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Will higher development costs affect GTA high-density land prices?

The rate of price growth for new condominium apartments in the Greater Toronto Area has finally s...

The rate of price growth for new condominium apartments in the Greater Toronto Area has finally started to calm down after several years of rapid appreciation.

Unsold new condo prices jumped by approximately 40 per cent in 2017 and 15 per cent in 2018. In many GTA submarkets this year, price growth is well below double-digits.

However, according to data from Buzzbuzzhome, the average new condo price per foot in downtown postal code M5A, which includes the East Bayfront, Corktown and Regent Park, increased by 32 per cent year-over-year to $1,176 per square foot. In M5V, which is primarily the Entertainment District, prices jumped 33 per cent annually to $1,301 per square foot.

Land owners and their brokers are calculating the residual value of their lands and figuring at $1,300-per-square-foot pricing, their land should be worth $250 to $300 per buildable square foot. However, given the major increase in costs, the past back-of-envelope relationship between land and end-selling prices no longer holds.

Dramatic rise in construction costs

At a recent condo investor event, Brad Lamb of Lamb Development Corporation talked about the rise in construction costs in Toronto.

Lamb told the audience when he started his Harlowe condominium in 2015, he had hard construction costs of $190 per square foot.

When he started his East 55 project in 2017, construction costs were $275 per square foot, and now on the precipice of starting his new Woodsworth project (which has no parking), construction costs at $315 per square foot – over 65 per cent higher than four years ago!

The other major cost increase is development charges. The development charge for smaller suites in Toronto is nearly $26,000 per unit, an increase of 34 per cent annually, while larger units have a charge of nearly $38,000 per unit, an increase of 40 per cent annually.

Economic theory suggests that when costs rise, developers will pay less for land to maintain their margins.

However, despite the cost increases exceeding revenue increases in many GTA municipalities over the past year, land prices continue to increase.

Land prices continue to escalate

According to the Q1 2019 GTA High-Rise Land Insights Report by Batory Management and Bullpen Consulting, the average land transaction with high-density potential sold for approximately $119 per buildable square foot, an increase of 12 per cent annually.

Land owners don’t want to hear about rising costs; they want to get more for their property than the last seller, especially when they see higher prices at the most recent launches, and new condo projects selling quickly.

Many of the land owners have no sense of urgency, as they’ve owned the land for several years. A recent GTA high-density property sold for $9.5 million; the previous sale occurred in 1960 for $18,500!

At a real estate charity event, developer Rob Cooper, the president and CEO of Alterra, told the audience they have no choice but to plug their noses and buy at these high land prices.

Competition for development sites is fierce. If a developer doesn’t pay above-market for land, (effectively betting on much higher future prices), their firm would have no product to sell and would soon be out of business.

Longer approval timelines, higher financing costs, higher DCs, higher construction costs, and greater built form and interior use requirements with the new TOCore planning framework will continue to put upward pressure on costs.

The only way for developers to deliver product end-users can afford, and investors can reasonably rent, is for land prices to stagnate or decline.

Do you think that will happen?

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Ben Myers is President of Bullpen Research & Consulting, a boutique real estate advisory firm that works with land owners, developers, and lenders to better inform them of the current and future macroeconomic and site-specific housing market conditions that can impact their active or proposed development projects. Follow Bullpen on Twitter at @BullpenConsult or find Ben at

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