In May of last year, I was a panelist at the Land & Development Conference in Toronto, just weeks after the Fair Housing Plan was announcement by the Ontario government. I warned developers in the room to be very careful buying land, that the annual price growth was extremely high, and it wasn’t the same 7%-12% growth we could attribute to a strong economy and record-low supply. A few of my fellow panelists were shocked to hear me say that, as I’ve been fairly bullish on the market for several years, but when the data changes, my opinion changes. A good analyst alters their opinion when new data made available.
From about June on, the ground-oriented new housing market has seen sluggish sales from previously-launched projects, as these expensive homes are typically purchased by move-up buyers, but with so much uncertainty in the resale market, these prospective purchasers have been reluctant to list their existing homes and buy another (especially a multi-million dollar new home). The high-rise market has continued to chug along, with the majority of sales going to investors. These investors don’t have a home to sell, and realize they’re buying a housing market future, and they’re betting that in 2021 and 2022 when these projects complete construction and register, values will be higher (will rents be high enough – that’s a whole other blog post).
I mentioned the high level of risk for developers right now in my first Bullpen blog post, and the typical know-it-alls were already commenting on my “inconsistent message” before I had even Tweeted out the link!
One of the problems with social media is your short thoughts and comments can’t capture all of your opinions, and those opinions are often taken out of context. I’ve talked in the past about the low market risk of ground-oriented (or low-rise) development, meaning when developers have launched the right product at the right prices, they’ve seen experienced tremendous success in the GTA. However, market risk is one component of risks faced by developers when they first purchase a property.
There is financing risk: Will there be credit available for a land loan? Will interest rates rise? Who should they use for equity? Do they need a mezz piece? Do they have the covenant strength to secure construction financing? Is there someone that can provide a guarantee?
Entitlement risk: Is the councillor or mayor on board with more housing growth? Is the project in the urban boundary? Does the proposal fit the current zoning? Is there servicing allocation available? Will the project be the subject of NIMBY pushback because of too much density?
Execution risk: Do they have the team in place to manage construction trades? Are they doing enough marketing? Do they have a good customer service team? Can they effectively negotiate the Section 37 fees? Are they aware of future changes to the building code or development charges?
On the market side is where my expertise lies, is it the right location, the right built form, the right unit sizes, the right mix of units, is it targeting the right prospective buyers, does it have the right interior amenities, what should the exterior amenities be?
People want things to be two dimensional and proportional, if new home sales are down 15%, then risk for developers is up 15%. However, risk in the development industry is three dimensional, there are hundreds of factors constantly shifting and changing.
The risk faced by a developer is significantly different than risk faced by a condo investor, and significantly different than the end-user
buyer of a new single-detached house, which is also significantly different than the buyer of a 50-year old resale townhouse. Macro-level housing market conditions can influence all four of those purchases, but it is just so much more complicated than that. Textbooks have been written about all the issues to consider as a developer, I’ve read one!
That being said, if you’re a land owner or new developer, I can’t help you with a lot of what’s in that textbook, but I can put together a team that includes a planner and cost consultant to make sure my advice on the market side is in line with two other major aspects of a development project. Let’s work together to reduce some of your risk.
Despite some of my warnings, I still expect new and resale house prices to increase in 2018. You?