Update: In a story published in this week’s issue of Maclean’s (and on the Web below) we look at the plague of condo holes afflicting Canada’s once-hot real estate markets. With several construction projects halted, and rumours flying around many others, we thought we’d found a bright spot with Vancouver’s Ritz Carlton condominium development. The project was put on hold last year. Then earlier this month several backhoes returned to the site and resumed moving dirt. The developer didn’t return calls confirming whether the Ritz was back on or not, but we decided to give them the benefit of the doubt. We did so too soon. On Wednesday the Vancouver Sun reported the luxury condo project has officially been killed.
It’s worth noting the location of the Ritz project is a particularly sensitive one for Vancouver’s bruised real estate ego. When the last bubble burst in the 1990s, a half-built concrete tower was abandoned there. For years it was an ugly reminder of the excesses the city’s real estate developers, investors and buyers are prone to. Now a six storey-deep hole in the exact same spot could prove to be an eyesore for months, even years, to come.
In 2007, when developers announced that a flashy new 80-storey condo, dubbed simply 1 Bloor, would rise at Toronto’s Yonge and Bloor intersection—arguably the most prestigious address in Canada—it sent the city into a frenzy. Buyers lined up in the rain for days, one promoter dubbed the site “the Manhattan of Toronto,” and realtors warned potential purchasers that if they didn’t get in now, they may never own a place downtown. Today, months after the existing buildings at the site were torn down, the project shows no signs of life. The key financial backer for the project, Lehman Brothers, is bankrupt. The developer, Kazakhstan-based Bazis International, won’t return phone calls or emails from Maclean’s. The city hasn’t even granted the developer a final building permit yet. The project is still officially a go, but the initial buzz is long gone—now replaced by talk of how embarrassing it will be if Toronto’s premier downtown intersection ends up featuring a debris-covered vacant lot.
Similar scenarios are being played out in major cities across Canada as condo prices tumble and projects are put on ice. Canadians have grown used to the sight of construction cranes sprouting up from the urban skyline. But to build up, one must first dig down, and now a number of massive excavation sites lie dormant, victims of the credit crunch and slowing sales. Many others aren’t even making it to the construction stage before developers tear down the “For Sale” signs. “The condo market is going to react much more severely than the rest of the housing market,” says Benjamin Tal, an economist with CIBC World Markets. “You’re going to see more projects put on hold before things improve.” If he’s right, Canada’s cities could be scarred by the deep craters left by abandoned condo projects, an enduring and unsightly memorial to a frenzied building boom that went a few thousand condo units too far.
A quick survey of Canada’s former condo hot spots—Vancouver, Calgary and Toronto—reveals dozens of projects that may leave their mark with enduring pits and empty spaces. In Vancouver, Wall Financial became the latest major developer to pull the plug on a condo project in late January. The company had sold just 30 per cent of the units in Wall Centre False Creek, a 414-unit project that was set to rise near Vancouver’s troubled Olympic athletes’ village, when the developer decided to shelve the project, at least until after the Games. But the hole workers had begun to dig there is just a wading pool compared to what else is out there. In the heart of downtown Vancouver a giant sign still beckons buyers to the luxury Jameson House project, even though in mid-November work crews were told to go home. Work stopped after one of the lenders to the $180-million project backed out, but they had already excavated a giant crater seven storeys deep. Making matters worse, crews had dug beneath a neighbouring historic building, which was to be incorporated into the project. The 90-year-old building, weighing 1,200 tonnes, is now suspended in air using a truss system. The project is currently under protection from its creditors while the developer seeks alternative financing, but no deal has been announced yet.
In Calgary, the situation is equally grim. City officials are keeping an eye on nine different residential and commercial projects where construction has halted, according to Kevin Griffiths, the city’s chief building inspector. One of the largest is the Gateway Midtown, which was to house 650 units in two towers. It was slated for the city’s downtown core just steps from the Calgary Tower, but last fall the project went bust, and a crew hired by the receiver is now working to reinforce the walls of the seven-storey hole.
