Cost creates volatility in pre-sale market
News that some builders in Toronto’s hot condo market are bailing on pre-sale projects poses the question: What about Vancouver?
After all, this is also a market with skyrocketing pre-sale condo prices, as well as construction and land costs.
In the Greater Toronto Area, some 17 projects, with more than 3,600 pre-sale units offered for sale before 2017, were awaiting construction.
But they have been cancelled since the start of last year, according to real estate services firm Altus Group Ltd., which was quoted by Bloomberg in a piece called “That Gorgeous Toronto condo you signed up for? They just scrapped it.”
Generally, Toronto developers have been cancelling in greater numbers compared to past years because it’s harder to make money now that construction costs are more expensive and every subsequent pre-sale launch is asking for higher prices.
In Vancouver, there have been examples of this, too, with three projects cancelled for various reasons after being pre-sold to buyers several years ago. Two higherprofile, but different, examples are Vivagrand’s Langara West, a 72-unit development on Cambie Street in Vancouver, and Murrayville House, a 92-unit in Langley.
Another one, Jago Development’s Westbourne Residences in New Westminster, is proceeding, but only after most buyers reluctantly agreed to pay an additional 15 per cent to keep alive their approximately two-year-old pre-sale contracts after Jago said it wasn’t able to keep up with extra costs due to labour shortages, soil conditions and extreme weather.
Both Vivagrand and Jago would be considered smaller developers, but they do have a few other condo projects they are hoping to develop elsewhere in Vancouver and New Westminster.
The Altus Group says construction costs in the Toronto area went up by six to eight per cent last year instead of more typically rising two per cent along with inflation. In Vancouver, Altus Group expects the anticipated escalation this year will be in the five to seven per cent range.
Some B.C. developers, however, have been seeing even steeper climbs.
“Last year, construction prices were as much as 20 per cent higher,” said Ian Butterfield, of Butterfield Development Consultants, which provides cost management services to developers across Metro Vancouver.
He added that larger developers were not hit as hard, but still saw price increases of between 10 to 12 per cent last year.
“This is not (rising costs due to) buying land or getting permits, but the higher cost of labour due to shortages in trades, relative to the amount of work,” said Butterfield, adding the majority of projects in Metro Vancouver are by “developers of reputation who have a continuous stream of projects they want to sell.
“Their deep pockets mean they can absorb the increase, and it’s also likely they bought land a long time ago. Their profits will be reduced, but the project still makes sense,” said Butterfield.
“The (developers) who bought land more recently (as prices were going up) and then pre-sold condos, and now are facing higher construction costs, are the ones more likely in a bind.”
In Toronto, there are some 143 condo projects that haven’t started construction yet even though more than 70 per cent of their units have been pre-sold, which qualifies them to proceed for financing, according to Altus. Of these, 43 met that pre-sales threshold more than a year ago, which says they are likely still juggling the math of rising cost of labour and materials, as well as trying to hire contractors and workers.
To compare, in Vancouver, there are only 26 projects that haven’t started construction and only three of them are more than a year old, according to Altus.
“The majority of projects that have not started construction launched sales in the last six months and may be awaiting demolition permits or construction contracts,” said Matthew Boukall, senior director at The Altus Group.
“The Vancouver market is seeing a much, much lower number of projects not commence construction once they have hit over the 70 per cent sales test.”
Another factor in the Vancouver area is that pre-sale prices, which have increased between 30 to 60 per cent in the last two years, have been “elevated” for longer than they have been in Toronto, Boukall says.