The Canadian real estate market is confusing enough without having to look at it from a global standpoint. However, sometimes you have to look at the bigger picture to help put things in perspective. According to the Knight Frank Global House Price Index, Canada is sitting at the bottom of a global housing slowdown.
In 49th place of 56 housing markets, the report which tracks annual house prices by country shows that Canadian home prices in the second quarter of 2019 inched up by just 0.5 percent compared to 2018. However, despite this news, there is hope that the Canadian real estate market is looking up.
Home Pricing Holding Steady
Although the Knight Frank report shows we took quite the tumble, compared to a few years ago, we weren’t as bad as markets that reported declines such as Morocco, Italy, Finland and Australia. As well, according to the Canadian Real Estate Association National home sales held steady for November with activity up by 12.9% year-over-year, although there was a slight decline compared to October by 1.8%. The good news is the actual national average sale price rose 5.8% year over year.
Accelerated Sales in Vancouver and Toronto
Looking at those driving markets that have proven to be key to Canadian real estate, Toronto and Vancouver, they also saw accelerated sales activity according to the Huffington Post. This indicates recovery according to Robert Hogue, a senior economist for RBC. “Canada’s housing market correction is over, and the recovery is on.” So, things are truly looking up.
The Financial Post reported Canada’s realtors have been enjoying great performance going back to September, another sign the market is strengthening. B.C. was at the head of the charge, and weakness is only apparent in our oil-producing regions.
Steady Interest Rates
This info aligns with other factors that point to recovery from the slump we experienced in the beginning of 2019. According to the Financial Post, this includes the Bank of Canada’s decision to hold interest rates as is despite what is happening around the world. “Home sales activity and prices are improving after having weakened significantly in a number of housing markets,” says Gregory Klump, chief economist at the Ottawa-based realtor group in a statement to the Financial Post. “How long the current rebound continues depends on economic growth, which is being subdued by trade and business investment uncertainties.”
Bubble Risk in Canada
On a less positive note, according to the UBS Global Real Estate Bubble Index, risk of the real estate bubble in Toronto is the second highest in the world. The index looks at areas with the highest overvaluation of housing prices. Toronto was second to Munich and sitting in the company of Amsterdam and Hong Kong, which tied for third.
Vancouver actually saw improvements. The index reports areas that are experiencing consistent mispricing in real estate markets. One of the things they consider is what they call a “decoupling” of prices from local incomes and rents as well as issues in the economy such as higher instances of lending or what’s going on with construction activity.
Toronto Housing Crisis
It’s no secret Toronto suffers from unaffordable-housingitis. According to the Toronto Housing Markets Analysis, renters who are trying to save to buy in the GTA have to wait from 11 to 27 years just to for a 10 percent down payment on the average priced home. As well, unfortunately, Toronto’s rental market is not keeping pace with need. The majority of the purpose-built rental housing in Toronto was built during the “postwar rental apartment boom” of the 1960s and 1970s. Of the available units, over 90 percent were built pre-1980.
Drop in Prospects
According to Mortgage Brokers News, not surprisingly, contributors to the Index report say when there is low affordability, it causes issues for people who can’t afford to live in an area. Head of Swiss & Global Real Estate Claudio Saputelli and Head of Swiss Real Estate Investments Matthias Holzhey stated in the Index report: “If employees cannot afford an apartment with reasonable access to the local job market, the attractiveness and growth prospects of the city in question drop.”
The Mortgage Brokers article says that in markets that experience overvaluation, the expected drops can lead to managing curb price appreciation by taking regulatory measures. This is to help correct overheated prices. According to the Index, when looking at 2016 top rankers, they all experienced price drops at an average of 10 percent.
Real Home Prices Rise
As well, the Canadian cities in the Index between 2000 and 2018 saw real home prices rise by more than 5 percent each year in Vancouver and Toronto. “The introduction of taxes on foreign buyers, vacancy fees and stricter rent controls seem to have taken effect,” says the report. “While the average price level in Toronto has remained broadly unchanged from last year, prices in Vancouver are down by 7 percent. Lower mortgage rates are supportive but cannot outweigh lower economic growth.”
However, when it comes to Canada, in general, it really only is Vancouver and Toronto at risk of real estate bubbles.
