TUC PODCAST 76
Toronto Under Construction Podcast: Navigating Toronto’s Real Estate Landscape with Industry Leaders
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In Episode 76 of Toronto Under Construction, Ben is joined by Noah Rechtsman, Doug Hochglaube, and Francesco (Franc) Margani to explore the intricacies of Toronto’s real estate market. From land valuation and distressed properties to rezoning challenges and innovative financing solutions, this episode offers an in-depth look at the factors shaping Toronto’s urban landscape.
Meet the Guests
At 1:47, Noah Rechtsman, an executive at Hullmark, shares how his team manages over $1.25 billion in assets, focusing on reshaping Toronto’s urban core. At 2:06, Franc Margani introduces his extensive experience connecting real estate developers with tailored capital solutions for diverse property needs. Finally, at 2:31, Doug Hochglaube, CEO of Trolleybus, highlights his company’s efforts in creating 6,000 new residential units by unlocking the potential of fragmented parcels. Finally,
How Much Is Development Land Worth?
The discussion begins with Ben referencing a Brandon Donnelly blog post that explains: “(Land is) worth whatever money is left in your proforma once you’ve accounted for everything else. This is what is called the ‘residual claimant’ in a development model. Given that determining the value of land starts with revenue, one way to do a very crude gut check is to look at the relationship between land cost and revenue. This is sometimes called a land-to-revenue ratio. And historically, for new condominiums in Toronto, you wanted a ratio that was no greater than 10%. However, this is, again, a very crude rule of thumb.”
Donnelly adds that rising costs typically lead to higher unit revenues, but in softer markets, land prices tend to decline.
Ben turns to Doug, saying, “One thing that Brandon didn’t mention in his blog is that a major factor in the valuation of land is expectations. Buyers of high-density land rarely launch the project in the six to 12 months following the buy. Developers are making forecasts on housing formats, costs, revenue, planning policies, tax policies, interest rates, and capital availability. Your firm is making assumptions on all these factors when underwriting deals. Do you expect many major changes in any of these factors over the next year?”
At 4:53, Doug explains the detailed analysis behind determining the highest and best economic use of land. The group also discusses shifts in landowner expectations over the last four years, highlighting how market conditions influence valuation.
Distressed Properties and Media Narratives
The conversation shifts to findings from the latest GTA High-Rise Land Insights report from Batory Management and Bullpen Consulting, which notes a 13% year-over-year drop in the average price of high-density land, now sitting at $98 per buildable square foot (pbsf). Ben mentions a notable transaction at 15 Neighbourhood Lane, where a partially built property sold for $48 million under receivership.
He asks Franc, “I won’t ask you to speak specifically about this sale, but do you anticipate that we’ll see more receiverships like this, buildings stopped mid-construction, or was this an outlier?”
At 14:37, Franc offers insights into the likelihood of similar scenarios arising, while Doug weighs in on how negative media coverage shapes vendor behavior and market sentiment. Tune in at 22:49 to hear Doug’s thoughts on how these factors influence decision-making across different asset classes.
Office-to-Residential Conversions
Next, Ben discusses findings from the JLL report, which identifies 73 office buildings in Toronto with potential for conversion into residential units. These projects could address high office vacancy rates while adding up to 51,000 housing units.
Ben asks Noah, “Has your firm ever seriously looked at an office-to-residential conversion? What is your view on the state of the office market today and in the future?”
At 26:49, Noah reveals that Hullmark has considered such projects, and the panel discusses the challenges and opportunities in repurposing office space for housing.
Ontario’s 1.5M Housing Goal
Ben references an Urbanize Toronto article that examines the challenges of building 1.5 million homes by 2031. He points out that 70% of Toronto’s land is designated as low-density “Yellowbelt” neighborhoods, limiting opportunities for intensification.
Turning to Doug, Ben says, “I see a lot of these lands wasted with giant parking lots, rock climbing gyms, self-storage facilities, and car repair shops with the same broken-down vehicles on the lot for years. Do you think the City should reduce the number of employment lands?”
At 40:44, Doug advocates for more efficient land use, calling for collaboration among stakeholders to unlock potential in underutilized spaces like the air rights over the Eglinton LRT.
Ben then asks Noah, “You’re in the process of rezoning lands for higher densities. How do you think we’ll do with our 1.5M housing goal in the current regime?”
At 47:59, Noah shares his thoughts, injecting humor with, “You don’t think we’ll do it?” The panel compares today’s challenges to those of the 2008 financial crisis.
Exploring US Multifamily Investments
Ben transitions to the U.S. market, citing a PGIM and Citymark partnership to invest $500 million in multifamily loans. Ben reads an excerpt saying the joint venture has been created to deploy the capital into senior loans or other structured positions secured by multifamily properties that have lifecycles ranging from new delivery to full stabilisation. The venture intends to focus on acquiring both performing and non-performing loans, where the collateral is supported by recovering sector fundamentals. He asks Franc, “Can you dumb this down for the layperson? Is there anyone doing similar things in Canada? And why are there so few American lenders operating in Canada?”
At 1:08:59, Franc unpacks the nuances of multifamily lending and cross-border investment strategies.
Rental vs. Condo Decisions
Ben highlights Hullmark’s recent projects at 1071 King Street West and 115 Larchmount, asking Noah “How did you ultimately choose rental tenure versus condo tenure at these two sites?” At 1:13:31 Noah explains the strategic considerations behind these decisions, balancing market demands with long-term goals.
Turning to Doug, Ben says “I spent some time doing work on your Glenavy site near Eglinton and Bayview, a high-rise project you’re rezoning with Elysium and Terracap. I understand that the development team is leaning towards rental. How are you thinking about your exit here, are you looking to sell the building to a pension or Lifeco, or are you looking at building a pipeline of cash-flowing assets?”
Tune in at 1:18:23 For Doug’s insights into Trolleybus’s Glenavy site, detailing the team’s exit strategy at 1:18:23.
Developer Accountability
Finally, Ben references the HCRA’s actions against a Hamilton builder for failing to enroll homes in the Tarion warranty program. He asks Franc, “The new HCRA seems to have more teeth, and is willing to actually go after bad developers, where the old Tarion did not. Can you walk us through what is going on?”
At 1:20:16, Franc discusses the differences between HCRA and Tarion and their implications for accountability in the development industry.
Challenges in Today’s Market
As the episode wraps up, Ben asks the guests about their biggest challenges in today’s market. Tune in at 1:25:00 for their responses and stick around for the rapid-fire segment where Ben asks questions like; If you were trying to help congestion, would you add or subtract bike lanes in Toronto? The City of Toronto is looking to require landlords to get a “Renovation License” in order to remove a tenant to fix-up one of their rental units. A building permit and architectural study will be required. Will this help maintain affordable housing, or simply increase the number of derelict suites? A so-called housing analyst asked why more rental units in Toronto don’t have walk-in closets, what would you tell them? If rental rates in the City of Toronto increased by 15% in a year, do you think you’d increase the rent on your tenants by a similar amount? Who is slower to accept the realities of lower land value: developers, lenders or appraisers? How many term sheets should a developer get when seeking construction financing? And more!
Tune in now to episode 76 of the Toronto Under Construction podcast!
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