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Gloom lifting, but developers face a new landscape


The Globe and Mail
April 17, 2009 at 12:00 AM EDT

If you are a believer in the old adage "It is always darkest before the dawn," then you may also be able to see some bright rays peeping above the horizon in the Toronto area's new condo market.

Some experts say indicators suggest the worst may be behind us. Incentives offered by developers have begun to draw traffic to presentation centres. Positive economic indicators here and in the United States appear to be lifting consumers' spirits. Plenty of low interest mortgage money for buyers combined with deals on new suites have created a positive atmosphere.

Look for a slow but steady pick-up in sales through the spring and early summer months, they suggest.

Judging from sales reports, the low point in new condo sales appears to have been December when just 198 new condo suites were sold, according to RealNet Canada Inc. In January, sales climbed slightly to 233 and in February 289 traded hands.

If you see some disparity between figures in this column for past monthly sales, they are the result of the way RealNet tracks these things. The company does not report sales until the rescission period is over — the time when buyers can back out with no penalty — then it goes back and adjusts monthly totals.

"Sales are way down from last year — just 522 suites in January and February, compared with 1,825 in the same period last year," says George Carras, RealNet president. "But this month many of the incentive promotions such as cash back on closing kick in and I think you are going to see those starting to jump-start spring sales."

But snail's pace sales are only one of the challenges facing Toronto's new condo market. Another issue is the inability of developers to find construction financing — even if they have met traditional sales targets set by lenders. The simple fact is that there are too many projects chasing too little money right now.

With no syndicates or mortgage-backed securities to provide funding (in past years they provided more than 25 per cent of commercial mortgage financing), banks have fallen back to what is known as balance sheet lending. While last year they may have lent $100-million without blinking an eye, today their limits are closer to $30-million for an individual project.

Lenders can and are picking and choosing to limit their risk. Some very high-profile, very popular projects are having the devil's own time finding a lender to finance a construction start.

Back to sales. Brad Lamb, who both sells condos through Brad J. Lamb Realty Inc. and develops them though Lamb Development Corp., says pay little attention to those monthly new condo sales figures. More important are multiple listing system statistics on resale homes. They are more accurate and the resale home market is a bellwether for all types of housing — new and resale.

He points out that MLS sales fell 45 per cent in November from the previous year and dropped 55 per cent in December. The sales decline then rebounded to 45 per cent in January and improved relatively quickly to 31 per cent in February. Last month, sales were just 18 per cent off last year's mark.

"We very likely hit the bottom as far as consumer confidence goes in December," he says. "In past weeks we have seen positive indicators coming out of the U.S., the stock markets have begun to trade higher and fewer major layoffs have been reported."

Combine that with developer incentives and there is a bright ray of hope at the end of what has been a dark tunnel.

"It will take a while to set in but I think the worst has passed and we just didn't notice."

As for projects unable to find financing, Mr. Carras says he can see one of five things happening with those not yet under construction. The first option will be to delay a construction start and hope lending restrictions will lift as the year progresses. The second is the formation of new partnerships to provide the increased developer equity lenders now demand — up to 40 per cent in cash instead of just 15 per cent.

The third and one that is already taking place is the reconfiguring of projects, downsizing them to meet the new financing limits or reducing the size of suites to make them more affordable. Nos. 4 and 5 are measures of last resort, he says. Facing little hope of finding financing within reasonable time frames, some projects will be cancelled while others will be sold to other developers with deeper pockets and better credit.

While Mr. Lamb generally agrees with Mr. Carras, he takes a sunnier view. He says lenders are under pressure to lend or else they do not make money. As economic uncertainty gives way to more predictable outcomes he can see some of the more severe restrictions starting to ease.

"I think that if they can afford to wait it out, even the largest projects will be able to pull together construction financing later this year," he says. "I really think the worst may now be behind us."

Posted on Wednesday, April 22, 2009 at 03:13PM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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