David Mirvish and architect Frank Gehry at a press conference at the AGO in Toronto on October 1, 2012.Peter Power/The Globe and Mail
This week, Toronto witnessed the unveiling of the condo to end all condos. Backed by theatre impresario David Mirvish and designed by Frank Gehry, a giant in his field – known locally for the latest incarnation of the Art Gallery of Ontario, and globally for a stunning roster of buildings in places ranging from Bilbao to Prague – the new three-tower development was announced to much fanfare.
"I am not building condominiums. I am building three sculptures for people to live in," said a proud Mr. Mirvish of his new project, which will rise from the current footprint of the Princess of Wales Theatre. Even in a city accustomed to scores of cranes dangling over the skyline, citizens took notice. These were big names, yes, and even bigger ambitions.
But behind the project's blinding star power, there is a darker outlook. No project, not even one created by one of the world's most famous architects, is immune to laws of economics. And right now, tens of thousands of new condo units are being built in a market with fewer buyers.
There were a record 196 condo projects under construction in the Toronto census metropolitan area at last count (the end of June). Sales of newly built high-rise units downtown this August were about half what they were a year ago, according to RealNet, a real-estate research firm. Prices are slipping – in August they were about 4 per cent lower than the year before – and many economists believe that a glut is forming that will cause prices to drop further.
Mr. Mirvish's tower unquestionably offers potential residents a unique opportunity. Not every condo offers the bragging rights that come with living in a Frank Gehry building. But as the market sags, the project's promoters may also have to respond as other developers have – by going to great effort to offer potential buyers something more than just a box in a tower. With perks such as access to TIFF parties or tickets to sports games, condo developers not just selling a piece of real estate; they are selling a lifestyle.
Mr. Mirvish seems to have taken a page from their books. In addition to offering buyers the opportunity to live in a "sculpture," residents of his new 2,600-unit project will have special privileges at its art gallery and access to exhibitions, he said.
But will that be enough?
The numbers suggest that even a stellar special-interest project will only get a project so far. According to Urbanation, a market research firm, the number of unsold condo units in the Toronto area in June hit a high of 18,123 (a figure that includes projects that are not yet completed). "With plenty of potential resale condo supply coming over the next year, Toronto is quickly heading for buyers' market territory for the first time (depending on your definition) since the recession," economists at Bank of Montreal wrote this week.
"It's an extremely crowded market," said Urbanation's Ben Myers. "They have to somehow differentiate themselves from the competition if they want to make sales."
Of late, developers have begun to do that by experimenting with practical incentives, such as free furniture or a year without maintenance fees or property taxes, which are proving to be more of a draw for buyers than the thrill of living near key sports or cultural sites.
Michael Bodsworth, 27, bought a unit in Maple Leaf Square in 2010, a condo project near the Air Canada Centre. He, like other residents, said it was neat that some Toronto Raptors lived in the building, and he ate numerous dinners at the Real Sports Bar and Grill. "The building's atmosphere was fun," he said.
But a little more than a year later, he moved to a different location where he could get more space for his money.
"If you think of the number one and number two reason why people buy it's probably price and location, or location and price, depending on who is buying," said Hunter Milborne of Milborne Real Estate Inc. "Incentives that relate to something that's a necessity, like free common expenses for a year, are probably more valuable than theatre tickets."
Barry Fenton, the chief executive officer of Lanterra Developments, one of the companies behind Maple Leaf Square, says its sports theme was such a draw that it enabled it to charge significantly higher prices. "We marketed our project at $100 more per square feet than anybody else in the area, and literally it was because of the theming," he said.
But residents weren't that interested in access to games at the ACC. The builders had leased private boxes in the arena that residents could use for a fee, "but the funny thing is, hardly anybody used them," Mr. Fenton said. "I could never figure it out. What I think was more successful was that we provided TTC passes to everybody for a year. We were one of the first developments to do that."
Geeta Saini, a resident of Festival Tower, which sits atop the TIFF Bell Lightbox on King Street, said the movie-themed perks had nothing to do with her decision to move in. "It was location," she said.
Indeed, brokers and realtors say that developers would be wise to focus on the things that take some pressure off of buyers' pocketbooks, rather than other perks.
A couple of buildings in the city have been offering as much as $30,000 worth of free furniture, some of it chosen by designers to take the hassle out of shopping. It's an appealing idea, but not one that will woo people who already have their own furniture, agents said.
"I've only had one client this summer that took advantage of that furniture package, everybody else has essentially said, 'I don't want the furniture but if they can give me a discount instead, I'd take that,'" said Oliver Baumeister von Bretton, a broker with Re/Max 2000 Realty Inc. Incentives such as zero closing costs are more enticing to buyers, he said.
The heavy use of incentives to sell units may be a sign that developers are sensing trouble.
As the market heated up over the past decade, and really soared in the last five years, developers sought to cash in with a wave of new projects. There are large up-front costs involved in developing condo buildings, which tend to take at least three years to plan and construct, but once the units are sold and the keys handed over, the developer no longer bears the risk that the market will drop. So as long as it looked like the market would hold up for the next three years, the building frenzy kept going.
But now some developers are taking projects off the market after finding sales difficult. Mattamy Homes has abandoned what would have been its first real condo project downtown Toronto because it became worried about the amount of money it would have to spend up front, given the dampening outlook for the market in the coming years. The company recently backed out of a deal to buy the property surrounding the Globe and Mail's headquarters near Front Street and Spadina Avenue, an unusually large site that Mattamy had planned to build as many as seven or more buildings on.
"That's not a call on a massive decline in the market, it's more, 'Let's be a little bit careful here, let's not go all in on a big site like that in a market that's trending lower in volumes if not prices,'" said Mattamy chief operating officer Brian Johnston. "We sort of felt, why stub your toe on the way out of the starting gate? I think in any real-estate endeavour you're going to go through cyclical highs and lows, but why start at a cyclical low?"
But sources involved in the sale of the site say it is back up on the block and there is as much interest from developers now as there was when it was first on the market. And other developers are plowing ahead, including Mr. Mirvish, whose mega-project would encompass three towers stretching as high as 85 storeys.
In the current environment, they will have to work hard to make their buildings sell out – no matter how much name recognition they have.