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Why now is the time for long-term condo investors
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Into The Market Why now is the time for long-term condo investors
Into The Market Why now is the time for long-term condo investors
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INTO THE MARKET Why now is the time for long-term condo investors
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THE HISTORY OF TORONTO CONDOMINIUMS How did we get to the point where there’s a massive shortage of condos in a rapidly-growing, world-class city?
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CONDOMINIUM VS. FREEHOLD Why investing in condominiums provides a higher return with a lower cash outlay and fewer headaches
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PRE-CONSTRUCTION VERSUS RESALE Why pre-construction condos are ripe with pitfalls and unmitigated risks
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TORONTO DEVELOPER SAYS 300 SQFT CONDO COULD COST $1MILLION IN 10 YEARS A year-old BlogTO article already shows us that this prediction may come true
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THE CONDOMINIUM INVESTMENT Breaking down the numbers involved with the purchase of a 1-bed, 1-bath condo in downtown Toronto
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NEXT STEPS How can we get started?
Into The Market
Why now is the time for long-term condo investors
There’s an old adage that goes like this: Question: “When is the best time to sell real estate?” Answer: “Never.” On a long enough time horizon, real estate is always going to be worth more down the road than it is today. The city, housing type or style, and price point need not matter. On a long enough time horizon, real estate will always be worth more. That could simply not be more true when said about the city of Toronto. The average home price in Toronto increased every single year from 1997 through 2017, before declining in 2018, and continuing to ascend thereafter to the present. The average home price in Toronto tripled between 2004 and 2020, and this is even more incredible when you consider that an overwhelming majority of new-construction in the GTA is in the form of condominiums, which are inherently lower-priced than freehold. So over the last two decades, despite the boom in smaller, cheaper properties, the average home price has still more than tripled. Real estate as an investment can take many forms. Buying mortgages versus buying properties. Financing a development versus undertaking to develop. Buying to flip versus buying to hold. There’s commercial versus residential, condominium versus freehold, and
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a seemingly limitless number of ways to step foot in the “game.” We believe that the simplest form, which often comes with the highest return, is that of buying and holding small condominiums in the downtown core of Toronto. And when you consider that many of our investors are combining investing with longterm family-planning, there’s an intangible and invaluable benefit that comes from the peace of mind of knowing that the ‘kids’ are taken care of. In recent years, we have noticed an increasing number of clients who are buying condos for their children who are nowhere near the age of moving out on their own. Consider a client who recently purchased a condo “for his daughter” who happens to be 18-months-old. It’s very possible that by the time his daughter is living and working downtown in her early20’s, this 500 square foot condo is valued at $1,500,000 and would otherwise be completely unattainable. We at Toronto Realty Group are exceptionally bullish on the long-term prospects of Toronto real estate, specifically that of downtown Toronto condominiums. Having worked with numerous clients who are investing not for today or tomorrow, but rather the day after tomorrow, we understand the role that adults in their 40’s or 50’s are going to play in the lives of their childrens decades down the road.
Into The Market: Why Now Is The Time For Long Term Condo Investors is meant to serve as our thesis on the real estate market, as well as an investment guide, but also as a vision of life in Toronto in the future. With some of us having already purchased properties for our own infant-aged children, suffice it to say, we’re committed to this vision.
