Multi-family residential developers can expect to continue to pay a hefty premium when acquiring land which already has approved zoning in place, according to a new report.

Ben Myers of Bullpen Research & Consulting Inc., has authored a 2018 GTA Land Insights report, in conjunction with Batory Management. (Image courtesy Bullpen)

Residential real estate advisory firm Bullpen Research & Consulting Inc. and land-use planning and project management firm Batory Management teamed up to review and provide projections on more than 40 Greater Toronto Area (GTA) high-density land transactions in the first quarter. They’ve just released their findings.

The report shows approved projects traded for about 28 per cent more than sites where rezoning had been submitted (but not approved), and 35 per cent more than lands without an active development application.

“I didn’t know what to expect in terms of premiums for approved developments, as the report is new and no one has looked at land numbers this way before,” said Bullpen president Ben Myers. “Anecdotally, there was a sense that the value gap between zoned and unzoned lands had shrunk significantly over the past five years.

“However, there is now uncertainty in the market with the removal of the OMB (Ontario Municipal Board), and developers do not know what the outcomes will look like under the LPAT (Local Planning Appeal Tribune) system. The premium for approved sites over unapproved sites will likely remain high until developers and other land buyers can better understand the risks and timing that are associated with purchasing unzoned lands.”

Prices highest in Toronto

Any land transaction where a property was suitable for a new apartment of four storeys or greater was included in the report.

“The majority of the lands that transact include single-storey commercial, underutilized office or two-storey residential freehold properties,” said Myers. “Because of rental replacement and rental conversion control by-laws, many developers shy away from buying existing multi-family properties for redevelopment.”  

Properties sold for an average of $106 per buildable square foot in the GTA. The average development is projected to launch at approximately $810 per square foot.

Those respective numbers were $147 and $946 in Toronto, both of which were the highest in the GTA. At the other end of the spectrum among the 13 municipalities was Oshawa. Its properties sold for an average of $11 per buildable square foot and the average development is projected to launch at $450 per square foot, which were both the lowest in the GTA.

“Every developer is going to back the numbers out and do a residual analysis based on the expected revenue and expected costs, and Toronto new condo prices and rental rates are significantly higher than in any other municipality, so it was expected,” said Myers.

More institutional capital in land market

“Costs are also significant in Toronto, given the big increase expected in development charges and the higher costs associated with tighter sites. The average numbers can also be skewed by the ultra-luxury lands that trade in Yorkville and South Midtown.” 

The average project in the GTA sold for $17.7 million, with a lot size of approximately 40,000 square feet. Based on projections, the average project will have about 190,000 square feet of gross floor area and a height of 18 storeys.

Myers said there’s now more institutional capital in the land market, pointing out these firms have typically focused on existing buildings and other cash-flowing assets.

“Asset managers and investment trusts have partnered with residential developers in the past, but it appears that they’re getting into apartment development themselves. These types of players with a lower cost of capital have the ability to outbid mid-size developers for prime development sites.”