RealCapital Conference – Is there an Oversupply of Condominiums and Are They Underpriced?

I attended at one of the sessions of the RealCapital Conference held 2 weeks ago  at the Metro Toronto Convention Centre entitled "Financing Commercial and Condominium Construction & Development in Today's Market".  Two well-known lenders in the community, Carmin Di Fiore, Senior Vice President, Real Estate Banking, Bank of America/Merrill Lynch and Stelio Zupancich, Vice President, Real Estate, TD Commercial Banking gave very interesting and somewhat opposing outlooks of the condominium market.  Stelio focussed on the supply issue and the impact on investors in the marketplace, utilizing readily available CMHC statistics, whereas Carmin addressed the pricing levels.   Stelio had a number of interesting observations:

1. Based on information from the CMHC for the last 4 years, rental vacancies have dropped from 1.8% to 1.6% and new units coming onto the market from investors are selling to homeowners units after registration, without any difficulty, with about 20-30% being retained by investors.  The current inventory of 1.8 months is not out of line and accordingly, there does not appear to be an oversupply or a problem with the investors in the marketplace.  Their units are either being rented or absorbed in the normal buying and selling once condominiums are registered.
2. Stelio also reviewed the status of unsold inventory held by developers.  61% of the total unsold inventory is for projects which have not even been started and which may never start.  Only 32% represents inventory in projects which have undergone construction but are not completed.  Finally, only 7% of completed new condominium projects remain unsold.  Clearly, there does not appear to be an oversupply of inventory either.
3. Stelio did note a number of concerns such as:

(a)                investors in multiple projects; (b)               increasing land prices, the cost of which cannot be passed on indefinitely by way of increased price per square foot expectations; and (c)                a possibility of production backlogs given that over the next 2 years, the amount of expected completions of condominiums is more than double the average of 15,000 per year.   Carmin on the other hand, took a much more conservative viewpoint which is reflective of the approach taken by Bank of America/Merrill Lynch.  Carmin is a Senior vice President in Real Estate Banking and has been in the marketplace for many years with the Bank of America and previously at CIBC.  Carmin had focussed on pricing of condominiums inTorontoand the commonly held view thatTorontois underpriced as a world class city in comparison to other major cities.   He looked at various statistics such as the number of people per square mile, land area per subway mile and concluded that in comparison to the major cities in the world,Toronto's density was extremely light on both counts.  He also concluded that although there may be significant inflow of people intoToronto, there is also significant outflow resulting in far less than 100,000 people on a net basis moving intoToronto.  His view was that there is substantial room for population growth inTorontoand the pricing of condominiums is not overly cheap given the limited density of people along subway lines and the limited subway availability creating the density in the first place.   Who is right?  The debate continues.  An interesting bell weather will be the launches of numerous projects over the next few months to see if the appetite for investors forTorontocondominiums is as high as it was in 2011 and whether the increasing price levels being established byTorontodevelopers can be sustained.   Stay tuned.