It's the sexiest vacant lot in Canada. What it lacks in amenities, it makes up for in location, location, location: the southeast corner of Yonge and Bloor Streets, Toronto’s crossroads, where the city’s most important subway lines meet underfoot. Just to the west is the snootiest row of shops in the country—Holt Renfrew, Cartier, Tiffany, Hugo Boss. A bit to the east soar the stately headquarters of corporate titans Manulife and Rogers. This acre of dirt is rich in history, too—the post-millennial kind. It was the figurative summit of the city’s frenzied condominium boom of the 2000s, and ground zero for the bust stemming from the financial crisis in 2008. But most important, One Bloor East stands—or, rather, just lies there, for the moment—as an emblem of Toronto’s unkillable condo market. For that bust was quickly reversed by a stunning resurgence, despite a punishing recession.
If you were making a movie of this saga, you’d set the first scene on Nov. 13, 2007. Hundreds of people line up on the sidewalk for the opening of the neighbouring sales office for One Bloor East. The proposed 80-storey condo and hotel tower will be the tallest in Toronto. Many of those in line are stand-ins, hired by real estate agents, and they’ve been waiting in line for days.
Just before the office is due to open, the crowd groans as sales staff hike the range of condo prices advertised on a sign outside—$300,000 to $2 million becomes $500,000 to $8 million. Agents squawk into cellphones to their head offices or clients overseas, then barge in and place orders anyway.
Now jump to the summer of 2009. Condo sales in Toronto have plummeted by more than half. At One Bloor East, exit Bazis International Inc., an upstart developer that had arrived on the scene in 2005. Exit also Bazis’s ambitious young Russian-born CEO, Michael Gold—forced to sell the Yonge-Bloor lot to relieve a cash crisis. Enter the buyer: the Great Gulf Group, wily old development pros.
The next scene is set on March 24, 2010. It’s a low-key party for select real estate agents being held by Great Gulf to open its sales office for One Bloor East. “We aren’t opening to create lineups,” declares Bruce Freeman, Great Gulf’s executive vice-president of sales and marketing. The company doesn’t have to; it has already sold almost 85% of its 693 units, most of them by reclosing Gold’s clients.
A keenly interested bystander is Gold. He may have lost One Bloor East, but he’s now a comeback kid who will soon be able to point to his three other condo projects in Toronto.
There’s only one cinematic problem here: It’s a bogus journey for the only characters a young movie audience could identify with—first-time homebuyers. Vast numbers of them were priced out of the market for houses in Toronto and many other Canadian cities in the early 2000s. Condos are their only alternative. And, after all, new condo buildings have their attractions—One Bloor’s plans include a shopping mall, two pools, and a two-floor spa with a gym, yoga studio and “foot relax basins.” But the average new condo in Toronto now costs about $500 a square foot. That translates into about $250,000 for an entry-level one-bedroom of just over 500 square feet, and maybe twice that price or more in One Bloor or even ritzier downtown developments. Before monthly fees, that is.
How did this happen? Is permanent condo mania the new reality? Or is the market headed for another crash—a real one this time?
Typically, it takes about five years from the purchase of a condominium building site to buyers moving in and the developer collecting its money. In between, the developer and its partners and lenders are vulnerable to any upheavals in the real estate market and the economy at large because they are highly leveraged and they are stuck with a large, illiquid asset.
In the case of One Bloor, Bazis bought almost all of the lot for about $63 million in December, 2006. Gold, who’s now 48, won’t say how much of that money was Bazis’s, but, typically, the developer only puts up a fraction of even that initial outlay. Some of the rest may come from equity partners who take an ownership interest in the project, but the bulk of it is usually borrowed. Bazis had what looked like a top-drawer equity partner, Lehman Brothers, the giant New York investment bank, and a rock-solid lead lender, the French bank Société Générale, which had agreed to head a consortium of European banks that would provide the construction loans.
Even though it was near the peak of a boom, Bazis’s plan for Yonge and Bloor was startling. The southeast corner of the storied intersection had been an eyesore for decades—a ramshackle block of low-level storefronts, many of them fast-food joints. “For us, it was an opportunity to do a signature project,” says Gold. “It was going to cost $450 million to $500 million.” One Bloor would have a three-storey mall at its base, a 15-storey hotel, and 65 storeys of condos, shooting high above everything else in sight.