Meanwhile, back in Toronto, there are other signs of trouble beyond the slushy mess at Yonge and Bloor. In August, Pinnacle International, which is building its third and fourth towers in the city’s downtown core, stopped work on the fourth building after just one floor had been erected. Company CEO Mike De Cotiis says the company hopes to resume construction on the tower once the third building is finished. Then in December, developer Minto tore down the sales centre for a condo project on King Street and abandoned the project altogether. Now the Trump International Hotel and Tower is trying to fend off media speculation the project is in trouble, even as workers toil away at the site. “Everything is on track,” says Howard Tikka, director of marketing. “I don’t know where all these rumours come from.”
Many project failures are indeed just rumours at this point, but the numbers indicate an imminent oversupply of boxes in the sky. “It’s night and day from just a few months ago,” says Adam Vaughan, a Toronto city councillor. On any given day for two years he’d receive at least one application for a new condo project in his Trinity-Spadina ward, but hasn’t seen one in six months. “There were more 50-storey buildings under construction in my ward than Calgary has ever built,” he says. Will Dunning, a Toronto real estate economist, says that although the fall-off in new projects has certainly been dramatic, it may not have been fast enough. Today, he says, there are roughly 35,000 units on the go in Toronto. But in December, just 198 new condos were sold, a stunning 81 per cent drop from the year before. “This very large pending inventory is setting the stage for a substantial correction within the condo market,” he warned in a report late last year.
Hopefully things won’t get as bad here as they already are in the U.S., where the image of stalled condo craters is nothing new. Some two dozen Seattle condo construction projects are now on hold. Last fall, in Chicago, work screeched to a halt on the Spire, billed as the world’s tallest residential tower. The move left a perfectly round, eight-storey-deep hole near the city’s lakefront. In some U.S. cities, officials have even ordered developers to fill holes back in. In cases where developers go bankrupt and no other companies step in to take over, the fear is local taxpayers could be on the hook to plug the holes.
The image of those gaping pits is starting to worry city planners here at home, who are starting to rethink their approach to major condo projects with an eye to more failures. After all, a lot can go wrong when you have a giant hole in the middle of a city. If the pit fills with water it could erode the walls and threaten surrounding buildings, not to mention providing mosquitoes with an urban swamp in which to breed. And if left too long, the walls will eventually begin to decay.
As it is in Vancouver, a developer can halt construction for six months before the city threatens to withdraw the building permit. Sometimes projects do come back to life. For example, earlier this month, workers returned to a gaping hole in Vancouver dug for the glitzy The Residences at the Ritz-Carlton, four months after the project was put on hold pending “design changes.” Still, if a hole remains dormant for long enough, officials will step in to make sure it is properly secured and monitored, says Will Johnston, Vancouver’s chief building official. That’s already happened in Calgary, where last November city planning officials took responsibility for safeguarding a hole dug for the Manchester Station condo project. The tougher question of what happens if big projects are indefinitely put on hold is one Vancouver and Calgary are only now just starting to consider. “We don’t know if we’re going to see more of this or not,” says Johnston. “But my worry is: what if this goes on for three years, and we have 20- to 30-m holes dug and left sitting there?”
Abandoned condos don’t just cause problems for cities—the buyers who had hoped to live there will end up with huge headaches, as well. Before the first pile of dirt is moved, developers typically pre-sell 60 to 80 per cent of a project’s units, collecting deposits of up to 20 per cent of the sale price in the process. The money gets put into a third-party trust. If a project is cancelled, buyers get their deposits back. But the fact is, a developer can delay a project for months before having to return the money, leaving buyers stranded while they wait for a refund.
The fear is, if condo prices fall far enough, it will make more economic sense for buyers to walk away from their pre-sale agreements and risk being sued rather than complete the deal. After all, if you made a $50,000 down payment on a pre-sale agreement to buy a $900,000 condo, but your condo is only worth $700,000 now, you’ll only lose $50,000 by walking away, but you’ll overpay by $200,000 if you go through with the deal. If enough people walk, more projects might be put on ice. And just the sight of condo craters sitting empty threatens to further drive down consumer confidence. “When you see a project where nothing is happening, it becomes a symbol of what’s happening in the economy,” says CIBC’s Tal. “It impacts the psyche of potential investors and consumers.”
Even some realtors are starting to express concern. “There are still cranes building condos downtown so somebody is getting financing, but let’s face it, most people in Canada don’t have any idea how bad the world economy is,” says real estate agent Jim Sparrow. “I think you’re going to see a lot more pain before it gets better.”