Favourable Financing Conditions
In these expensive cities, the Index finds favourable financing conditions are not helping. This is one of the reasons home prices are staying high, even though in most cases affordability is one of the things that should, in theory, impact financial conditions. It’s a puzzler.
Although many are atremble thinking about the American housing market tragedy that occurred when the bubble burst, Canadians have some differences that might help. For example, we are seeing lending growth on par with GDP growth. This was not the case as the Great Financial Crisis in the U.S. crept up on everyone.
There, outstanding mortgage volumes increased up to 2.5 percent faster than GDP. We don’t seem to be seeing such an issue which is a hopeful sign for the Canadian real estate market and the state of our economy as well.
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Why Plaza Condo Buyers Are Feeling Regret
Photo-Illustration: Curbed; Photo: Peter Kramer/Getty Images
When Bob and Suzanne Chute of Naples, Florida, bought a three-bedroom spread at the Plaza in 2008, they seemed a little awed by their own daring, dropping $14 million on an apartment they’d never even seen. (“We are psyched, we are so psyched,” Bob, an entrepreneur, told the New York Times then.) The couple was charmed by the computer renderings of the views and, like a lot of buyers at the time, so dazzled by the opportunity to buy in such a famed building that they proceeded without much, if any, caution. “There was huge hype. People were very excited by the stature of the building and the wonderful location,” says a broker who sold some of the sponsor units after El Ad converted the hotel into condos in the mid-aughts. Such was the sales mania in those early days that the marketing team at the time reported working 17-hour days. The Chutes’ apartment, which has pretty Versailles-like paneling and views of Central Park and Fifth Avenue, is now listed for $13.9 million.
Downstairs, a three-bedroom on the ninth floor with Central Park views, a slicker renovation by Schoos Design, and a stylish art collection sold to an LLC for $14.375 million in 2008. It’s now listed for $14.15 million. Meanwhile, a four-bedroom duplex on the 19th floor with “one of the largest living rooms” at the Plaza, per the listing (it’s 1,000 square feet) and a gas-burning fireplace is trying for $15.9 million, a little more than the $15.1 million the owners paid in 2008. But it’s been listed since May. In 2008, the average Plaza condo sold for $3,726 per square foot, according to Mansion Global. The average price per square foot now is $3,836, according to an analysis by Urban Digs.
The prevailing wisdom is that you pretty much can’t make a bad real-estate investment in Manhattan. Plaza buyers might disagree. For many, owning an apartment at the fabled hotel has meant losing money or at best breaking even on resale. Sure, the condos were wildly overpriced at the start, but it’s been 15 years since sponsor sales started closing — years in which billionaires and oligarchs and other assorted LLCs set ever-higher Manhattan records in neighboring buildings like 432 Park and 220 Central Park South. These days, many sellers aren’t even trying to get more than they paid in 2008. “Everyone thinks their home is a palace, but at the end of the day, the market is the market and they become more realistic,” says a broker who has sold extensively in the building. So how did owning a condo in an iconic building in arguably the best location in New York City become such a terrible bet?
The Plaza launched sales at almost the exact same time as 15 Central Park West, back in 2005, and at first, the brokerage community saw the two elegantly old-fashioned new-development condos on Central Park as being neck and neck, says Jonathan Miller of appraisal firm Miller Samuel. If anything, the Plaza was the more sought after. “I remember at the beginning everyone was saying, ‘It’s old Europe, all these Europeans are buying there.’”
But once closings started, 15 Central Park West pulled ahead — it was modern but also somehow unapologetically baronial with excellent layouts and enormous windows designed to perfectly frame its Central Park views. It was, in other words, what people thought an apartment in the Plaza would be like but wasn’t. Condos there quickly started flipping for twice what buyers paid.
It was another story at the Plaza. In January 2010, the Times reported that the last 11 resales had lost money, some of them nearly half their value. Hedge funder Oscar S. Schafer, for example, paid $14.6 million for a three-bedroom in May 2008 and sold it a little over a year later for $8.5 million.
