As real estate activity slows down due to the coronavirus, sellers of preconstruction condominium apartments are finding the old reliable methods to shift units just don’t work under a physical distancing regime. To carry on, developers are trying everything from virtual sales centres to price guarantees.
A presale contract is essentially a bet on the future value of a condominium apartment, and the economic uncertainty wrought by the pandemic has pushed Toronto condominium builder Lifetime Development to make an unheard-of guarantee for the 280-unit Liberty Market Tower, Phase 3 of a development in Liberty Village. Unheard of, because for the past decade or more of rising values, it has been hard to imagine a Toronto-area condo presale unit selling late in a cycle for less than the early access sales price.
“With the price protection plan, the developer is saying he has absolute confidence in his prices and his product,” said Barbara Lawlor, president and chief executive officer of Baker Real Estate Inc., specialists in preconstruction condo sales. “If there’s a future discount on that price, you will get the benefit of it upon occupancy.”
“Given that there are some early signs that condo prices in the resale market are softening at least a bit, and that the near-term outlook is highly uncertain given the impact of COVID-19, it may help buyers feel more confident in the project,” said Shaun Hildebrand, president of Urbanation, who has heard of no other developer offering a similar promise.
“We launched [sales] a month and a half before we rant into COVID situation, sales were progressing really well. Prior to the slowdown we released 70 per cent of the building, and sold 85 [per cent] to 90 per cent,” said Brian Brown, principal at Lifetime who said the guarantee is to reassure buyers. “When we do get back to business on a normal scale, we don’t see pricing coming down. Whether you buy today or wait three months, nothing is going to change … if you’re looking today, you don’t need to wait three months.”
There are some conditions unique to the Liberty building, for one thing it’s already under construction; the parking garage was already built, and the above-ground structural work has reached the fourth floor. Mr. Brown estimates completion in as little as 18 months, much shorter than the typical five-year wait for preconstruction condo buyers.
“However, this is a guarantee that the value of the unit in this project won’t go down relative to its other units – it does not offer protection against a decline in the market value of the unit. If resale prices in Liberty Village fall over the next two years, there is obviously no guarantee that the purchaser will receive an equivalent discount,” Mr. Hildebrand said.
The change in the market has been rapid, according to Ms. Lawlor. Now developers are deploying virtual sales centres, rent guarantees, generous terms on deposits or extending “cooling off periods” up to 100 days for buyers to break the deal with no penalty.
“New construction condo sales market was on fire, just really buoyant. We were all just absolutely thrown off our game,” Ms. Lawlor said. “Like a month ago, we were absolutely still doing large-scale gatherings, notably at the ROM when we launched 11 Yorkville. We gathered 2,000 brokers and there was only 593 units in the building. There was a huge demand and not enough supply, and that was driving our marketplace pre-COVID.
“These launches would take us close to the 70 per cent of sales mark. We were doing them on iPads, we were processing 100, 150 sales in a day.”
Now, the sales have slowed to a trickle, and some new launches are being delayed, perhaps as far as September. “There were launches we were ready to bring to market in April and May and they are definitely on hold,” said Ms. Lawlor, who adds that Baker has worked with many of the city’s largest developers – Metropia, Capital Developments, RioCan, Dream, Urban Capital – and has about 20 sales centres on the go right now.
“New construction has been gaining traction with investors since the banking crisis,” Ms. Lawlor said. “Once a building launches there is always the potential for price increases. That’s what keeps the investors buying, believing there will be price increases over time.”
That price rises have been so reliable is partly what makes Lifetime’s guarantee extraordinary. It’s like saying out loud that things might not always continue as they have. And as Urbanation’s Mr. Hildebrand has said, investors should pay attention to shifts in the traditional market conditions.
“New construction is already priced at a premium to resale,” he said. “Similarly, new condo projects are also priced based on the level of rent they will be able to generate when completed.”
On April 17, Urbanation published research that suggests rental prices have already slowed their growth in the post-COVID-19 market. The average monthly rent in the post-COVID-19 period decreased 0.7 per cent year-over-year, with lease volumes going from 25 per cent higher than the same period in 2019 to 25 per cent lower in the second half of March. With thousands of new rental units coming to the Toronto market, that trend could continue. “If rents in Liberty Village fall, the value of the unit would inherently decline as well,” he said.