When I started attending the Land Conference about 7 or 8 years ago, there were 350-400 attendees. Last year there were 600 attendees. This year there were over 750 attendees. Clearly, the real estate market in the GTA is a hot item.
There were a number of great speakers and panels throughout the day. Some common themes that emerged:
1. Is it a Supply Problem or a Demand Issue?
Benjamin Tal and a panel including Stephen Diamond from Diamond Corp., Ben Myers from Fortress Real Developments Inc., Rizwan Dhanji from Canderel and others agreed that Kathleen Wynne and her Liberal government have got it backwards but are powerless to address the real issues, the real issue being not demand but supply.
And lack of supply is primarily due to the government’s own policies. Its growth plan policies dating back to 2005 which created a greenbelt, and limited development within other areas, have created a severe land shortage. Simple economics is such that when a product is scarce, the price goes up. Another key factor that the government refuses to address are interminable delays and approvals from municipal and provincial agencies, and the tremendous cost of delay which only adds to the cost of housing.
2. Land prices are expected to continue to rise both here and in Vancouver by 15-20%.
I moderated a panel on land transactions with a number of senior brokers handling major transactions across the country and the unanimous conclusion was that land prices would continue to go up as long as the revenue side can support those increased prices. Vancouver prices average $1500-$1750 per square foot for standard condominiums with specialized condominiums now being marketed at $2500 per square foot. Land costs are now close to $450-$600 per square foot. Interestingly, the price of high-end finished condominiums in downtown Montreal is $600 per square foot.
3. The impact of the Fair Housing Policy announced by the Liberal government will be negligible on cooling prices.
The impact of the foreign buyer tax in Vancouver and the impact in Toronto based on recent condominium project sales which have sold out over weekends, make it clear that all of the proposed measures have little impact on reducing demand in either city. The Liberal plan is merely designed to show the government is doing something to keep prices from escalating. In reality, it is merely an attempt to buy votes by reacting to headlines.
4. Purpose-built rental will suffer as a result of the Liberal plan to cap rents.
The most unfortunate result of the Liberal’s Fair Housing Policy was to put a rent increase cap on all rental buildings, irrespective of when they were built, at inflation rate with a maximum of 2.5%. Based on current inflation rates, that would mean a 1.5% increase for the next year.
The bulk of purpose-built rentals are aimed at the high end of the market with rents well in excess of $3.00 per square foot per month. The major investors in these projects are pension funds and other institutions seeking a reasonable return of 4-5%. Stephen Diamond pointed out that he had recommended to the government that new buildings be capped at inflation plus 2%. This would eliminate the high profile situations in the Urbancorp receivership projects where rents were doubled on tenants, but still allow investors to get a reasonable return on their investments.
Unfortunately, the Liberal government chose to ignore the tremendously negative economic impact of putting a flat inflationary cap on all rentals in order to garner tenant votes. The 28,000 units currently in the pipeline are in serious jeopardy and those that get built, will be smaller units that turn over quickly as opposed to larger units to support families. So, potentially less economic activity and fewer family units.
5. When governments and developers work together,great things happen.
Dean Shapiro, Senior Vice President of Oxford Properties Group in New York gave a fascinating presentation on the Hudson Yards Project in southwestern Manhattan. It is a multi-billion dollar project which will result in 14 acres of parkland and a 150 foot high piece of accessible art which will become the Eiffel Tower of southern Manhattan, with over 17 million square feet of new buildings.
The architecture will be spectacular and there will be a tremendous mix of retail, commercial and high-end condominium. It has attracted numerous AAA retail and office tenants. One of the drivers to the success of the Hudson Yards is the tremendous planning and cooperation between the municipal government, the federal government and Oxford. The city extended Line No. 7 to the Hudson Yards at a cost of $2.4B, which is already constructed, well before all of the buildings had been completed. This now makes the area reachable and livable. I contrast this to the 4 or 5 years to build 2 stops to Vaughan in Toronto at a cost now of $2.8B, with little funding in sight for any other major subway extensions.
What’s In Store for 2017?
Interest rates will not go anywhere for the next year or so according to Benjamin Tal of CIBC. The BOC governor has a clear plan to drive the value of the Canadian dollar down by keeping rates low irrespective of the fact that the Canadian economy is actually doing fairly well. Until there is a market spike in interest rates, the strong demand for new housing by 100,000 new immigrants to the GTA will not abate, so look for another exceptional year for vendors and a very expensive one for new home buyers.