Toronto condo projects teeter on collapse amid rising costs

Theglobeandmail.com
April 18, 2018
By Shane Dingman

As Toronto's condo market booms, signs are emerging that a stressed industry is facing rising costs and tax burdens that may mean an even grimmer outlook for buyers.

Observers are still sifting through the wreckage of the Toronto area's latest project cancellation - a sold-out Vaughan project that dumped 1,100 would-be buyers back into the market earlier this month. That collapse is by some counts the 11th residential building project to be cancelled in the last year, and some are pointing to a rapid escalation in builder costs as the primary culprit.

Among developers, architects and construction analysts, there is a feeling that building a new condo in the Greater Toronto Area is not the common impression of assembling a towering pile of guaranteed profit, but taking on a gigantic legal and financial 3-D puzzle that can take seven years to assemble and in which prices can change very late in the game. If just a few of those puzzle pieces no longer fit by the time a project is complete, it can turn success into abject failure.

"The reality is that most projects don't work out," Toronto-based high-rise developer Brad Lamb says. "There are all sorts of places where you can get creamed in this business. " Mr. Lamb had to cancel a condo project in Edmonton last year and is fighting for planning approvals for several projects in Ontario. "If you do 10 projects, you're going to get one absolute home run that's absurdly good, and that pays for all the other nine. Five or six of them are well below expectations, and maybe three are below expectations … out of 10, you're going to have two disasters."

Any number of factors, from unforced business errors to macroeconomic forces, can derail a project. But in the GTA, builders have noticed that critical components such as concrete and glass have been rapidly rising in price since 2015.

"The Toronto market is a very busy market; every asset class is busy," says David Schoonjans, senior director, cost and project management at the property-research firm Altus Group. Mr. Schoonjans says that while high-rise construction uses a lot of concrete, large-scaled infrastructure – such as subways and the buried Eglinton LRT line – consume even more. "We've got multiple mega-infrastructure projects in the GTA, among the largest in the city's history. When people talk about concrete they are talking about a whole group of things: form work, reinforcing steel and everything that goes into the concrete … all of those have gone up more than the average trade."

There's no single price for concrete and glass, but some industry insiders describe price hikes greater than 20 per cent from 2016, others suggest quoted prices for windows has been going up every month in 2018.

Mr. Schoonjans says prices began to rise progressively in 2015, and in 2017, overall construction costs went up 6-per-cent to 8-per cent across the region. Worsening the effect of the cost rises is the drop in labour productivity, which Mr. Schoonjans says Altus has anecdotal evidence of. Essentially, as the industry ratchets up capacity and training to meet increased demand, newer inexperienced workers can mean that a contractor is being paid more to do less work than before.

"Construction costs are going up as a result of the demand being quite high; we're the victim of our own success," says Babak Eslahjou, principal with Core architects, who adds that it's not just raw materials, either. "Labour is in scarce supply; if you had 10 contractors available today to frame up your new house, you'd get a very good deal. If you can't even get a contractor to give you a quote for the things you want to do, then you know the price is up."

Also, even though developers in 2018 can sell new condos in parts of Toronto for more than $1,000 per square foot, that increase doesn't end up as profit in their pocket. "What's followed suit is as soon as the trades understand you're getting $200 more a square foot than you were getting two years ago, they are taking $50 right off the top," Mr. Lamb says. "Margins are generally, pro forma, 15 per cent. Our contingencies are 5 per cent. If you blow your contingencies and make a few more miscalculations your profit could get down to 5 to 8 per cent."

That might seem like a lot of money, but Mr. Lamb points out that the profit from each completed building is needed to fund the next one.

Mr. Schoonjans also notes that finished glass window and window-wall products manufactured in the GTA don't always stay in the region: When the dollar drops they can become very competitive to export into the United States, worsening the supply/price crunch in Canada.

In response, some of the bigger developers now try to pre-purchase as much material as they can.

"The market is adapting, you have to do new tricks," Mr. Eslahjou says. "Some clients, they try and get a contract for your phase-one [as in first building of a multitower project] glass, and you also prepurchase your glass for Phase 1, 2 and 3 … so the guy can give you a better per-square-foot number." But that game has gotten harder to play as prices rise and suppliers can trade guarantees from buyers now for higher prices later.

"The guys with the big pockets, the guys with the big projects, have better buying power," Mr. Eslahjou says. "It's really hard being a smaller or an average-sized developer these days."

According to the condo market research firm Urbanation, there were 215 condo projects - totalling 58,900 units - under construction in the GTA at the end of 2017, and there were another 144 in preconstruction, good for another 40,000 units. Mr. Lamb predicts that many will not be completed.

"Some of those projects will never go ahead," he says. "Projects are going to get cancelled with delays, there's projects that have appealed to the Ontario Municipal Board and if they lose at the OMB, they are not going to happen, period."

Mr. Lamb's Television City project in Hamilton is among those projects that have appealed to the OMB (which is still clearing its docket even though it has been replaced by the Local Planning Appeal Tribunals as of April 3).

Buyers may just now be waking up to the possibility that the presale contract they bought is not the sure thing they believed it was.

The greater Toronto area set new records in 2017 for preselling new unbuilt condominium apartments, more than 36,000 contracts to buy a slice of future real estate were signed according to data from Altus Group.

Altus also records that in 2016, there were 29,132 presale condo contracts signed in the GTA, of which more than 2,500 have already been cancelled by the developers that sold them.

On April 6, Liberty Developments in Vaughan announced that it was cancelling more than 1,100 contracts with buyers of its Cosmos condominium project in the city's Vaughan Metropolitan Centre development area. It was not only one of the largest single projects in recent memory to be cancelled but accouts for about one-fifth of all the broken contracts in the GTA since 2012.

Other recently sold and then cancelled in 2017 projects include more than 600 presold contracts in a troubled Scarborough project called The Kennedy; close to 400 contracts were sold at a cancelled Ajax development called Central Park; more than 200 contracts disappeared in another Scarborough project in receivership called Harmony Village and there were about 168 units in the cancelled Toronto Junction-area Museum FLTS project from Castepoint Numa.

Over the weekend, a group of Cosmos buyers who have been coordinating on a 600-member Facebook group met in person and agreed to move forward with joint litigation in an effort to extract more than just their deposits from Cosmos and Liberty Development Corp.