At Fortress Real Developments, we partner with residential, commercial and retail builders and developers across Canada, and are constantly evaluating real estate opportunities. Over the past few weeks, the majority of the deals we have been presented are potential Toronto condominium apartments.
My role often involves evaluating the projected revenue assumptions at the proposed project, the overall metro-level and neighbourhood-level market (in terms of pricing and supply), as well as the merits of the product type, unit mix, unit sizes, and the builder/developer.
I have often uttered the phrases: “that area is pretty crowded right now” or “there is a lot of resale supply coming to that area.” In reality, it doesn’t appear supply has had that big of an influence on values either negatively of positively. Let me walk you through it.
I took a look at the number of resale units and average index pricing (on a per square foot basis) for 34 submarkets in the Toronto Census Metropolitan Area (CMA) in Q2-2004 and Q2-2014 as tracked by condominium market research firm Urbanation Inc. My goal was to assess how many new units were completed over the past 10 years as a per cent increase from 2004, and compare that to the per cent increase in the index price from 2004 to 2014.
Two pertinent questions
I wanted to determine what is a more dominant factor as it relates to condominium values in an area, by asking these two questions: does abundant supply suppress price growth or does gentrification of an area boost price appreciation?
Toronto’s downtown core (the Core) submarket, which is essentially the Yonge Street corridor stretching from about Front Street to Bloor Street, was seeing approximately 5,000 completed condominium apartment units trade for $287 psf on average 10 years ago, the 11th-priciest submarket in the Toronto CMA.
Fast-forward to Q2-2014: the number of units have increased by 166% (fourth-most) and values have increased by 108 per cent (highest among submarkets), moving the Core to fourth place among CMA submarkets, and registering the largest ranking increase (11th to fourth). So despite the numerous cranes and thousands of units being built, the Core condominium values went up more than any other submarket.
The Core was already a relatively mature condominium market 10 years ago, so I can’t really say it was gentrification at play here, but is shows that transit, connectivity and proximity to employment are becoming even more important in an increasingly crowded Toronto.
Cityplace and the Entertainment District popular
Two of the most talked about submarkets in Toronto are Cityplace and the Entertainment District, and for good reason. They were the top two areas for 10-year growth in the number of condo units at 391% and 368%, respectively.
They were back-to-back in terms of price increase as well, sitting in ninth and eighth, respectively, with Cityplace increasing by 73% from $307 psf to $532 psf and the Entertainment District growing by 86% from $328 psf to $609 psf.
The nearly four-fold increase in units in these areas hasn’t suppressed price inflation, as the submarkets rank almost exactly the same in 2014 as 2004 (third and eighth versus third and sixth). We are very bullish about the Entertainment District, and looking forward to launching a project with Carlyle Communities there next year.
It appears as if it doesn’t matter how many new units are added to a submarket, the desirability of most neighbourhoods have remained very similar (by rank) over the course of 10 years. The luxury submarkets of Bloor-Yorkville and the South Midtown were the highest priced resale condominium neighbourhoods in 2014, unchanged since 2004.
The Bloor-Yorkville unit count increased 106% (14th-ranked) and pricing increased 59% (20th-ranked), while South Midtown’s unit count increased just 28% (28th-ranked), while pricing increased 69% (16th-ranked). Pricing did appreciate more in South Midtown than Bloor-Yorkville, but it is not likely the case South Midtown is more desirable – it was that more ‘mid-market’ buildings were completed in Yorkville, while South Midtown witnessed more boutique and upscale projects being built.
Gentrification apparently boosted values
In conclusion, gentrification appears to have boosted values in the Downtown East, Downtown West and to a lesser extent the Downtown Core, while major increases in units completed appear to have depressed price growth to an extent in Bayview Village and the Etobicoke Kingsway neighbourhoods.
However, in the end, good neighbourhoods stay good neighbourhoods and less desirable neighbourhoods have stayed that way. For my purposes, it is much more important where the project is, than how much competition is currently for sale, or coming to market. Developers need to keep that in mind when looking for sites, and prospective condo buyers need to keep that in mind when looking for a suite.
Fortress Real Developments is a diversified real estate development and investment company that partners with established builders and developers across the country. Fortress sources equity capital for the partnership, in addition to providing value-add services such as market research, structuring of debt, marketing, and other realty services.
Ben Meyers assists in evaluating both the market conditions and projects in which Fortress is active. Follow his blog posts and commentary on the Canadian Housing Market at www.fortressrealdevelopments.com/news or follow him on twitter at @BenMyers29