And then there was Tommy Hilfiger’s penthouse, which famously took 11 years to sell, cost the fashion designer $25.5 million — he reportedly dropped another $20 million on the renovation — and went, in the end, for $31.5 million. (“He missed the market,” says one broker, who told me he thought Hilfiger could have got $55 million if his ridiculous $80 million asking price hadn’t doomed the listing.) Not even the Candy brothers, standard-bearers of the London trophy-condo craze, could flip a unit there. The penthouse they paid $26.2 million for and buffed to an oligarch-worthy sheen with custom finishes and furniture sold for $32 million. They’d listed it for $59 million. There were some exceptions. Apartment 1109, an unlisted unit sold this fall for $65.8 million in a deal between two limited-liability companies, $20 million more than the buyer paid in 2008. The apartments with Central Park and Fifth Avenue views and recent renovations usually do a lot better courtyard-facing apartments with original finishes.
The problem, brokers say, is that by the time the prices at the Plaza caught up to the market again, it was already seen as passé, a bum investment. “When you’re selling a new development for the first time, you have a very wide audience. Then the finishes get dated and you lose the new-development crowd,” says a broker. “There are buildings that maintain their value, like the Robert A.M. Stern buildings. But most other buildings have their day and that’s it.”
And the Plaza’s day, as a condo anyway, was the gaga presale era, back before buyers saw the actual apartments. (The Chutes weren’t the only ones buying off renderings — this was before riding up in construction elevators to scope out the view was common practice in new development sales and El Ad refused to let buyers see the under-construction spaces, which doubtless added to the project’s allure. And the subsequent disappointment.) It isn’t a has-been like some of the old-line co-ops with anemic sales or even a once-hip building that went out of vogue like Olympic Tower. It just missed the mark.
“Everything’s a little off; it’s not like you think it would be,” says Julie Satow, who wrote The Plaza: The Secret Life of America’s Most Famous Hotel. “When the original sales were going on, it was a crazy market and people paid ridiculous amounts of money without seeing their units, so there were a lot of lawsuits.”
The most famous was that filed by Russian hedge-funder Andrey Vavilov, whose wife reportedly burst into tears when she saw that the penthouse they’d purchased — the penthouse she’d expected would help her break into New York society and whip up the envy of her friends back home. Instead of a showpiece she found herself in an attic. “The narrow windows were small and oddly shaped, beginning partway up the wall and then sloping inward into the apartment, more like skylights than a wall of glass,” Satow writes in the book. “Outside, enormous drainage grates and large setbacks blocked what was supposed to be unimpeded views of Central Park.” Even worse, an enormous column housing the air conditioning system was right in the middle of the living room.
The ungainly renovation wasn’t all El Ad’s fault. The Plaza is landmarked, which tied the developer’s hands when it came to some design features — those weirdly placed columns, the little windows. And the tippy top of the building had been an attic of sorts — it was the servants’ quarters, typical of a building of that era. But Satow says buyers also complained about cheap finishes: oak veneer over plywood instead of solid oak, Chinese marble instead of Italian, hallway carpeting cut and pieced together using a cut-rate method known as “patch-’n’-match.”
Buildings do recover from bad finishes — by now, most residents would have ripped them out anyway. But overtime, it came to seem that there was a cloud hanging over the Plaza. Besides the lawsuits and the bad resales, there was the story of the woman who got accidentally trapped in the garbage room for seven hours, her screams unheard by her rich, absentee neighbors. Something was also just lost in the conversion, Satow says. The hotel, which was always the draw, got a downgrade when the building’s best real estate was given over to condos. The Palm Court, basically the only real restaurant at the hotel these days, is considered mid-tier (it has 3.4 stars on Yelp). And then there was the whole Todd English Food Hall debacle. “Maybe if the Oak Room were like the Polo Club it could help with the cachet,” she offered. “But the bad reputation it got initially, then the fact that many of the iconic spaces never reopened or became anything great. It’s hard to recover from all of that.”
The looming office space real estate shortage. Yes, shortage
There is more pain to come in the office real estate market across the U.S., with maturing debt needing to be refinanced and a wave of expiring leases, but there is also what may seem at first brush to be a counter-intuitive message being sent to top tier companies by real estate intelligence company CoStar Group: prepare for an office space shortage.
You read that right: amid a commercial real estate market across U.S. downtowns being described in apocalyptic terms, CoStar sees a shortage on the horizon, with one key caveat for top companies to bear in mind.
