Toronto Building Costs Rise and Builders Scrap Pre-sold Toronto Condo Towers

by Yvonne von Jena | April 20, 2018

According to BNN, some builders in the Toronto condo market are walking away from big towers that they have pre-sold due to higher construction costs. This reflects the possible profitability challenges builders are facing.  In turn, this is leaving some buyers in the lurch.

Soaring Construction Costs

Construction costs in the Toronto area, which typically have risen in tandem with inflation, increased between 6% to 8% last year, compared with an inflation rate of only about 2%, according to Altus. “We believe that going forward next year, it’ll be at least that or more,” David Schoonjans, senior director at the firm, said. At the same time, labor costs are rising, with hourly compensation up 2.4% across Canada in 2017. “At some point the project stops making financial sense,” Schoonjans said. This, despite the increase in condo prices, which have risen by about 20% since February of last year, are contributing factors according to the Canadian Real Estate Association (CREA).

The Hurdles

Typically, developers need pre-sales of at least 70% to get financing to move a project forward, said Phong Ngo, director of data solutions at Altus. The next hurdle is to break ground, and as interest rates increase, the higher the costs of materials and labor. Builders can face delays in getting government permits, finding contractors and workers amid the hot demand or parrying special-interest groups that oppose construction.

As of February, 143 condo projects that are at least 70%  pre-sold had not started construction yet, according to data from Altus. Of these, 43 had hit the 70% mark more than a year earlier.

“Many projects launched for pre-sales prior to having their proper approvals in place,” said Shaun Hildebrand, a senior vice president at Urbanation Inc. which studies the Toronto condo market. “By rushing to bring units into a hot market, some projects jumped the gun and added risk to the development.”

Project Cancellations

According to Urbanation, there are 10,622 condo units in the greater Toronto area that were offered for pre-sale before 2017 and still await construction. Since the start of last year, 17 projects, with 3,627 units, have been cancelled in the region, according to real-estate-services firm Altus Group Ltd. That’s up from seven projects, with 808 units, in 2016.

This month alone, Liberty Development Corp. pulled the plug on a three-tower, sold-out condo development, citing problems with construction financing.  Another project is a sold-out one in Vaughn that affected 1,100 would-be buyers per the Globe and Mail.

More Cancellations Looming

The threat of still more cancellations looms over Toronto. However, in the end says Lauren White, senior vice president of the Land Services Group at CBRE Group Inc., “only a small portion” of condo buildings will be canceled. “Therefore, the effect will be a minor tightening on supply as purchasers from canceled projects move to active projects.”