Thanks to the readers for suggesting blog topics before the long weekend!
As you saw in Tuesday’s blog post, I took one such suggestion to heart.
And now, a second one, as a reader provided a request that I think has merit.
Here’s the comment:
Thank you for taking us back to that place that we all thought we had left for good: pre-construction.
It’s my least favourite topic and that’s because it used to be my most favourite topic. And because I’m a cynic, you can correctly assume that my “most-favourite” topics were ones that infuriated me to no end.
I started blogging (ranting?) about the pre-construction condo industry just as soon as this blog was launched back in 2007.
Somewhere along the line, I grew tired of it. Not only because I said the same things over and over, but because the more I ranted about the perils of pre-construction, the more slimy real estate agents rushed to gain VIP access to “launch parties” so they could chase 4% commissions.
Like the crypto-expert who keeps popping up on your Instagram feed in that photo of him standing in front of his three Lamborghinis…
Some people just never got it, and never will.
There’s a comment on one of my YouTube videos from 10+ years ago where I’m ranting about the $800 per square foot price of pre-construction condos in one particular development, and the comment says, “This didn’t age well. Prices are $1,200 now.”
That missed the point.
The point was that resale condos were $650/sqft at the time, so a buyer in that development was paying a massive premium just to take on a slew of risks that don’t apply to resale.
As I said, some people will just never get it.
I rarely write about pre-construction these days, but if somebody has a question or a point, I’m always happy to chime in.
Blog reader Densha asked about pre-construction condo delays and it’s a good topic. Sadly, it’s a good topic because these condos are always delayed and the “horror stories” are extremely common.
So what are the reasons for these delays?
In my mind, there are five major ones, and as you’ll read shortly, they all somewhat tie into one-another…
1) Deliberately misleading target completion dates.
I was down on Front Street this week with clients who sold in 2019 and are now back looking to purchase again. We passed by the St. Lawrence Market and they marveled at how the north market is almost finished.
How long did that take?
It was 2009, if you can believe it, that the international architectural competition was launched to find a design for the north market. David Miller was the mayor and came up with the idea. That is how long ago this was!
Here we are, fourteen years later, and the Market is almost finished.
Torontonians have grown so accustomed to delays that we simply expect it.
So why in the world are pre-construction condo buyers caught off guard when the nonsense timeline they were purchased by the builder doesn’t come to fruition?
When you walk into a sales centre in February of 2023 and the advertising reads, “Move after New Year’s, 2025!” you have to know that’s bullshit, right?
It kind of reminds me of this:
Yeah, I know I’ve done this bit here on TRB many, many times.
But as a 10-year-old, I really, truly believed the advertising and thought I was getting twelve CD’s for a cent.
Condominiums don’t get planned, sold, built, and turned over within two years.
And yet every developer out there promises a timeline that’s absolutely impossible, unless you live in North Korea where you can build a new hospital in four months.
Many pre-construction buyers express displeasure with the “delays” simply because they don’t have the experience, knowledge, or downright cynicism and distrust of developers to know that the target completion dates presented during pre-sales is always far earlier than anything approaching reality.
I told this story before a few months ago: A new agent in our office asked aloud, “What percentage of condo projects end up delayed?” Almost in unison, three of us shouted, “All of them.”
The “fine print” in developer agreements is nothing short of fantastic. They don’t need to adhere to the target completion date, nor are those “estimated maintenance fees” anything but a pie-in-the-sky number. Oh, really, the monthly fees in this project are only going to be $0.50/sqft? Go on…
So if you’re a buyer and you’re feeling snake-bitten by a “delay” in your project, ask yourself if you had a realistic expectation to begin with…
Years and years ago, I was trying to explain pre-construction condo sales to a group of Manhattan bankers who had come in for the day to investigate the Toronto market while looking for the next “big short.”
I remember ranting, uninterrupted for a solid five or six minutes, before I said something that made one of the guys reach out, grab my hand, and say, “Hang on……..can you say that again?”
“Projects don’t need to be approved before a developer starts advertising and selling,” I said.
The whole table went quiet.
“This is the fucking Wild West,” the guy said.
One of the many issues I’ve had over the years with pre-construction condo sales is that the buyers aren’t really buying anything. They’re simply making a bet.
A developer is looking to build a condominium to his specifications, within his timeline, with his projected profit margin, and on, and on, and on.
Some do, some don’t.
And along the way, there are all kinds of changes to the timeline, the condominium structure, and the project itself.
Some developers start sales when they have the exact project that they want, fully approved in every way from every regulatory body.
Others just shoot first and ask questions later.
Another “across the table” conversation I had many years ago with a group of Manhattanites had to do with the concept of selling before a property is built.
Yes, seriously. This is how long ago this was, and this is how foreign the concept was to a group of very astute, very savvy, very informed individuals who worked in the financial markets.
One of the guys said, “I was looking at an apartment on the Upper West Side that was almost done, and we walked through with an agent saying, ‘This is going to be a marble counter, and this ceiling will be coffered,’ but the apartment was done and built. The building was finished. It was just the final touches that we were negotiating, and it still made my fiance and I feel uneasy.”
Imagine his response when I told him that here, in Toronto, we sell nothing and the buyers of said nothing simply wait to see what happens.
It’s almost impossible to think of a day when a condominium in Toronto is built and then people buy the units.
But we’ve grown so accustomed to developers selling units in advance that the opposite idea is completely unreasonable.
Lost in this, however, is the fact that the project isn’t going to get built if the developer can’t sell enough units. And since the developer provides iron-clad agreements to buyers, the developer can effectively wait as long as it takes to get those units sold!
Contrary to popular belief, not every condo sells out in 48 hours after the pre-pre-V-VVIP sale where buyers line up overnight while wearing purple wrist-bands.
