Last week’s Insight Article talked about how the City of Toronto has effectively doubled their development charges overnight. In case you missed it, you can read about that here: Pre-Construction Condo Prices Are Primed to Increase!
As a follow-up to last week, I will be discussing yet another issue – the actual cost to build a condo is also primed for an increase this year. If you’ve been following my content for a while now, you know that when I recommend a project, there is quite some thought that goes into why I recommend it and a lot of the projects that you’ve seen me recommend have been in the Entertainment District in Toronto (area pictured below).
I’m a big advocate of the Entertainment District in Toronto because with the price per square foot to rent ratio, the returns that you could achieve is the most ideal for investors. Additionally, your tenant profile in this area tends to be the best of the best as well. As an added bonus, the growth in this area has been unmatched by any other area in the city.
Big Time Money! I have some good and bad news for you depending on your perspective. The last parcel of large land in the Entertainment District, a parking lot, has been bought by a developer for an astronomical price of $110,000,000. You read that right – ONE HUNDRED TEN MILLION DOLLARS. Queue: Doctor Evil’s pinky finger. Yes, that deserved all caps because that’s a whole lot of money!
That one expensive parcel of land is 229 Richmond St West, north of the fire station on Nelson Street between John St & Duncan St.
The Good and the Bad – This is good news if you’ve been investing in the Entertainment District for a while. The supply will surely be capped at this point until they start building on top of buildings, which is incredibly difficult to do and not very economical (but not impossible). Ultimately, this means that prices will go up due to the lack of supply.
This is bad news if you’ve been sitting on the sidelines still waiting to buy because when builders pay this kind of price for land, the charge per square foot is going to be very high in order for them to turn any sort of sufficient profit.
It always comes down to making money at the end of the day. The builders need to make money when taking on risk for developing the land. We make money as investors by taking on risk of buying projects before the construction even begins.
Land Acquisition Cost Comparatives – To give you some perspective on how crazy this deal is, I’m going to compare the last two projects and how much the land acquisition cost was. In January 2018, in the Entertainment District, 357 King St West & 8 Widmer St (Theatre District) were launched at an average price of $920 per square foot and $950 per square foot, respectively.
The chart above that I’ve put together for you to shows you the price of land, in total and the cost per square foot. The land acquisition cost for 229 Richmond St West is approximately 5 times the cost per square foot than Theatre District (8 Widmer St) just 3 years ago ($773.68 vs. $3,881.17). That’s insane!
But Wait, There’s More! Land acquisition cost is just the first part of the equation to build a condo. We also need to factor in the hard cost and the soft costs. The cost per square foot for these expenses are:
Hard costs: Approx. $350 per square foot
– All materials and labour.
Soft costs: Approx. $150 per square foot
– Everything else, development charges, architects, section 37, planning act, commissions, marketing, etc.
Land costs: Approx. $300 per square foot
– This is an approximate average price per square foot is based on Altus Group’s 2018 Real Estate Construction Cost Guide (CLICK HERE). This means that on a normal piece of land downtown, the cost per “build-able” square foot is close to $300.
When you add it all up, the cost is approximately $800 per square foot. This also does not factor in the risk of the condo becoming shorter due to city disapproval, which will mean less square footage (i.e., units) for the developer to sell.
The price per square foot that we paid at the initial offer for 357 King St West & Theatre District was an average of $935 per square foot (average between $920 and $950 from the chart above).
Let’s take a quick look at the math:
Selling Price: $935 PSF
Less Cost to Acquire Land and Build: $800 PSF
Total Developer Profit: $135 PSF
That’s about 14.4% profit margin. It’s still a lot of money, but it is quite slim compared to other businesses, especially given the significant amount of work that goes into the acquisition and development process.
With development charges doubling, construction costs continuing to increase, and this crazy land acquisition cost, even I’m preparing myself for the shock when the next few projects officially launch (especially 229 Richmond St West). I can’t imagine where it’s going to start – perhaps $1,200 per square foot?!
The Wrap – Despite the absurd purchase price for this piece of land, if all of the smart people at the developer’s office think they can make money on this project, then there is obviously something here. As they say, the juice is worth the squeeze. What do you think?