Has the GTA condo market peaked?

Alfredo Romano steps up to a computer screen that looks like a giant iPad and starts tapping away.

“Look at this” says the developer with a wide grin. The computer is showing a floor plan of a condominium. Another tap. A simulated walk through of the unit. He taps again. The actual view from the unit pops up. “This is really cool.”

The downtown Toronto sales centre for Romano’s Backstage condo project at Yonge St. and the Esplanade is the stuff of science fiction. The futuristic, modular design references the Museum of Modern Art with a nod to Battlestar Galactica.

Welcome to the digital showroom. Condo sales centres have evolved dramatically, where buying units seem as effortless as ordering a pair of slacks online. In North America’s most competitive condo market, it pays to stand out.

The movie set appeal isn’t likely by accident: Romano is a principal in Pinewood Studios. And in a way, that’s who the developer is trying to appeal to. Tech savvy young singles who want a downtown lifestyle.

So far the marketing seems to be working. Launched in January, the 286 unit project was more than 70 per cent sold out before it officially opened to the public.

So whatever happened to the great condo crash?

Analysts have been forecasting the demise of the Toronto condo market for more than a few years. But so far, prices have gone one way – up. This year could be the test of whether those prices will hold.

For one thing, the second quarter will see the release of an estimated 40 projects with more than 9,500 units – a record number for any quarter in the history of the city according to Toronto based research firm Urbanation Inc.

The Toronto market already had 286 projects being marketed at the end of 2010, the most in North America. Last year was also the second best year for condo sales on record.

“There is definitely going to be some competition out there,” said Ben Myers, executive vice president of Urbanation.

While developments such as Romano’s are doing well – analysts remain convinced that some kind of payback is inevitable.

A Scotiabank report says there are “emerging signs” of an oversupply of condos in the market with a higher than average stock of unsold properties, although the bank is not forecasting a major correction.

“I think in the short term there is a concern for the Toronto market, given the supply,” said Benjamin Tal, senior economist for CIBC World Markets. “But in the long run, I think condos are still attractive. They will still be attractive to baby boomers and people who want to live in urban areas.”

Sherry Cooper, chief economist for BMO Financial Group has also said she is also concerned about the ultra high end condo market where prices are well over $1,000 per square foot. A new Ritz Carlton, Four Seasons, Trump and Shangri La hotel and condo towers are set to be completed within months of each other.

The luxury properties cannot be entirely supported by the domestic market, says Cooper.

“To be sure, foreign individuals and businesses are buying many of these units. With the trend in foreign direct investment in Canada, demand might well trend upward,” said Cooper. “But with a strong Canadian dollar, the risk is that at least some excess supply pressure is likely.”

Jamie Johnston, one of the city’s largest condo brokers, says active listings for the downtown condo market are up by 45 per cent. More supply means downward pressure on pricing.

“So don’t look for condos to appreciate at the same rate as detached housing in prime markets.”

One thing is for sure, says Myers: Projects that don’t hold the attention of the more crowded market this spring, will suffer.

So far, savvy marketing in central locations by some of the key players such as Romano’s Castlepoint Realty Partners, along with Sam Crignano of Cityzen Development Group and Fernbrook Homes have propelled sales by some developers. Hiring a “starchitect” also doesn’t hurt. The partners are also developing the Daniel Libeskind designed L Tower just north of their Backstage condo site.

Romano and Crignano feel that urban towers that have unique design will hold in value. But values are already at record levels.

In the fourth quarter of 2010, the asking price of new condos in the Greater Toronto Area was $530 a square foot. That means a 1,000 square foot condo would cost more than half a million dollars.

In the former city of Toronto, prices were even higher. A downtown condo asking price is going for $723 a square foot. That means a 1,000 square foot condo would cost $723,000.

Higher prices mean first time buyers are squeezed out. It also means less margin for condo investors, who have increasingly made up a bigger portion of the market. Low interest rates and tight vacancy rates for condo rentals have allowed investors to make a profit by keeping their units.

Myers says three years ago the ratio of investors in the market was estimated at about 30 per cent. Now it is likely as high as 60 per cent in many projects, he says.

“Investors are a huge component for new sales,” said Myers.

Developers will have to keep a lid on pricing if investors are expected to stay in the market. However, prices have crept up dramatically, and interest rates are expected to follow. More supply in the future could also have a negative impact on rents. In that case, investors would abandon the market. That’s one potential scenario that no one wants. But it could provide an opportunity for some home buyers to pick up devalued properties as more supply comes on stream and investors off load their condos.

But so far, the market has chugged along.

“I think we’ll be OK, as long as developers are cautious with pricing,” said Myers. “Investors still have to make a profit at the end of the day, and end users want to know that their investment will hold value.”

Tony Wong


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Backstage

Located across from the Sony Centre for the Performing Arts, Toronto’s newest condominium will rise 36 storeys from the corner of Yonge and The Esplanade. In the heart of the St. Lawrence Market district, you’re centre stage to shops, services and cultural venues.

L Tower

Now under construction in the heart of downtown Toronto, The L Tower is the evolution of 21st century living. An iconic landmark designed by celebrated architect Daniel Libeskind, the residential tower rises 57 storeys and is home to 593 suites, graced with high-end luxurious features and finishes.