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The history of Toronto condominiums The first urban community to live in Toronto dates back to 1793 when the Town of York was founded by British colonial officials in what was then “Upper Canada.” The “City of Toronto” was incorporated in 1834. The population of Toronto surpassed a half-million people in 1921, and one-million people by 1950. But at what point did Torontonians embrace the “condominium?” Here’s an exact date: December 27th, 1967. That was when the province’s very first condominium was registered and incorporated as “Peel Condominium 1.” As for Toronto’s very first condominium, that was “York Condominium 1,” which followed in 1968. But as it pertains to the downtown core, condominium development didn’t begin until the midto-late 1970’s. It was Halloween, 1972, when 40 Homewood Avenue was registered, and the building is equally as scary now as it was then. Most older downtown condos don’t get much love these days. In the 1970’s, many apartment buildings were being converted to condominiums, but one of the first purpose-built condominiums was The Masters on Mill Road in Etobicoke. Condo enthusiasts might point to Toronto’s waterfront as a mecca for original condominium development. 33 Harbour Square was built in 1976. 55 and 65 Harbour Square followed in 1980. In 1986, the development of 250, 260, and 270 Queen’s Quay was completed. Around the same time, condominiums were being built in what is now prime King West. The original buildings in “The Summit” at 701 King Street West, and including the townhouses at 570 Wellington Street West, were built in 1984. The second and third buildings in The Summit at 705 and 725 King Street West followed in 1985 and 1986. People often muse that in the 1960’s and 1970’s, Toronto was “just a city of parking lots.” The photo on the top of page four paints a perfect picture of that sentiment. Original Torontonians will also suggest that Toronto seemed to be a city randomly built, with no actual plan. There are original buildings dating back to the 1800’s, some kept in full, some built around or included in subsequent developments. But the downtown core always seemed desolate and barren, with buildings scattered about, surrounded by parking lots, and wide streets with plenty of parking. By the 1980’s and into the 1990’s, the downtown core ceased to merely be a destination for work or entertainment, but rather a place where one would choose to live. Condominium development took off in the 1990’s, and with land in such abundance, it would seem easy to construct what currently exists, if we look back with hindsight.
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HARBOUR SQUARE IN THE 1970’S
SKYDOME IN 1990
ROGERS CENTRE TODAY
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Condominium completions topped 10,000 units in 1990, around the time that original photo of the new “Skydome” was taken. But as the recession of the early-1990’s took shape, condominium completions in Toronto dropped below 5,000 units in 1992 and hit a low of only 1,417 new units in 1993 (Source: CMHC Housing Starts & Completions Survey). Condominium completions remained below 10,000 units for the rest of the decade. It wasn’t until the turn of the millennium that we saw condominium completions back over 10,000, and this was the result of a huge surge in demand for new units in the late 1990’s, which led to completions of 14,652 in 2002. This chart shows the number of condominium completions from 1990 through 2019:
Toronto Condo Completions Toronto Condominium Completions 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 12 14 15 16 17 18 19 20
While completions peaked with 33,398 units in 2015, that number has dropped dramatically since. Developers simply cannot build fast enough to satisfy the demand for new condos. With Canadian immigration projected at 400,000 per year in 2022, and with an overwhelming majority of those individuals settling in Toronto, one could argue that we’d need to see 100,000 housing completions each year to keep up with the demand from end-users, investors, and new Torontonians. Freehold completions fell below 10,000 units in 2020 for the first time since the 1980’s, and if you combine freehold, purpose-built rentals, and condominium completions in 2020, we still only saw 30,841 new units last year. This is a fraction of what’s actually needed in this city moving forward.
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As land becomes more scarce in Toronto, and the price of land appreciates exponentially, it’s safe to say that developers aren’t looking to build freehold on the ground when they can build condominiums in the sky. As a result, the percentage of housing completions that condominiums represent has been climbing since the early 1990’s:
Condo Completions as Percentage of of Condominium Completions as Percentage Housing Completions Completions Housing 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 12 14 15 16 17 18 19 20
With no more parking lots on which to build soaring towers, developers are getting creative and at times, desperate, to find sites. It’s not uncommon to see a developer purchase a 20-storey office tower at a premium price, only to tear it down, and construct a 50, 60, or 70 storey residential building in its place. Land banking and land consolidations are expensive and time-consuming, but they too represent one of the most innovative ways to create sites. As a result of the price of land increasing, as well as the massive surge in pricing for materials and labour, pre-construction condominium prices are soaring. Increased demand, decreased supply, and an increase in the cost of construction all point toward continued price appreciation in the Toronto condominium market.
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Condominium versus Freehold A freehold property is always a better investment than a condominium, right? Not necessarily. There’s a common misconception that freehold will always outappreciate condominium, simply because, all things considered, most people would rather live in a large, detached home than a one-bedroom condominium. But desire is not the same as demand. Demand in a marketplace is a function of affordability. And if an individual wants a freehold property but can’t afford one, then that individual will turn his or her sights to the condominium market. As a result, condominium prices have substantially outpaced those of freehold over the past five years. The average condominium price in the 416 has risen 61.1% in a five-year period from October of 2016 to October of 2021. In the same time period, the “Holy Grail” of real estate, aka a detached home, has only risen by 37.0%.
