There are thousands of unsold condos in Canada’s two most expensive cities to live in, and not many buyers in sight. Who blinks first – buyer or seller – is the key question that will determine whether sales pick up.
A wild card could be private equity groups already eyeing inventory in Toronto and Vancouver, hoping to capitalize on a turnaround, just as corporate buyers in the United States did during the 2007-2010 U.S. subprime housing crisis.
Mark Goodman, principal broker at Vancouver-based Goodman Corp., said he believes there will eventually be massive takeovers in the sector.
“Several major players across the country have reached out to me and suggested the idea of helping them acquire distressed condominium projects that are already built and sitting vacant,” Goodman said. “They came and bought hundreds, if not thousands, of units in one fell swoop.”
The veteran real estate trader, who is among British Columbia’s top multifamily sellers, said there are signs the market has finally “bottomed out” and he wouldn’t be surprised if some of those groups move in to buy the unsold inventory, whether from him or another agent.
When it comes to apartments, Goodman said his group has become involved in a growing number of court-ordered sales driven by lenders canceling loans.
“Basically there’s blood on the streets right now, and that could last a few more years,” Goodman said, adding that multi-family rental housing in the Vancouver area has declined by an average of 35 to 40 per cent over the past four years as landlords face the reality that their properties have lost value.
Greg Zayadi, president of Rennie & Associates Realty Ltd., is skeptical that private equity will somehow swoop in and buy unsold condos in the Lower Mainland, where his group estimates there are 3,472 unsold units, about 80 percent of which are in concrete high-rises.
“Can’t they get it at a bargain price?” Zayadi said, pointing out that while there has not been the necessary crash to attract buyers to the sector, the possibility of bulk sales is being considered.
“There are a number of groups like us, others that are working in various forms to figure out what bulk purchases of inventory would look like,” he said.
Part of the problem is that developers can afford to hold units a little longer because inventory loans are now plentiful at relatively cheap interest rates and the loans are non-payment, meaning only the interest needs to be covered.
“It’s just status quo for a while while developers fight the market. The price of inventory is already below replacement cost (or construction cost),” Zayadi said. “We just don’t see big discounts.”
For lenders, a loan, even for just over 50 percent of the value of the building plot, is relatively safe and usually short-term, namely 12 to a maximum of 24 months.
“You can get these loans from all types of lenders, forget about top-tier banks,” Zayadi said, adding that interest rates could range from eight to 12 percent depending on the quality of the loan. What will happen in 12 months? There could be a bulk sale or some inventory could be rented out when the market recovers, he said.
Urbanation Inc. reported nationwide in Toronto last month that there were just over 3,900 unsold units on the market, but that total does not include defaults, likely increasing the numbers by 3,000 units, according to the research firm.
“The private equity is real, just smaller groups,” said Shaun Hildebrand, Urbanation’s president, adding that they are trying to get a low enough price to cover their costs of operating the condo. “The thesis is: hold it for three or five years and wait for it to rise when the market sees a reversal in supply.”
By 2028, the theory goes, supply will be limited again and prices will rise due to shortages. But condos will still never be an effective product based on returns and again is predominantly speculative.
“We’re talking to groups that say they’re going to buy units today and sell them at premium prices in a few years,” said Hildebrand, who doesn’t believe that scenario will play out. “We see small batches of maybe 20 units changing hands. Nothing major.”
In the meantime, it’s a waiting game for something that will trigger further price drops and prompt developers to sell unsold units at deeper discounts.
Anthony Scilipoti, president and CEO of Veritas Investment Research, said the condo market will only resolve itself with “pain” because there is simply no demand for unsold units.
“I’ve always found it strange that there’s talk of a lack of supply. There’s a lot of supply, just at what price,” Scilipoti said. “It’s also the size. Everyone wants a larger or extra-large suite, and they’re all made small.”
The Bay Street veteran, who worked in clothing retail, said it was like a clothing store with a lot of sizes that people don’t want.
“These will be sold at a 50 per cent discount during regular times and then on Boxing Day they will be sold at a 50 per cent discount on the 50 per cent,” he said. “People who say you can’t go below a certain price because it’s less than the cost of replacing it, but no one replaces it. It’s like end-of-line clothing.”
Using the clothing retail metaphor, the CEO recalls stocking up on T-shirts he imported from China in the early 1990s. They were popular. He bought 2,500. The market turned and he still had 500 left.
“We couldn’t even give them away,” he said.
He recalled taking all of his tees to the legendary Ed Mirvish, whose Honest Ed’s in downtown Toronto was known for its discounted merchandise. “They had cost me $3 each. He said, ‘I’ll give you $1.’ I told him he was going to kill me and he told me, “You came here to sell this.” I don’t want these.’”
Call them “vultures,” but these are the ones who have to buy at the low end of the market when few people want your product, and Honest Ed got in at the only price Scilipoti could get.
Is this the next step for the unsold condo market?
“It’s the lenders,” he said. Once they stop lending money, Scilipoti said, more speculative condo owners and developers will go bankrupt, but as long as there is money to finance it, the holding pattern remains.
Relying on demand to return increasingly seems like a long shot, especially given declining immigration.
Until then, the wait continues, but today’s Honest Ed is out there. It’s simply called private equity.