Toronto’s Commercial Property Bubble

With 137 new real estate construction projects slated for Toronto, amidst the already abundance of supply, there seems to be a new property bubble brewing, even more imminent than the residential one and that is the commercial property bubble. With the number of new office towers in the city, demand for leasing space is disturbingly slowing with some of the older office buildings, such as First Canadian Place and TD Center (to name a few), where the vacancy rate has climbed to over 20%. There has never been such high vacancy rates in downtown Toronto for such buildings yet on the flip side the number of projects that have come up in this latest commercial real estate construction boom has outsripped the previous one in the late 80’s as well as late 70’s combined. Remember what happened afterwards?

With Scotiabank rumoured to list their flagship Plaza for a hefty price tag of $1 billion to raise capital, is this a sign of trouble ahead? Tenants are moving into the newer buildings thus leaving their old office spaces at record a pace. With alot of debt on the balance sheets of the companies holding these expensive real estate properties, they are desperately spending alot of money renovating and upgrading the old buildings to attract more customers. With increases in layoffs in Canada of late, how can they attract more customers? Although it has been some years in the US since their residential real estate has collapsed, Canada’s previous patterns of real estate cycles tend to be reverse from the US. In the past few recessions, the Commerical Property Market collapses first before the residential (remember the famed SkyDome and Olympia and York bankruptcies of the early 90’s?).

With recent numbers for the Toronto Real Estate Board on the commercial property sales, the numbers look very negative. Is history repeating itself? Are real estate developers ignoring the supply numbers and is it time demand falls off the cliff to counterbalance?

Toronto Real Estate Collapsing

Although it has not been receving much media attention of late (and that is why this website exists), the Toronto Real Estate Market really got hit hard in the latest period of December 2011. Traditionally December is a slower month than November in terms of real estate in general, but not this bad. According to the Toronto Real Estate Board’s figures, sales of 416 area code properties dropped from 3,027 to 1,948 from November to December which represents a whopping 36% drop. Sales of 905 area code properties dropped from 4,065 to 2,770 representing a decline of 32% month over month as well.

The average sales price of a property in the 416 area code fell from $524,805 in November to $474,270 in December. That is a drop of over $50,000. When combining both area codes (otherwise known as the GTA) from November to December, sales of detached homes dropped dropped 35%, condos dropped 31%, semi-detached dropped 37% and townhouses dropped 33%.  The biggest losers definitely in Toronto 416 where average prices for detached homes dropped $74,171, semi-detached homes dropped $44,912, townhouses dropped $45,886 and condo’s dropped $14,027.

With Canadians maxed out to their limits in terms of borrowing money (via debts) how will this progress towards the spring during a time when many people list their houses for sale? What happens when the very high demographic of baby boomers set to retire look to sell their homes to downsize or move to retirement communities? What if the unemployment situation in Canada worsens with the Global debt situation reaching records levels? What if interest rates rise due to market conditions? People who remember the early 80’s and early 90’s realize that Toronto’s real estate is in the midst of yet again a cyclical collapse.