Year 2016 2021
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Condo $459,199 $739,647 +61.1%
Semi-Detached $902,137 $1,322,229 +46.6%
Townhouse $687,809 $1,025,257 +49.1%
Detached $1,303,339 $1734,979 +37.0%
Purchasing a simple 1-bed, 1-bath condo for $400,000 in September of 2016 would provide the buyer with an on-paper valuation today of $644,400.
• ureaformaldehude foam insulation. The condo-investor need not worry about a leaky roof, a crack in a foundation, or mold growing in the fiberglass insulation.
These figures are 416-specific, however, and when looking at the downtown core, it’s hard to argue that the appreciation hasn’t been even higher.
Condominiums make for a far easier investment than their freehold counterparts, and there are far less capital expenditures required. Combine the financial outlays with the time requirement on behalf of the investor-landlord, or the cost of a property manager, and a freehold property as an “investment” is that much less appealing.
A $400,000 condo in 2016 may very well be worth $700,000 today, and that $300,000 gain, for most buyers, is calculated on a 20% downpayment, or $80,000 in 2016. Where else can you see a 375% gross return over five-years? But while the buyer of a condominium in 2016 enjoyed an incredible profit, the condoinvestor also enjoyed a far more maintenancefree investment than that of the freeholdinvestor. A freehold property is inherently more prone to upkeep than a condo. A large portion of central Toronto’s housing stock was built between the late-1900’s and mid-1900’s. Even a 1950’s built home, renovated multiple times by multiple owners, is going to have more surprises than a condo built in 2006. Condominium units do not require the owner to maintain or remedy: • • • • • • • • • • • • • •
roofs basements boilers air conditioners furnaces sump pumps sewage evacuation pumps eavestroughs downspouts lead pipes clay pipes knob-and-tube wiring aluminum wiring asbestos
Rental prices were hit hard by the 2020 pandemic and have still yet to fully recover, but in spite of this, the rental yield on condominiums is still higher than freehold. Condo Freehold
Price $550,000 $1,650,000
Rent $2,100 $4,000
Yield 4.58% 2.91%
Condominiums do come with maintenance fees where freehold homes do not, but if you factor in the long-term capital expenditures associated with freehold properties, that more than offsets the condominium maintenance fees. In summary, a condominium investment requires less time, effort, and energy than that of a freehold. There’s less capital expenditures, maintenance, and upkeep. The rental yield is higher. And most importantly, the appreciation is higher as well.
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Pre-Construction versus Resale Why not pre-construction? Perhaps the better question is why? Why would anybody, in 2021, purchase a pre-construction condominium? Flash back to 2004 or 2005 for a moment. Back then, the market priced pre-construction offerings for their inherent risk as well as the lack of tangibility and liquidity. If a 1-bed, 1-bath on the resale market was being sold for $200,000, a pre-construction condominium next door would be priced at $160,000. This made perfect sense! As a buyer, you’re purchasing something that does not yet exist. You’re taking on the risk that the developer is able to finance the project, build the condo, and do so according to what was originally promised. There’s also a 4-5 year timeline, despite promises of 2-3 years, and along those lines of broken promises comes a host of potential changes to the unit or the building. Ask the buyers at Emerald City how they valued condos in a building that connected directly with the TTC subway at Yonge & Sheppard when they purchased the units in preconstruction. When the developer simply decided not to follow through with those plans, they didn’t rebate the buyers. Developers can make changes to “common elements” without issue. Whether the artists renderings show a rooftop waterfall pool has no bearing on whether the developer actually has to provide this in the final product, and therein lies the risk. But with respect to the unit itself, the developer is the one to define “material changes.” When a buyer purchases a condo in pre-construction with 10-foot ceilings, and the developer decides to build units with 8-foot ceilings instead, the buyer isn’t the one to conclude if this constitutes a “material change,” but rather the developer has the final say. But aside from changes to the building and the unit, how about if there’s nothing to change? What happens when the condo is simply cancelled? Bahaus, Museum FLTS, Halo, YSL, and King’s Club are just a few of the high-profile downtown condo projects that were cancelled in recent memory, all of which saw buyers given their original deposits back without the massive profits they had banked on when they lined up (literally) to purchase. So why does anybody buy pre-construction in 2021? But factor in what’s happened to prices since the early-2000’s, and it makes less sense.