The lineup frenzy in November, 2007, and an average sale price of $850 a square foot were also impressive. One buyer from China reportedly signed up for a penthouse worth $24 million. Still, Toronto’s real estate industry was skeptical that Bazis could pull it off. “They had money, but they didn’t have a lot of credibility,” says veteran condo realtor and developer Brad Lamb.
Getting at the reality behind the perceptions is hard. Like most sizable Canadian residential developers, Bazis is privately owned and doesn’t disclose its financial results. Gold is also guarded about his family, which adds to the air of mystery around One Bloor East. He says his background is modest—his father is an engineer and his mother an accountant, and the family emigrated from St. Petersburg in 1977. Gold studied general arts and sciences at York University, then ran several businesses in the 1990s, including clothing stores in Toronto. His plunge into development didn’t come until after he got married in 2005. His wife is from a family of developers in Kazakhstan, a fast-developing but democratically deficient petro-state in central Asia. Initially, Bazis in Toronto was an arm of a parent company of the same name in Kazakhstan.
In late 2007, the Toronto market was so hot that there appeared to be room for plenty of upstarts and glitzy new high-rises. More than 130 condo projects launched that year in the city and surrounding suburbs, and sales of new condos soared by 32% to a record 22,399 units.
In May, 2008, Gold razed the stores occupying the One Bloor site. He’d sold more than 80% of the condo units, leased more than half the retail space and had lined up the European chain Sofitel as the tenant for the hotel. That was more than enough to satisfy SocGen and its consortium, which lent Bazis $250 million for construction.
That’s a lot of money, though, which is why condo developers and lenders typically take several steps to limit their risk. The lessons of past markets are still fresh in their minds. In the not too distant past, banks often financed projects with relatively few presales. In the late 1980s, deposit requirements for condo buyers were just 5% to 10% of the purchase price and buyers could resell units, even in proposed buildings, days after they bought them. “Everyone was an investor,” says real estate consultant Barry Lyon. “The cab driver, the barber—everyone was picking up a condo to flip it.” This layering of levers collapsed with a vengeance when Toronto and many other Canadian cities went through a spectacular real estate bubble and bust in the late 1980s and early 1990s.
Now, government regulations and bank lending practices require developers to sell 60% to 70% of their units before they can get construction financing. Canada’s big banks and other lenders limit the amount they will put into any one development, and the total dollars they will lend in individual cities and regions. They also like to see a developer ally itself with an equity partner—or several—with deep pockets and a track record.
By September, 2008, Gold had jumped through all those hoops. But on the morning of Sunday, Sept. 14, he received a fateful phone call at home. It was his contact at Lehman, who said, “Turn on CNN. We are bankrupt. We will not be in a position to finance anything.” Gold was incredulous. “This was a $639-billion investment bank,” he says, “$639 billion.”
SocGen and its consortium also headed toward the exits. Gold quickly called a meeting with representatives of all the banks, and pleaded: “Guys, we have the presales. The people are there.” But at that point, the finances of One Bloor itself were irrelevant. It looked like no bank in the world was safe, and each of Gold’s lenders, as he remembers, pointed at the others and said, “We don’t know if that bank is going to be there in six months.” Soon after, SocGen shut its North American real estate office.
What about the deposits that One Bloor buyers had put down—20% in most cases? Gold couldn’t get at them because, by law, that money is locked in trust accounts until closing.
The nightmare then got even worse for Gold. A trio of Toronto vulture investors had bought Bazis’s loans for the property from its bankers at a discount to the full amount, hoping to foreclose if the company couldn’t make its payments. “It’s like when you have a mortgage on your house,” says Gold. “The bank can sell that loan to anybody, at any given time.” In April, 2009, the investors filed a lawsuit in an attempt to seize control of the One Bloor project. Two other Bazis condo projects in Toronto were also on hold, and industry gossip had it that Gold’s company was about to go under.
As shocking as the global meltdown was, Gold says the timing could have been even worse—it could have come when he’d already started building One Bloor. “In high-rise construction, once you start, you can’t stop,” he explains. “You can’t say, ‘I’m going to stop at floor 12, or take out floors 18 to 22, and then continue on.’” And very few developers have enough cash on hand to pay construction workers and suppliers out of their own pocket. Nor can they sell off small portions of properties or buildings to pay bills as they come due. “In our business, we have big assets, but we roll the money,” says Gold. And so, as the financial crisis took hold in late 2008 and early 2009, a game of chicken between developers and lenders began.
