It’s been weeks since thousands of purchase agreements were left in the lurch as three major Toronto projects developed by Cresford entered into receivership.

In late March, PricewaterhouseCoopers (PwC) was appointed as the receiver and manager of assets for three of the luxury developer’s downtown projects: The Clover on Yonge, Halo Residences and 33 Yorkville. As no firm decisions have been made yet on the fate of any of these projects, the roadmap for what could happen to them may vary. The receivership process is in the early stages, meaning the outcomes of any of the buildings could go in many directions.

“It’s [the] very early stages and has a lot of implications. There’s a lot of questions in the air,” said Pauline Lierman, Director of Market Research at Urbanation. “For our purposes, we still have them active in our database, but they are no longer actively selling, so we’re maybe going to put them on hold, because we don’t know how this is going to be treated. We have our guesses, but we don’t know exactly.”

Further information released by PwC in mid-April calculates that 1,805 purchasers entered into agreements between all of the projects, totaling $252 million in deposits. On May 6th, PwC declared that it would no longer be accepting deposits from purchasers.

“In my opinion, the statement by PwC that they will no longer be accepting deposits is sensible and the only way forward at this stage,” said Jillian Siskind, Principal Counsel of Jillian M. Siskind & Associates, a boutique law firm specializing in construction and real estate litigation. “Taking additional deposits at this point would be irresponsible since there is no active project underway.”

Siskind explained that it may be possible for another developer to purchase the project’s land and work in place, a distinct action from the projects being purchased. If bought just for the construction and land, Siskind said that a new developer would likely want to start the process from scratch, meaning old project deposits would be returned through Tarion or Cresford’s insurer, and new agreements would be created.

Two of the projects in question, Halo Residences and 33 Yorkville, are in the early stages of construction, with most work still at grade-level, according to photos recently published online. The Clover, however, is nearly finished. While a developer could take over the project, Siskind explains that it is uncertain how that would happen with The Clover and whether old purchase agreements would be transferred over. Financial viability, among other factors, would influence the purchasing decision of the project or its assets.

“A new developer will examine the financial viability of the project including its assets and debt. It will also consider the purchase price for the units,” said Siskind. “It may well be that the new developer could not get those same prices in today’s market, or to the contrary, maybe they could get more.”

With The Clover nearing completion, Lierman said that the project may need to be almost comparable to resale price points now that it has phased out of preconstruction over time. In terms of what purchasers may receive at the end of the process would depend on what the purchaser decides, Lierman explained.

“You have to expect that on Yonge Street, you’re going to want to get a certain level of revenue on this site, and the gap between what your owners paid for the units versus now,” said Lierman. “At the very least, they should be getting their deposits back if they’re going to go the clean-slate route, with interest.”

Homebuyers, real estate investors and industry commentators alike are grappling with the many ways the COVID-19 pandemic will impact Canada’s housing market and the path ahead as economic activity across the country cautiously resumes.

One approach in the search for clues on both the short and long-term market implications of the pandemic’s disruptive effects is to look at how the 2008-2009 global financial crisis played out.

While there are several quickly identifiable similarities — home sales falling dramatically, cuts to interest rates, evaporating buyer confidence — there are a couple of key differences to keep in mind as the pandemic wears on and the market adjusts to the challenging new environment.

In a report published earlier this month, BMO Senior Economist Robert Kavcic highlighted that Canada’s resale market “has effectively frozen itself in time.” New home listings, he wrote, are sharply declining alongside home sales which likely means that “the deterioration in prices should be contained for now.”

“Contrast that to 2008/09, when sales fell by almost 40 percent from the end of 2007 to the 2009 lows, but new listings rose by 15 percent through the early stages of that period — that’s how you get a quick and meaningful decline in prices,” Kavcic wrote.

So even though home sales figures looked bleak in the second half of March and entirety of April, there’s reason to believe that this strong economic shock will differentiate itself by not leading to a sharp fall in home prices.

“We suspect that sales and listings could both come back in rapid fashion, leaving broad prices steady through this challenging period,” Kavcic wrote.

That prediction has, so far, played out in the data published by real estate boards in major markets across the country. Average Toronto home prices rose a marginal 0.1 percent in April over the previous year even as sales declined by 67 percent. Meantime, Vancouver’s real estate board reported a 2.5 percent increase to its benchmark home price in April with sales hitting a 38-year low for the month.

Home prices tend to respond slower to changing market conditions than monthly sales volumes, but as businesses reopen and homebuying activity creeps back up, Canada’s housing market may resume activity closer to where it left off than the bleak April data would suggest.

Many people have pointed out that the COVID-19 pandemic has magnified several negative trends that were already underway, from income inequality to disfunction in care for seniors.