The more office real estate that disappears – an estimate recently given to CNBC by the CEO of major bondholder TCW Group forecasts up to one-third of office real estate still to be wiped out – the more the major players in the market will be vying for the top tier of Class A commercial space. Add to that the fact that more companies are headed back to an in-office reality closer to pre-pandemic expectations, and competition may be hotter than the weaker end of the market suggests.
CoStar’s call of an upcoming office space shortage is predicated on a look at the current data on leasing and construction activity compared to recent market history. As office occupiers scrutinize their footprints more carefully, and in the months ahead leases that were executed before the pandemic continue to approach expiration, newly constructed buildings aged 0-3 years are proving to be the winners. They have attracted over 175 million square feet of net new occupancy since the beginning of 2020, an average of 12.7 million square feet per quarter. By comparison, the quarterly average from 2011-2019 for similar properties was 11.7 million square feet. From 2008-2010, during the Great Recession, the quarterly average was 13.6 million square feet.
“Modern, premium office space remains in demand, just as it has historically, even during difficult economic times,” said Phil Mobley, national director of office analytics at CoStar Group.
And the supply will increasingly not be there to support the demand. Currently, buildings aged 0-3 years comprise 2.4% of office inventory in the U.S. While that is in line with the average from 2015-2019, Mobley says construction has slowed dramatically. Less than 30 million square feet has broken ground in 2023, making this year the lowest for construction starts since 2011. Today, there is about 200 million square feet of office space in buildings aged 0-3 years, but that figure will be under 150 million by early 2026 and under 100 million by the middle of 2027. At that point, it will represent only about 1% of inventory. Even in the aftermath of the Great Recession in 2013-2014, buildings aged 0-3 years never represented less than 1.3% of inventory.
“The very type of space that tenants have historically demanded most — even during recessions — will be in short supply,” Mobley said.
This isn’t to say there won’t be more headlines about trophy buildings being sold at discounted values. But those transactions also mean that now is a time when tenants are getting good deals. The number of new lease transactions is higher this year on a quarterly basis than the 2015-2019 period. Deals are smaller in square footage – which explains why overall market vacancy is up – and expiring leases are part of the reason for the uptick, too. Still, the deals are “highly concentrated” in the premium space, Mobley said.
Meanwhile, landlords of iconic, trophy buildings are offering sweeteners, from bigger contributions to custom buildouts to the number of months offered rent-free. It’s not clear how long that will last, though. As more top buildings are sold at depressed values, investors mark down the value of property holdings, and bonds go bad, new owners can make their finances work with attractive terms to tenants. But for building owners who will need to refinance in the near-term, that game is ending. Case in point: a recent deal for the City of Los Angeles to occupy multiple floors in the iconic Gas Co. Tower, a deal which would have comprised 11% of new quarterly leasing activity in the market, was rejected by bondholders.
Billionaire real estate investor Jeff Greene explained his bet on new towers in West Palm Beach, amid the correction he sees coming for much commercial real estate in the next two years, in the following way during a recent CNBC interview: “There will just be office buildings with no tenants whatsoever in markets where brand new building will get the tenants. … Some of the older buildings just won’t have any tenants at all, and if there’s no tenant at all for a prolonged period of time, that paper [the bonds] will be worth next to nothing.”
The U.S. housing market never recovered from the financial crash as measured by the inventory levels today, one factor responsible for pushing up home values across the country. But Mobley says there is a better parallel for the office space crash: the retail washout, which was overbuilt, and has not been built much since e-commerce disrupted the sector. While Class B malls are still sitting vacant, high-end “experiential” retail is not.
“That’s the parallel for office,” Mobley said.
CoStar estimates there is still over half of leases executed before 2020 set to expire. “As companies face these renewal decisions, they are now laser-focused on utilization,” he said. That implies a world in which tenants may need less space, but as they continue to make the case for the world of work to return to pre-pandemic in-person collaboration, competition for the best square footage in the market is heading higher.
For companies facing lease expirations that believe in the notion of the office as a tool to help maximize workforce effectiveness and, as a result, want to be in premium locations — and not the 10-20 year-old iconic buildings but the newest properties – some of the best opportunities are now, Mobley said.
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