Condo investors might cash out, expert says
Slower demand and lower rents could push sales, research firm says
The president of condo tracking market research firm Urbanation says the development industry might be overly optimistic about the sector’s postCOVID prospects.
Shaun Hildebrand says his company will be watching to see if condo investors start selling when activity returns to normal following the COVID-19 shutdown.
Condos have appreciated significantly in the years since most were sold in the pre-construction stage. But if investors’ finances are stretched and they can’t achieve the rents they want to carry their units, they might decide it’s time to sell, he said.
Hildebrand thinks most will hang on to their units because prices have appreciated so significantly that, even with a slight drop in rents, they can probably make up their carrying costs.
But he cites anecdotal reports of rising assignment sales. Those occur when the original investors of pre-construction condos sell their contracts to other purchasers, usually around the time a building is ready for occupancy. The initial investor reaps the appreciation on the property for the period between when they bought and when it is built.
There is no data on assignment sales, but Hildebrand said they probably represent fewer than 10 per cent of newly completed projects.
Urbanation’s first-quarter survey of 100 developer representatives shows most say Toronto’s rents and vacancy rate will hold steady when the world opens up again. But that runs counter to Urbanation’s expectations and signs that rents were slowing even before April, when pandemic restrictions took hold.
“I think we’re in for a softer period than what’s being expected,” Hildebrand said.
Lease activity dropped 71 per cent year over year in April and average rents declined 1.2 per cent to $2,342.
Although few survey respondents expected condo prices would rise this year, nearly half “were expecting that vacancy rates would remain at less than 2 per cent or perhaps rise to 2 to 3 per cent with rents basically holding steady versus last year,” he said.
Hildebrand has been predicting Toronto area rents will drop as much as 5 per cent by the end of the year as new condos come online for lease, Airbnb owners sell up and rental demand drops as COVID-19 impedes some of the city’s anticipated population growth.
Urbanation says resale condos saw a 2.2 per cent price decline in April. But median prices remain 4.7 per cent higher year over year, suggesting that the biggest price drops are occurring in high-end condos.
Although 29,000 new condos were scheduled for occupancy this year, construction slowdowns related to safety protocols on work sites and supply chain issues mean 20,000 is probably more realistic, says the report. About 7,000 GTA condos were released for occupancy in the first quarter with a further 13,500 expected by the end of the third quarter. But half of those will be delayed until the fall and the rest likely won’t be finished until winter or early spring 2021, Hildebrand said.
Meanwhile, there are signs some municipalities are moving forward with permits so construction projects can move full-tilt once the province allows more building.
The Town of Oakville announced on Monday it will receive online submissions for building, planning, engineering and development applications. Those include plans of subdivision, rezoning and site plans. Residential building permits can also be submitted electronically.
“The town’s intention in resuming these services online is to give all who need approvals the chance to advance essential projects and prepare non-essential work for when the Ontario government lifts essential business restrictions,” the town said in a release.
Toronto has processed 2,198 building permits since March 17, including those on home renovations and smaller projects, said a city spokesperson.
While staff initially gave priority to larger projects, they are now able to review all permit applications, said Ellen Leesti.