In retrospect, you wonder how anyone could believe that all the world’s major banks and real estate markets could crash at once, especially in Canada, with its highly centralized and tightly regulated financial sector. But things sure looked scary at the time to developers. Brad Lamb was arguably in worse shape than Gold—Lamb had four condo projects worth $300 million on the go. “I had 700 condos, sales were dead and I had no construction loans,” he says. “It became evident to me that I was screwed.”
But developers had several things going for them. One was the Bank of Canada. Like central banks in all the world’s leading economies, it slashed interest rates and injected billions of dollars into the chartered banks to encourage them to keep lending. For the most part, the banks still wouldn’t grant loans for new projects, but they were carefully doling out money for many that were already under way or ones that met the 70% presales threshold.
Developers also scrambled to adjust. To get construction loans for his four projects, Lamb managed to push presales over 80%, and injected more of his own equity into them—several million dollars.
Gold bobbed and weaved, too, with mixed results. He kept control of Exhibit, a proposed 32-storey tower across the street from the Royal Ontario Museum’s striking and controversial Michael Lee-Chin Crystal, and Emerald Park, twin green glass towers slated for a busy intersection in northern Toronto. To do that, however, he had to invite in two respected Toronto developers as equity partners in both projects: Plazacorp Urban Residential Communities and Metropia. That helped secure construction loans.
Gold wasn’t as lucky at One Bloor, a much bigger proposition. No Canadian bank was willing to lend him $250 million. Nor would the four largest banks even split the risk. And the vulture investors were circling. In September, 2009, Gold tossed in his cards at One Bloor and sold the lot to Great Gulf, although neither he nor Great Gulf will call it a distress sale. “We were interested once we knew it was available,” says Great Gulf’s Bruce Freeman. He won’t disclose the purchase price, but Gold says it was about $53 million, a painful haircut for him. Bazis also retains a small ownership interest in One Bloor (Gold won’t disclose the size). As for the One Bloor buyers’ deposits, those were released from trust accounts, and Great Gulf has since reclosed three-quarters of the sales.
If rock-bottom interest rates made that feat possible, the fact remains that for homebuyers, low interest rates are always a mixed blessing. They make it easier to borrow, but they also inflate prices. The trigger for the real estate crash of the early 1980s was mortgage rates that soared to near 20% as the Bank of Canada and other central banks tried to suffocate double-digit inflation. They relented somewhat in the mid-1980s, and the real estate market boomed again. But even in the late 1980s, many mortgage rates remained above 10%, and the Bank yanked them even higher in 1989 and 1990.
In 2009, by contrast, the Bank was doing everything it could to keep the economy alive and avoid a U.S.-style real estate meltdown. At the variable mortgage rates of 2.5% or lower that prevailed in 2009—as they continue to do—even a $1-million loan carries for just $25,000 a year in interest charges. Knowing this, Toronto developers and realtors held the line on condo prices and waited for buyers to come back.
They didn’t have to wait long. Again, the turning point was a lineup. On Nov. 25, 2009, Great Gulf opened its sales office for X2, a proposed 42-storey high-rise two blocks east of One Bloor. It was the first opening of a major condominium project in the city in a year. With overall sales in the market still slow, Great Gulf priced units $15 to $20 per square foot below what it figured were the market averages. The company needn’t have bothered being so cautious. As in 2007 for One Bloor East, some real estate agents camped out for days. And there was shouting and shoving when the doors opened.
“Did that surprise us? Yeah.” says Freeman. “We had a situation that day.”
The “condo-monium” over X2, as one newspaper headline described it, gave the whole Toronto real estate market a shot in the arm. Total sales of new condo units for 2009 closed the year at 15,544, down about a third from the peak in 2007, but still respectable. Last year, new condo sales soared back to 20,897, second only to 2007. Resales of existing condos set a new record: 21,147.
Freeman, one of three Great Gulf executives who co-founded the company in 1975, says that the 2008-2009 real estate slump turned out to be less severe than busts at the beginning of the 1980s and the early 1990s. “Business was difficult, but manageable,” he says. For Great Gulf, that is explainable partly because it is much larger and more diversified than Bazis and many other developers. Great Gulf builds both houses and high-rises across Southern Ontario, and has averaged about 1,000 new units of each in recent years. In booms or busts, it’s easier to speed up or slow down construction of a new subdivision of single-family homes than a condo tower.
