpenconsulting.ca Twitter@benmyers29

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Outlook 2020 – Deena Pantalone, Managing Partner and Director of Marketing & Innovation, National Homes

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Outlook 2020 – Deena Pantalone, Managing Partner and Director of Marketing & Innovation, National Homes

Part of our series of Outlook 2020 Q&As with building industry executives

How do you see the outlook for the new home industry in 2020?

We’re going to see strong demand fueled by record population growth. The period from August 2018 to July 2019 was the largest 12-month population increase in Canada’s history. And the industry is not building enough housing, especially rental housing. At the end of November 2019, ReMax predicted a six-per-cent increase in the average cost of a Toronto resale home in 2020 – fueled by demand that just isn’t being met.

Deena Pantalone
Deena Pantalone, Managing Partner and Director of Marketing & Innovation, National Homes

Ben Myers of Bullpen Research says Toronto needs 22,000 new rental apartments a year to create a healthy vacancy rate of three per cent. If you include all the new purpose-built rental units coming on, say 4,000, plus if you assume that three-quarters of all new condos will be rented, then we’re still falling 9,000 units short. That’s not good for renters, homeowners or the health of our economy.

One thing I definitely see is that people are open to new ideas, new technology and design that will make their lives easier and give them time for the important things in their lives. And that means property technology (Proptech) will become more and more central to their lives, and to the building industry in general.

And what’s the outlook for National Homes?

For decades now, National has focused on putting the needs of our customers first, and that’s what our You are the Blueprint philosophy is all about.

This year, we’re introducing a wide range of “Bright Ideas” that were developed at National’s inaugural Blueprint Workshop. Globally recognized leaders in the fields of technology, product development and design, participated in group interactions and the co-creation process. Also taking part were dozens of past and prospective National buyers of varied ages and demographics; National staff architects, designers and engineers; and students from York University’s Schulich School of Business real estate master’s program. The results are now being unveiled in our newest communities.

What is National Homes doing to address the issues facing the homebuilding industry – namely, affordability and new home supply?

Our Bright Ideas are intended to make people’s lives simpler, from innovative Proptech to design solutions. We are introducing four different townhome projects, from Courtice in the east to Burlington in the west. We are also introducing new construction thinking, such as our Panergy Wall Systems that bring factory efficiency and quality with significant energy cost savings, year after year.

We’re also making it easier for young families to own with plans for flexible down payment programs.

What more could the industry do to address these issues?

It’s all about innovation! The building industry hasn’t changed much in 100 years. New thinking, new products, new technology… the only way we’re going to adapt to the needs of a new millennium are by doing things differently and better.

Our industry needs new ways of building that save time, and therefore money, new products that save real dollars in energy costs, new construction methods that reduce waste and improve quality.

What should prospective new-home buyers know about National Homes for 2020?

In Bradford, we have 40 detached ravine lot homes from the mid $800’s at The Forest. In east Brampton’s Three Rivers Claireville, we have Phase 2 of our townhomes, right next to the 850- acre Claireville Conservation Area. In Burlington, we’re launching townhomes at Tyandaga Heights on Brant Street, by the Tyandaga Golf Course. And in Courtice, we’re introducing The Vale by National, backing onto woods and a stream.

Why should homebuyers consider buying from your company in 2020?

We design with the needs of our customers in mind. That’s more than a motto, it’s central to the way we work. Our Blueprint Workshops are the spark that drives our design. We learn what people want; what they wish builders could offer; then we create the communities, the homes and the features that satisfy those dreams. And we’re building communities from east to west, so if you’re looking for a National home, we’re where you want to live.

Special Report: Outlook 2020

Outlook 2020 – Jim Andrews, Director of Sales & Marketing, Fieldgate Homes

Outlook 2020 – Shakir Rehmatullah, President, Flato Development Inc.

Outlook 2020 – Mike Parker, Vice-President Sales & Marketing, Georgian International Build Corp.

Outlook 2020 – Brad Carr, CEO, Mattamy Homes Canada

Outlook 2020 – Art Rubino, Contracts Manager & Marketing Manager, Regal Crest Homes

 

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THE RESEARCHER: Are developers properly managing risk?

THE RESEARCHER: Are developers properly managing risk?

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THE RESEARCHER: Are developers properly managing risk?

by Ben Myers
Bullpen Research & Consulting

With land prices skyrocketing across the GTA and zoning approval timelines growing, the upfront financial investment required by developers has increased substantially in recent years.

Many builders and developers are now taking on equity partners to reduce their exposure to any one project, share their entitlement, development and execution risk, while allowing them to free up the capital to pursue other opportunities. The institutionalization of residential real estate is growing rapidly, and even the typically old-school self-funded family homebuilders are considering alternative financing options. It would not be a surprise to see a couple of GTA developers go public in the next decade, as a way to access public funding for their massive new projects. Another way developers are managing risk is understanding the marketplace. After 15 years of advising developers and landowners about freehold and condominium market conditions in Ontario, I launched my own firm, Bullpen Research & Consulting, in January of this year to help my clients figure out those risks.

