Forecasting market dynamics is easiest during times of stability, and while prescient strategizing has been complicated by the pandemic, as a team, we remain focused on understanding how and why our city and its real estate market have adapted. Over the past year, we have negotiated through the implications and opportunities presented by what continues to be an anomalous, protracted period of uncertainty. Trying to make sense of the change is not easy, especially in the midst of a global health crisis. We have summarized below our observations, along with some strategies to employ as we navigate the year ahead:
Divergent Markets
In March of 2020, uncertainty and fear stalled activity. By May, once the initial shock had been absorbed, some recognized an opportunity and sold their investment properties by effectively positioning them at the front of an otherwise unimpressive crop of inventory, while others made aggressive offers, purchasing from anxious sellers hurriedly looking to cash out of the market. This frenzied trading of low-rise, single-family and multi-residential properties kept inventory low, resulting in quick, and aggressive negotiations for those willing to venture out of their homes. The late start to the spring market pushed activity through the summer, with no sign of the usual languorous Labour Day pause.
During this time, a fault line that we had been closely monitoring for several years was starting to show across the downtown condo market. 1 in 3 Toronto condos was, at the time, owned by investors, many of whom had purchased at a premium, reliant on record-breaking lease rates to cover carrying costs. Confronting narrowing margins, and vulnerable tenants, investors weighed their options. Within our portfolio, condo vacancies surged as renters fled the shuttered downtown core. By September, the market was saturated with vacant condos offered for both lease and sale. Inventory continued to swell, demand cratered, and the growth that condo owners had enjoyed for the past five years vanished, seemingly overnight.
Vacancies peaked in our portfolio in November of 2020, with absorption rates continuing to improve as we move into Q2 2021. Speculative condo investors are treading water as lease rates have adjusted down by as much as 20% in some areas, with condo fees and property taxes continue to rise.
Acting on low-interest rates, reduced consumer debt and a persistent, intangible “fear of missing out” that has spurred the Toronto market since 2017, buyers are once again acting aggressively to secure more space and privacy, competing for and inflating the values of homes across Toronto, the GTA and beyond.
Shifting Preferences
Everyone is looking for more space. The realities of life under lock-down have many reconsidering what matters to them and their families. Comfort, privacy, security and room to grow seem to be top priorities. For now, the city has been rendered unnecessary, and to some, unhealthy. Micro-condos have been deprioritized, with the focus shifting to the suburbs, and young buyers even snatching up vacant land, with the hope of building a work-from-home sanctuary in cottage-country. Reduced spending, government subsidies and low-interest rates lend confidence to some in the race to buy whatever is available, as long as it is not a 450 square foot condo.
Our Strategy
If you have been contemplating a sale on your detached, semi-detached or townhome, a unique, pressurized environment currently exists in which you may be able to sell for a premium. As with any transaction, a thoughtful strategy is incredibly important. Within certain jurisdictions, the Landlord & Tenant Board is currently closed to all non-emergency matters; no point of escalation exists for conflict resolution or the enforcement of evictions or even access requests. If the home is tenanted, the slightest misstep could upset your tenants, compromising the entire sale and costing hundreds of thousands of dollars.
For several years, we have been advising condo investors to seek out unique, well-positioned units. If you’re holding one, you should move through this period with some stability. We see no headwind for unique, thoughtful, well-constructed condo inventory in the current market and expect growth to continue and improve through 2021.
If you’re currently holding a smaller, more conventional condo investment, maintaining cash flow until the slack in the market is absorbed should be the objective. The recovery of this segment will move in step with the return to relative normalcy and operability of the downtown core, particularly the return of students to campuses.
As mentioned above, the Landlord & Tenant Board is closed to any non-emergency matters. There is also a temporary moratorium on eviction orders. Tenants across the GTA are aware of their rights and many are aware of the obstacles currently in place for Landlords when it comes to selling, vacant possession and evictions.
Our Strategy
One of the benefits of having your property management and real estate services under the same roof includes ongoing relationship management. We know your tenants by name, we treat them with respect, and they trust us. For this reason, we have an easier time navigating difficult conversations. Not only do we work directly with your tenants to help them understand their rights, but we also recognize the impact that a transition out of the home will have on them and their families and we work to help alleviate that stress. Lastly, understanding the Residential Tenancies Act is crucial when negotiating sale agreements. One unlawful representation or warranty could compromise the entire transaction.
Competitive Buying
Much of the activity we are currently witnessing is largely detached from any sustainable market drivers. Homes across the city are selling for in competitive situations, within hours of hitting the market, often for three hundred to five hundred thousand dollars over their asking prices. Easily accessed credit and ineffective housing policies are creating another frantic period of rapid (possibly ill-advised) buying. We have seen some questionable purchases and would caution our clients to avoid getting caught up in the frenzy.
Our Strategy
We do not work exclusively with investors; we also help end-users to purchase their family homes. That being said, all real estate purchases are investments and should be scrutinized the same way.
Determining a firm budget will help prevent emotional bidding. Understanding what a property is worth today and recognizing when to tap out will ensure that when you do buy, regardless of the prevailing trends, you will have secured a strong, prudent investment that aligns with your long-term strategies for wealth generation.
Toronto has been through this cycle before and the current housing frenzy is just as unnatural and concerning as it was in 2017. With the momentum of Canada’s COVID stimulus pushing buyers forward, and lock-down fatigue encouraging us all to do something a bit more exciting, those who end up outbidding all others may be purchasing properties they will struggle to re-sell should the need arise. Speculation about a rapid return to normalcy and sustained double-digit property value increases have caused exuberance that we feel borders on recklessness. As a city, we are far from recovery but don’t tell that to the real estate market.
If you were considering a sale, the spring market has certainly arrived. We’re here to help.
