Graywood Developments has launched a $200-million investment fund, its 10th, to build high-rises in Toronto, and while others may be cowed by today's economic climate, the firm’s president and CEO sees opportunity.

“We raised our last fund in and around 2020 during the heart of COVID when many people thought that was possibly not the greatest time to be going to the market to raise capital, but we thought, because of COVID, there would be uncertainty in the market and we could take advantage of that,” Stephen Price told RENX. 

“We did four excellent transactions where we had less competition to buy land than we would have if we hadn’t been in the COVID era.”

That fund successfully raised $148 million and worked out so well that the same strategy is being deployed to raise $50 million more in the Graywood Fund X Limited Partnership.

Fund IX closed in November 2021 and the four investments represented approximately 2,900 residential units and over $2.2 billion of development value. 

Price noted consumer confidence has plummeted amid the Bank of Canada’s rising overnight lending rate, which is also squeezing landowners on carrying costs.

Opportunity in the uncertainty

However, again Graywood sees opportunity.

“There are fewer bidders on sites, more vendors where there may be difficulties where they’re forced to sell and we think it’s an ideal time to be looking for deals,” Price said.

“When the fund is launched, we have three years to buy land, so we don’t need to be in a rush to invest all of the capital right away. We will very carefully sort through the opportunities we see and we’ll be able to compete very strongly, having a big capital base behind us.”

Fund X will be deployed in the Canadian city with arguably the country's strongest market fundamentals.

Price anticipates developing four to six high-rise condominiums in areas brimming with economic opportunities, or — pointing to some of Graywood’s downtown projects — near educational institutions, and where options for entertainment guarantee demand, like its 47-storey Peter and Adelaide Condos.

But Graywood’s strategy hinges on taking a long-term view of the market, especially at a time when other developers have expressed reticence.

The Canadian government decision to increase its annual immigration targets to half a million newcomers is perhaps the strongest fundamental — and that figure excludes the hundreds of thousands of permit workers and students who come to the country every year, around half of whom settle in Toronto.

Price expects interest rates to moderate

Moreover, Price expects a favourable interest rate environment by the time Fund X matures to its first presale cycle.

Additionally, municipal development charge and tax regimes aren’t as hostile to developers as in recent years past — yet more encouraging signs, Price said.

Price said the fund has already received commitments, the first of which Graywood anticipates closing by mid-2023.

Referencing the Bank of Canada’s most recent rate hike — a 0.25 per cent increase, its smallest in 10 months — which was accompanied by a message from the central bank that it would refrain from more hikes, at least in the interim, there’s merit to such thinking, said Daniel Johanis, owner of Pekoe Mortgages.

“The markets are pricing in at least one 25 basis point drop this year and subsequent drops over the next couple of years,” Johanis said.

Some positive signs for multires market

He added the Federal Reserve, from which the Bank of Canada takes its cues, is expected to announce a 50 basis point decrease this year.

“That bodes well for anybody looking to close on a pre-construction property in the next few years,” Johanis continued.

Higher interest rates have made bears of consumers and developers alike, according to Johanis, who recounted a recent conversation with a developer client struggling with tighter cash flows. Consequently, this developer has delayed launches.

But Graywood isn’t taking a wait-and-see approach like many of its peers. Despite the fact that Toronto-area condos cost as much as single-family homes in other parts of the country — sometimes more — North America’s fastest-growing city is hampered by a chronic undersupply of housing.

“Housing prices will continue (climbing), so presale condominiums make a lot of sense today because costs are relatively stable at this moment in time, including interest rates, which have gone up but are expected to stabilize,” Price said.