Buyer and investor sentiment shifts quickly with each successive federal, municipal or geopolitical change, and smart developers realize they need someone in their corner that’s staying up on the impacts of the latest mortgage rule changes, the reactions to increased rent control legislation, attitudes regarding rising interest rates and other industry participants’ opinions on changes to the OMB, land prices, midrise development and sales strategy.

How does a developer maximize revenues while reducing market risk in the condominium apartment market? Some developers prefer to sell all of their units in a building during the first six months, reducing future absorption risk. Others prefer to sell 60 to 70 per cent of their suites upfront and slowly release the remainder of the unsold inventory during the pre-sale and under-construction period. This second strategy is deployed to ensure they can take advantage of future price inflation and have a revenue source to cover potential cost overruns.

Five years ago, developers in Ottawa got burned by holding back inventory as the market tanked and values corrected. In Toronto, the opposite occurred; developers that sold out didn’t reap the benefits of the sharp increase in values and were ultimately hurt by the 10 to 15 per cent increase in construction costs in early 2018. The phrase “you have to sell and build in the same period” has been uttered quite frequently lately.

The market for singles, semis and row homes had experienced steady price growth for 20 years in the GTA. In 2017, average asking prices soared by 45 per cent annually, with buyers camping out in advance of new releases, and 300-unit new subdivisions selling out as quickly as the brokers could sign the deals. However, after the Fair Housing Plan announcement, sales have plummeted, values have dropped nearly 15 per cent and developers are facing never-before encountered issues. Should they lower prices and face blowback from existing purchasers? Do they offer smaller homes with a lower quality interior finish, or do they shut their sales offices and try again next year? Developers that spend years, and in some instances decades, waiting for approval to sell their homes, don’t want to give them away in what might be a temporary slowdown. There were a few highrise developers that regretted slashing prices in early 2009 during the global economic slowdown, only to see the market come flooding back in the second half of that year.

Low-density land transactions in the first seven months of 2018 were half of what they were during the same period in 2017, and developers are struggling with valuations, given they’ve always built in future end-unit price growth. Most small builders don’t have the in-house expertise to truly evaluate current values and understand future growth potential in such an uncertain market. Without that knowledge, they’re choosing not to buy. Perhaps if developers could acquire better knowledge of the market, had a third-party opinion on market valuations, and could provide those figures to the land vendor, they’d be able to take advantage of land buying opportunities.

In my own practice, I’ve done a number of studies because developers want to know how to program the suite mix and unit sizes in their building and get a sense of values for their project, with condominium and rental tenure. They’re looking to reduce their risk by having a well-researched back-up plan. Is your development firm doing enough to mitigate risk? Are you having these conversations with your senior staff and sales and marketing team?

Buyer sentiment, government intervention and rapid changes in revenue and costs assumption are all contributing to volatility in prices and profit. Volatility equals risk, so make sure you’ve done your research to manage that risk.

Ben Myers is President of Bullpen Research & Consulting.

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The Consultant: Time to get building in Brantford, Kitchener and Collingwood.

The Consultant: Time to get building in Brantford, Kitchener and Collingwood.

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The Consultant: Time to get building in Brantford, Kitchener and Collingwood.

by Ben Myers

The next hot areas

Demand for new housing in the GTA has never been higher. According to Altus Group data, the benchmark price for available new single-family homes was $1,225,774 in December, a 23.2 per cent annual increase. The benchmark price for available new condominium apartments was $716,772 at the end of 2017, 41.3 per cent above the average value from December 2016. And for the second consecutive year, new condo sales set a record high. So the industry must be building more homes than ever, right?

Actually, no. Housing starts in the Toronto Census Metropolitan Area (TCMA) reached 38,700 in 2017 according to CMHC, only slightly above the 10-year average of 36,800, but down 1 per cent from last year. There is a massive backlog of projects that have experienced strong absorption, but have yet to break ground due to a shortage of construction companies. The average single-detached home took 11 months to complete in 2017, the highest total ever tracked by CMHC, and it took 13.5 months to complete a semi and 14 months to complete a townhouse, both record highs. It took over two and a half years to finish construction on the average apartment (condo and rental) in the Toronto CMA last year, the second highest annual result to date.

Some buyers tired of waiting for new home deliveries are looking outside the region. According to Bullpen’s Residential Real Estate Round Up Report, the most popular destinations in December for prospective new homebuyers outside the GTA were Hamilton and Guelph. New homes are delivered much quicker in both of those markets. In fact, CMHC reports that it took just six months on average to build a single-detached home in Guelph last year. However, the prices are not as inexpensive as they used to be. Our report shows that the average new project in Hamilton has new single-family units starting from about $1,600 a square foot for about $570,000, while Guelph projects have lowrise product starting from $1,700/sf for $625,000.

GTA buyers are taking notice of these more affordable markets. Ryan Waller of Home Group Realty Group in Guelph estimates that a quarter of all resale transactions in Guelph were to GTA buyers based on the fact that 25.5 per cent of buyers were represented by GTA real estate agents in 2017.

With the new mortgage stress test in place, and GTA new home price growth through the roof, the next hot area for new homes will probably be outside the region. Based on our numbers, look for strength in the Brantford, Kitchener and Collingwood new home markets in 2018.

Ben Myers is President of Bullpen Research & Consulting.

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