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When you could purchase preconstruction condos for a discount, relative to resale, the inherent risk made more sense. But as more and more buyers, both investors and end-users, started to embrace pre-construction, developers were able to charge more, and eventually, that risk premium vanished! Today somewhere along the time, preconstruction prices are above that of resale. Back in 2004 or 2005, you could expect to put down a 5% deposit and that was that! Sit back, wait for the condo to be built, and take your profits down the line. Consider the bachelor condos being sold at The Met for $99,900. A mere 5% down, or roughly $5,000, held your place in line for four years. And when the units were finished and selling for $190,000, that $90,000 gross profit was made not on the $99,900 purchase price, but rather the $5,000 down payment. The returns were absurd. Today, developers routinely insist on upwards of 25% down, which is more than the 20% minimum down payment required by the CMHC on investment properties or second properties. Couple that with the higher-thanresale pre-construction prices, and it no longer makes any sense.
Factor in the inherent risk of project cancellations, material changes to the unit, construction deficiencies that have to be addressed not by the builder but by TARION, and virtually no obligation for the developer to deliver amenities and features promised in marketing, and “investing” in pre-construction condos in 2021 makes absolutely zero sense. This, of course, will never stop scores of real estate agents from flogging units, however they can. With the buzz of phrases like “VIP Access” and words like “Insider,” plus flashy sales events and fake lineups outside sales centres that are eerily reminiscent of velvet-rope entry to half-empty nightclubs, preconstruction sales will continue in our city in perpetuity. But we at Toronto Realty Group are not swayed by the cozy courtship developers seek, or the fantasy they sell, or the fat commissions they provide to real estate agents who do their bidding. We look after our clients’ interests and we have a portfolio of successful, satisfied investors who have made substantial returns through investing in resale condominiums; returns that pre-construction condos in 2021 could simply never provide.
There’s a project called “The Goode Condos” at 37 Parliament Street in Toronto’s Distillery District which is offering units at $1,733 per square foot in pre-construction. The sticker-shock alone of that price should have buyers running scared, but consider that you can purchase a resale condo at 39 Parliament Street for $911 per square foot, and we ask again: what is the allure to pre-construction? Sure, the condo at 39 Parliament Street is 20-years-old, but we know this isn’t an apples-to-apples comparison. There’s simply nothing, in our opinion, to justify a $1,733/sqft valuation. Nothing.
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AS FEATURED IN
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Seven figures for 300 square feet of space seems reasonable... for a place on the moon or somewhere equally exotic. But a million bucks for a glass-paned shoe box in downtown Toronto?
“It’s not quite as bad as it is in New York, but we’re getting there,” Lamb continued. “There are so many factors pointing to rising prices. I really see no relief until the next worldwide recession, and after that’s done prices will boom again.”
We’re not quite there yet, but one of the city’s bestknown real estate pros says that Toronto could soon be in a place where micro-condos are sold for upwards of With the average price for all home types in the City of $1 million a pop. Toronto now just shy of $1 million, it’s a feasible theory. Just imagine: Paying $1 million for a condo no bigger than a two-car garage, situated high up in the sky where you don’t even own any land and still have to pay monthly maintenance fees.
Start saving up for your glorified walk-in-closet of a home now, I guess. You’ve got 10 years to make a million bucks... which matters not if you’re already spending most of your income on rent.
“In 10 years, a 300-square-foot studio in Toronto will go for $800K to $1 million,” said realtor and developer Brad Lamb in a recently-published interview with TRNTO.com. “I think the prices of both homes and condos are going to continue to rise.”
Ah, Toronto living.
Lauren O’Neil | Posted on March 14, 2020
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The Condominium Investment What type of return should you expect from a typical condominium investment? It really depends on how you view your “return.” Many investors consider their “return” to simply be appreciation on the overall condo, but that’s not how real estate returns work. Other investors look at the “cap rate,” which is short for “capitalization rate,” essentially representing the yearly net income as a percentage of the asset value or purchase price. And then some investors simply consider the monthly cash flow, which can be positive, neutral, or even negative. In the 2021 Toronto condo market, we believe that the investor should be looking at their Return on Investment (ROI), both with and without an estimated yearly appreciation. Let’s look at an example. Here’s a listing at “King’s Court” in prime St. Lawrence Market neighbourhood. This condo % , ?