Well, The Math Works, Right? At Least It Used To.

March 28, 2017

"The math checked out and so the hunt began"

 

I remember having coffee with a friend and client of mine back in the fall, chatting about cap rates and where the best ROI could be found either downtown, midtown, or uptown. We ran analysis models on different areas in the city, comparing rental rates with sale prices, and rated different buildings based on projected returns. Yes, I have no life. In the end we came to the conclusion that Yonge and Finch offered such a compelling investment thesis, that it's where we were going to focus all our attention for the next few months. I'd help him find a 1+den investment property for under $400k that he could rent out for $1750/mo. The math checked out and so the hunt began.

 

And then we waited. And waited. And waited. 

 

No new listings for most of November. Then one popped up at 15 Greenview Ave in December, which is a very popular Tridel building a block from Finch station. So we booked a showing only to find out the unit had sold earlier that day. Weird, but no worries, we'll wait for the next one. So we waited again. And then January 2017 rolled along. And the craziness began.

 

A listing would come up, we'd take a look that evening only to see literally 30 business cards on the counter from showings by agents that very day. And then I'd find out that there were already 2, or 4, or 12 offers on the unit. "This is Yonge and Finch", I thought to myself. "And it's January. Who wants a condo at Yonge and Finch this badly in January?" And here's how the next 6 weeks went:

 

Condo #1 - Sold in 24 hours with 12 offers. We lost.
Condo #2 - Sold in 24 hours with 24 offers. We lost.
Condo #3 - Sold in 8 hours with 7 offers. We lost.
Condo #4 - Sold in 48 hours with 4 offers. We lost.
Condo #5 - Sold in 3 days with 7 offers. We lost.
Condo #6 - Sold in 24 hours with 6 offers. We lost.
Condo #7 - Sold in 24 hours with 4 offers. We won (finally)!!

 

By this point, my client had increased his budget significantly and decided that the math for an investment didn't make sense anymore. So he and his wife decided to focus on larger 2-bedroom units for them to live in themselves. The unit we won was listed at 4pm on a Saturday, we booked a showing for 8pm, I had an offer to the listing agent by midnight that same night, and we had an accepted offer by 8pm on Sunday. This is the market we stepped into in 2017.

 

I thought maybe this was a weird Yonge and Finch phenomena and so I prepped my new listing at a downtown loft a couple blocks from St Lawrence Market back late January. It was a very cool two-storey unit and I actually used to live in the building, so I was very familiar with the values in the area, etc. The seller and I discussed and we would list for $359k, and hopefully get some quick interest. And boy did we ever.

 

"If we were to list today, we probably would have 20 offers"

 

I hosted an open house on the Saturday and I've never seen so many people cram into a 570 sq ft condo before! It was madness! I told the concierge earlier in the day that "we'll probably have a few people come by" and I completely under estimated myself. There must have been 40 or 50 visits within those two hours and I walked away with 4 offers that very day. We ended up selling for $388k, which was a record price per sq ft for the building. And if we were to list today, we probably would have 20 offers. The market just kept getting stronger by the day.

 

So here's what I'm seeing more and more of each day (I may do a blog about each of these points in the next little while):

 

1) People are shopping their budgets, not the building. If someone has $400k to spend they are looking at anything that is available for $400k, regardless of size, location, building, etc. There is such limited supply that people are looking to put their X dollars towards whatever X dollars can buy. And it has leveled out the relative values between "ok", "good", and "great" buildings. This will not last (see next point).

 

2) The divergence between "ok", "good", and "great" buildings will (and is) starting to appear again. When people are willing to pay $800/sq ft for a building that has never seen anything above $600/sq ft, one of two things will happen: a) The less valuable buildings will see their prices ease when the market normalizes, or b) The "great" buildings will see their prices increase quickly to recreate the gap. This divergence is inevitable and the latter is happening as we speak. "Great" buildings are seeing their values inch closer to $1000/sq ft, something that a lot of industry experts predicted would happen over time, but nobody saw this happening as quickly as it did.

 

3) Get ready for rents to rise. When investors pay $500k+ for a 1-bedroom condo, you can bet they are not going to be satisfied with $1800/mo in rent for long, so I expect rental rates to trend upwards in the next 12-18 months as investors who are purchasing in this market will get tired of losing money each month. Rental demand has been steady as of late (nothing like the craziness of 2016 but still very strong) so these increases should be absorbed pretty easily. The bad news: I don't think we'll see rents for true 1-bedroom units below $1800/mo in the downtown core for much longer (not that there are many left right now anyway). I'm working with a number of clients who are currently renting but looking to buy out of fear that their rents will rise at the end of their leases. And they are probably right.

 

4) The craziness is everywhere. There are bidding wars everywhere. On everything. In every building in the city.  If you see a "deal", everyone else has too. So just be ready to set your expectations accordingly and work with someone who knows what is going on.

 

So that's my take on 2017 so far. I will keep the updates coming for sure!  If you have a comment, feel free to leave it below. And remember, if you haven't already, please "like" my Facebook page and check back regularly!

 

Your Toronto condo lover,
Adil Dharssi
 
#AdilKnowsCondos #TrustSomeoneWhoKnows

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