Some projects are tougher to sell than others, whether it’s due to the location, price, project, or the lack of flash and pizzazz that often help to flog these magic beans.
Thanks to Urbanation, I have data for virtually every cancelled condo project in the last twenty years.
There are different columns for “total suites,” “total sales,” “percentage sold,” and finally, “months to 70% sold.”
Halo Residences on Yonge and The Clover, both by Cresford Developments, were only one month to 70% sold in 2016 and 2015 respectively.
But Union Lofts by Windmill Developments were a whopping 28 months to 70% sold in 2012.
All three projects were canceled and/or re-sold.
But there are many projects that take five, ten, fifteen, or twenty months to get to the 70% threshold that aren’t canceled. It just means these projects will be delayed.
A project that only takes one month to 70% sold is far less likely to be delayed than a project that takes one year to 70% sold, but there’s still no guarantee that either is finished on time.
And as we saw in point #1, what is “on time” anyways?
In bull markets, it’s almost easy to get to the 70%-sold threshold, but there have been long periods of sluggish sales in the pre-construction industry and that’s likely going to be a larger cause of a delay than any of these points on our list today.
This both is and isn’t related to point #3 above. Let me explain…
As noted already, developers don’t build a condominium and then sell the units. They pre-sell the promise of a unit to a buyer who puts down a deposit.
So who actually pays for the cost of construction?
Not the buyers! And not the developers!
Financing condo construction can be very tricky and it’s why so many projects end up being delayed or canceled.
For background consider the following…
I talk occasionally about how I work on land consolidations for developers, and while the idea of buying up a block of old houses, rezoning them, and building a condo is a sexy topic, what’s very unsexy is how to get from A to B.
When it comes to financing, who pays for the purchase and how?
Let’s say we bought a whole city block of homes for $90 Million. Is the developer paying for that?
Unlikely. Very few developers, believe it or not, have that kind of money.
Will a bank finance this purchase?
Not in a million years! Not a chance.
Why, you ask?
Well consider how land consolidations work, ie. you’re paying people more than fair market value for your homes.
A dozen houses worth $2 Million each might be purchased for $60 Million because, together, they could be rezoned and approved for a 50-storey tower, and suddenly that land is worth $200 Million.
But is a bank going to lend based on that $60 Million purchase price?
The houses are only worth $24 Million, right? A dozen houses at $2 Million each?
No bank is going to lend on that $60 Million purchase price.
So the developer often looks to the sellers for a 50% vendor take-back mortgage, then finds a partner to cove the other half. So of the $60 Million purchase price in the example above, maybe the developer has $15 Million in cash into the project.
Once the land is rezoned and the project is approved, the bank will refinance, and the developer can pay off the vendor take back mortgages and whoever else lent money.
But that can often be two years away.
Now, consider that these issues with financing, in our example where a developer is rezoning existing real estate, take place before there’s any approval, let alone sales.
So imagine what happens once a project is approved, sales are underway, and there’s a host of lenders involved?
Every project is different and involves different lenders. And every lender is different as well.
Banks, credit unions, pension funds, private equity groups, real estate investment trusts, or even extremely wealthy individuals or families.
Every development is financed differently, with different requirements, sales thresholds, and objectives that need to be met within prescribed timelines.
Very few developers are financing their own projects so they’re at the mercy of those who actually put up the money. So if sales targets aren’t met or if there are other things that the financial backers want, then construction is delayed as a result.
A developer might tell buyers, “We want to get this project started. We’re eager to get a shovel in the ground,” and that developer could be completely sincere with his comments. But whoever is putting up the money is going to have a large say in when construction starts, and often how quickly construction moves along.
5) Economic viability.
I’m going to be the bearer of bad news here, at least for a large percentage of the city who have ideas about development.
Developers aren’t not-for-profit, NGO’s, or entities to serve the public.
They are businesses.
They undertake “adventures in the nature of trade.”
They build condominiums to make money.
I’m always amazed by the graffiti on Development Notice boards that read, “Build public housing!!!” as though the developer who put up the notice should be tasked with a public sector responsibility.
Every time an article is written about a canceled condominium, people post comments saying, “They should be going ahead with this! Totally unfair!”
Why would a developer take on a project if it’s going to lose money?
Some will argue that there’s risk in many projects, in many industries, and nobody should be guaranteed anything.
I would be inclined to agree.
But I’m not a pre-construction buyer signing on the dotted line of a contract that allows a developer to cancel a project with no repercussions.
It’s the buyers who allow this simply by purchasing the units.
If the buyers said, “No way,” then the industry would change.
It’s like a sports team that is terrible every single year, but they sell-out every game. Why would management and ownership change anything? Why spend more money or rock the boat in any way? If the fans stop coming to the games because of poor play, then there’s an incentive for the team to implement change.
I believe in consumer protection to some degree and there is an argument to be made that developers shouldn’t be able to cancel projects. But if that were the case then they would look for protections elsewhere, perhaps charging higher prices at the onset, and that doesn’t help with affordability.
Developers all have these “economic viability” clauses in their iron-clad Agreements which allows them to delay projects or often cancel them.
A developer who isn’t sure if a project will be profitable is not going to break ground, and this is surely going to cause a delay.
New legislation has been enacted to limit the number of times that a developer can push back the economic viability date and outlines compensation for buyers, but this isn’t going to result in major changes.
Developers won’t build if they don’t make money. If a project isn’t economically viable, it will be canceled, or it will be re-worked (repackaged and re-sold…) so that it’s profitable.
So those are my top five reasons, and as I said, they all sort of bleed into one another, as you can see.
If you have experienced a delay with your project, we’d love to hear from you!