February 3, 2021 | Empathy City

Some weeks ago there were 14 condo units for sale in a prime low-rise, downtown, chi-chi 416 building. Then, in January, just a couple. Now, zero. The average selling price-per-foot vacillated wildly. From a thousand bucks last summer, it dipped briefly as low as $750. The final couple of sales were back to a grand.

In the last three months of the Year of Satan, condo sales in the nation’s biggest market zipped higher by 20.7% year/year even as the number of available units mushroomed. But look at this: the pace of condos newly rented jumped 86%. Rents are down by an average of 16.5%. And new rental listings keep piling up. (BTW, rents in SF are off 28%, down 23% in NYC and up 2% in YVR.)

Hmm. A sales surge does not quite jibe with the narrative that the virus, the looming vacancy tax, the lockdown, the collapse of Airbnb, the dearth of students and immigrants and the shuttering of the office towers would spell the end of urban real estate. So, what’s going on here?

Well, there are changes afoot. Demographic ones, which reflect what’s happening in the wider real estate market – where people are being priced out of $1 million semis in the burbs and by bidding wars in the far-flung boonies for houses they never envisioned themselves buying.

Yes, more condo owners are bailing. Yup, rents are falling and a slew of tenants are benefitting from that. But buyers have reappeared. The best units are being snorfled up. And it appears these buyers are end-users (in general), not investors this time.

No big surprise there since owning a rental apartment is a recipe for negative cash flow and heartache. As mentioned, rents have cascaded lower – right back to levels unseen for most of a decade. Meanwhile ownership costs – taxes and condo fees – continue to march higher. And as in several provinces, evictions have been outlawed as the virus continues to plague us. So if a deadbeat tenant decides to stop paying, well, tough. Moreover, now that the hammer has come down on short-term vacation rentals, the tourists and uni students are gone and arrivals at Pearson airport are treated like crime syndicate bosses, the economics of condo investing have changed.

Ergo, condos as homes. What a radical idea. The bottom rung of the property ladder is once again emerging in the urban core, now that Covid, nesting and WFH have pushed ticky-tacky suburban houses into the seven-figure cloud.

But wait, isn’t the core supposed to be a morgue? An economic dead zone? About to be repopulated by raccoons, coyotes and fierce falcons nesting in the crumbling crevices of what used to be bank towers? I mean, just look at how people have stopped moving around, and going to work.

Truth be told, urbanity has big pandemic issues right now. In Toronto, as mentioned a few times, the giant underground PATH, home to hundreds of small businesses is an empty (if glitzy) tunnel of despair. The commercial vacancy rate, a tight 2% pre-Covid, has zipped higher to more than 7% – and hundreds of thousands of feet of new commercial space (like in the CBIC complex and Google’s new digs on King Street) are under construction. (There are also massive, towering condo developments proceeding.)

And look at how depopulation has taken place, 11 months after our world rolled over.  There’s new evidence the WFH crowd is doing okay, and has retreated from the downtown while the hourly-paid workies have taken it on the chin. StatsCan says of the 80,000 jobs lost at the end of 2020, the drop was “entirely attributable” to those folks who punch a clock and earn significantly less than the salaried elite. “The number of hourly paid employees was 8.7% below its pre-COVID level, compared with 3.7% below the pre-COVID level for salaried employees.”

Okay, we get it. No restaurants, clubs, bars, gyms, hair salons, entertainment or events taking place. Vacant office space piling up. Rents falling. Investor-landlords freaking.

So, again, how do we explain condo sales rising and prices restoring?

Seems those buying these units as principal residences believe what we’re being told by the authorities. New infections are declining and daily cases dropping. A number of effective vaccines are being pumped out. Every Canadian who wants a shot will have one in their arm by the end of September – eight months from now, says the prime minister. The kids will be going back to school in person in all of Ontario (like the rest of Canada) next week.

We all knew the pandemic would be temporary. No, we did not expect it to last more than a year. But now there’s an end date. Our leaders say when the autumn comes, we’ll be okay. This has also been borne out by financial markets, pushing equity values to all-time highs on the expectation the second half of 2021 and next year will be wicked. Good wicked. Not the Satanic kind.

The expectation: this will be a year of decreasing anxiety about the virus. The herd will eventually get dosed. All service industries will be allowed to operate. Gathering sizes will remain restricted, but increasingly expanded as the year winds down. Schools will not close again. The hospitalization/ICU/health care system crisis will fade. Offices will reopen, most with a hybrid workplace/WFH schedule. Suburbia will lose its cachet. The city will renaissance. Urban streets will fill again. So will subway cars and commuter trains. Food courts. Sidewalks. Highways.

It will be slow, but relentless. From February of 2020 to the end of the virus could be three years. We are one-third there. But by far, this was the worst chapter.

What can go wrong? They’re lying to us.

Garth Turner February 3rd, 2021

Posted In: The Greater Fool

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