Momentum Continues for GTA Condo Market

Photo by Patrick Tomasso on Unsplash

GTA condominium projects still find capital despite additional scrutiny by lenders.

Brent Magnan, Managing Director of Canada ICI’s Toronto office, describes today’s condo asset class in the GTA as strong. He admits that during the first months of the pandemic, the market held its breath and waited to see what would happen. Then, before too long, developers dipped their toes back into the metro area’s market waters with land acquisitions and new sales launches. “There are still a lot of units being sold. Clients continue to launch projects, achieving pre-sale targets successfully, and therefore are able to get financing underway,” he reflects.

According to Brent, when COVID-19 first happened, condominium projects were, naturally, at different stages in their life cycles. Condo developments that were already under construction and had met their pre-sales targets weren’t affected because construction during the pandemic is deemed an essential service.

Projects much earlier in their cycles where land had already been purchased by the developer still had to go through the approval process. In busy markets like the GTA and Vancouver, this process can take between two and three years. Because of this lengthy wait-time for approval, the condo projects awaiting approval weren’t affected much by COVID-19, either. These projects needed to continue moving forward regardless of the uncertainty.

Finally, if developers had already planned projects and therefore were committed to the path of development and pre-sales, they forged ahead, and building continued despite the pandemic. But this wasn’t easy in the face of so much uncertainty. Brent Magnan talks about the questions that the developers about to launch projects asked as the reality of COVID-19 set in. Would sales prices hold through the pandemic and would buyers be able to get financing? How many units might they sell? Would there be enough liquidity in the market to allow developers to receive adequate construction financing? Projects just about to launch were the projects most caught in limbo by the pandemic.

Changes in Lending

In the five years or so prior to the pandemic, there was an abundance of confidence in the GTA condominium market and as a result, lending looked different in those days. Brent Magnan looks back, saying, “Over time, lenders became more and more aggressive in their financing of condos. In that pre-pandemic climate, lenders provided increased leverage.” 

Brent explains that lenders continually accepted less cash equity from developers, in some cases as low as 3% to 5% of the total project. Lenders were more likely to recognize appraisal surplus, which is the lift in land value that the lender may be willing to give credit for. Notwithstanding that pre-sales were generally easy to come by in the GTA, in some cases lenders were also willing to accept lower pre-sales tests.

Still, it was worth it to lenders to finance borrower clients in that competitive market.

Through the lens of 10 years of experience, Brent Magnan sees some changes in the lending market post-pandemic. He predicts that the larger lenders, the Schedule I Banks in particular, are more likely to remain within their current borrower-client networks, limiting new loans to existing clients or to new top-tier relationships.

Lenders have increased their scrutiny of the borrowers’ development experience, as well as the borrowers’ financial strength and ability to inject capital should there be cost overruns or if a project encounters any other trouble.

Post-pandemic, Brent believes that lenders will be more focused on when pre-sales have happened. Lenders will want to see that at least a portion of the sales have happened during COVID, or at a minimum, be satisfied that the older pre-sales and the unsold inventory, are still priced at current market levels.

No Shortage of Capital

The managing director of CICI’s office in Toronto becomes animated when he talks about how developers have pivoted and adapted quickly to the changes COVID-19 presented them with. During a virtual interview, Brent describes how the condo market maintained its buoyancy and specifically how developers creatively used technology to keep buyers engaged in the condo market.

“In one case, a developer rented an outdoor drive-in movie theatre and and played project marketing information and showed condos, unit by unit. And from their cars, people used a reservation app to buy units.” For Brent, this is an excellent example of a condominium sales strategy that safely involved and informed potential buyers. He notes that some of these changes are here to stay, and that there will likely be a blend of old and new marketing going forward.

Canada’s Big Five banks have made a concerted effort to continue lending during the pandemic but only to their most reliable clients because, as Brent puts it, “Lenders want to be seen as being active during COVID-19. Institutional lenders continue to lend; however, lenders may not be as willing to recognize the same amount of appraisal surplus. They may instead be looking for higher cash equity levels to be injected by the borrower.”

The great news is there’s a ton of capital in the condo market, so much that there is nearly a home for every loan.

Brent shares an optimism based on his office’s work in the GTA’s condo asset class. “This is where firms like Canada ICI can provide value. We work with a range of lenders, not just the traditional lenders, and in a time like this, we have an opportunity to form new relationships. There is so much demand on both sides. Our success this year and last is the result of our ability to match the right lender with the right borrower for the situation.”

In closing, Brent notes that Canada ICI is busier this year than they were last January before the pandemic. He believes there’s much more to look forward to in the upcoming year. “I’m optimistic about the market and about Canada ICI’s business. There’s a lot of financing for us to do in 2021.” 

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