The company has also scaled back slightly at One Bloor, which is scheduled for occupancy in 2014. Gold’s proposed 15-storey hotel is gone. But Great Gulf is still promising plenty of pizzazz, including an exterior pattern of balconies by architect David Pontarini that is “sculpted with piano curves to evoke a warm modernism that is organic and timeless.” Young buyers, in particular, appreciate bells and whistles like inspired design and footbaths.
The trouble for them is the price of the basic product. The same goes for their only realistic alternative: rentals. The still-buoyant real estate market hasn’t just kept house and condo prices high; it’s held rents aloft as well. Developers in Toronto and other major Canadian cities stopped building large new rental high-rises in the 1970s. That was partly due to rent controls in Ontario and other provinces, but also because condominiums offered a faster, more certain payoff to a developer—once the building is completed and you’ve sold the units, you’re out. You don’t have to manage and maintain it for years, even decades. As for owners, they could either occupy the units or make a pretty penny renting them out. “Condos have become the de facto new rental supply,” says consultant Barry Lyon. That supply is much more expensive than old rental high-rises. Lyon and other analysts say that renters typically pay 50% more for a new condo unit than they would on rent for a comparable apartment in an aged building.
And whenever condo prices and rents rise, particularly in Toronto and Vancouver, there’s a temptation to blame speculators—foreign ones in particular. Lyon says that foreign buyers are certainly a big and steady source of demand, but the “speculator” label no longer applies. The minimum deposit for foreign purchasers is now 35%, and, like Canadian investors, foreigners typically hold units for several years, Lyon says. On the other hand, he acknowledges that some realtors’ estimates that 25% to 40% of all new condo sales in the Toronto area last year were to overseas customers are probably close to the mark.
To those international investors and others, Toronto still looks relatively cheap. Average prices per square foot for new condos climbed from $456 a square foot in January, 2010, to $510 in January, 2011. But Toronto’s prices are still only a third of those in central London, half those in Tokyo and Hong Kong, and about two-thirds of those in Manhattan. Toronto appears safe and cosmopolitan, too—no ethnic or religious strife, drug wars, dictators or earthquake fault lines. “I don’t think we appreciate ourselves what a great city we have,” says Lyon.
Nevertheless, many economists say that something will have to give soon. In a widely publicized research note published last November, David Rosenberg, chief economist at Gluskin Sheff + Associates, said he was “pleasantly surprised by the fact that the real estate market has eased, rather than busted. Be that as it may, a more pernicious turndown in real estate values cannot be ruled out, especially if the Bank of Canada follows the market and resumes its rate-hiking program early next year.”
Developers like Gold and Lamb smirk at those kinds of predictions. “I don’t think a one- or two-percentage-point increase is going to affect the market,” says Gold. “We aim at a segment that is more of a higher-end luxury product.” Lamb argues that house prices in central Toronto have soared permanently out of reach of the vast majority of buyers—$1 million for a sizable family home. That leaves condos, and he’s concentrating on the fat middle of the market, whose centre of gravity is around $500,000. He adds that if you look beyond the hype that ultrahigh-end Toronto projects such as the Residences at the Ritz-Carlton, Shangri-La Toronto and the Trump International Hotel and Tower have generated in recent years, most other developers are catering to that middle as well.
Still, even Lamb acknowledges that the city might reach a price threshold within a few years. He figures that will be when the average new condo hits $750 a square foot. At that price, and with interest rates slightly higher than they are now and downtown condo rents averaging, say, $3 per square foot per month, he says that buyers will “get to zero.” That means their rental income will no longer exceed their mortgage costs.
Lamb adds that developers won’t be able to adjust by reducing the size of their units any more, either. Even One Bloor East, a centrally located, upscale project, is approaching the minimum realistic size in many of its “suites.” And a new-condo market dominated by young single buyers over the past decade is aging. “What happens if they couple up?” asks Barry Lyon. “Is 550 square feet enough?” Add a baby carriage to that equation and you have to wonder.
Toronto vs. the world
Just how expensive—or not—is it to buy a condo in Toronto? The city sits at No. 15 out of 94 on the Global Property Guide’s ranking of the World’s Most Expensive Cities, based on average U.S.-dollar prices per square foot of centrally located apartments (assuming a small—550 square feet—one-bedroom unit):
Pricey compared to…
Rome $366,000 Sydney $356,000 Amsterdam $310,000 Shanghai $278,000 Berlin $203,000
Cheap compared to…
Monaco $3,056,270 London $1,194,000 Hong Kong $839,000 Tokyo $658,000 New York $615,000