And for renters and landlords, this may turn out to be the case as well.

Over the past five years, the number of people who turned to renting over ownership started reversing to more historical ratios, industry observers say, while more apartments were coming on the market, slightly easing the tight vacancy rates.

Then the pandemic hit. As the lockdown put people out of work, slowed migration in the GTA to a trickle, and essentially shut down demand for Airbnb units, the effect on rental units has been rapid. Not only has there been a slowdown in people looking for rental apartments, creating less demand, but with more condos and purpose-built apartments available, there is also more supply.

Rental prices were already starting to flatten since August, those tracking the data say, and they have dropped in April, compared with a year ago.

All of this spells trouble for condo owners and relief for renters.

The question is, is this a short-term or a long-term trend?

We’ll get to the long-term question soon, but the short-term trend is clear.

“As rental demand declines as job losses mount, incomes are reduced, and immigration shrinks, the slowing in the GTA rental market that appeared in the last half of March will progress for at least the next few quarters given the current economic outlook,” said Shaun Hildebrand, president of Urbanation, in the real estate consulting firm’s most recent report from April 17.

Leases down, listings up

Lease activity is down more than 70% compared with April last year, says Pauline Lierman, director of market research for Urbanation.

The financial impact of the pandemic, which hits renters harder, according to John Pasalis, president of Realosophy Realty, combined with the increase of supply, will create more vacancies. Although there are emergency measures now to help people stay afloat, such as the CERB and relief on rents, it’s not clear how long that will last.

“Toronto’s labour market will be hit hard by the pandemic this year,” according to a recent Conference Board of Canada report. “Over 42,600 jobs will vanish, lifting the unemployment rate to 8.0 per cent. In the second quarter alone, employment is anticipated to fall by 5.0 per cent, while the unemployment rate is expected to hit 13.9 per cent.”

This will push some to move in with family or roommates, adding to the supply of apartments. And, as Urbanation points out, at the same time that there are fewer leases there are also more listings, adding to the overall supply.

In fact, there is a particular type of listing that has skyrocketed compared with last year…

The Airbnb factor

Furnished apartment listings in April were up about 90% compared with April 2019. This is a direct result of the ‘Airbnb impact’. (Generally unfurnished apartments are intended for longer-term rents.) The average rental price of furnished apartments is down about 10% from April last year, according to Urbanation’s data.

“Investors are not like owners” who live in units, says Pasalis. “They don’t want (their units) sitting empty.”

And there are more units owned by investors slated to come online. There are already about 400-500 units sold primarily to investors in buildings still to be completed just in downtown Toronto, according to Urbanation’s Lierman.

While the city is looking to curtail short-term rentals through regulation, many experts don’t see these as having a major effect on the rental market, or on decisions by people whether to buy in a condo for investment purposes. It is mainly the freeze on travel and its effect on short-term rentals that are seen as pushing investors to put these units up for long-term rental instead.

This will likely affect studios and one-bedroom condos most, says Scott Ingram, a sales representative with Century 21 Regal Realty Inc. Though Lierman notes that the health aspect of the circulating virus may push individual buildings to create stricter rules and enforce them once travel opens again.

Investor-owners are also facing competition from a growing number of purpose-built units coming online in 2020.

More units still to come

There have been a record number of building completions in Toronto, says Ingram. “And there are still buildings expected to be completed this year,” he adds. The first quarter of 2020 – just to the end of March – saw 7,150 unites completed, with an expected 10,000 units coming online in the second quarter, although some of those may now be delayed.

According to Lierman, before COVID hit, an anticipated 25,000 to 29,000 units were expected to be available by the end of 2020. That amount of units represents up to 100% increase over 2019 when 14,468 units were completed.

Even with delays, Lierman still expects about 20,000 new units to hit the market this year.

In line with this thinking, Brian Brown, Principal at Lifetime Developments, confirms that “We have still seen strong interest in our projects especially the project that we launched just before the pandemic, Liberty Market Tower. Sales have continued through the lock-down.” He adds, “We have experienced a slowdown but not a shutdown.”

Though, as units come online, one of the major sources of demand for them is currently AWOL due to COVID. That source? Immigration.

Immigration frozen

Migration is one of the major sources for renters, whether immigrants, foreign students, temporary workers or people moving from another province. All of this is frozen, though for how long is difficult to determine, experts say.

Once borders re-open, Canada will continue to rely on immigration as an economic driver, as the population ages, Immigration Minister Marco Mendocino told the Canadian Bar Association’s Immigration Law Section on May 5.

Before instituting border restrictions due to the spread of COVID-19, Canada pegged its immigration target at about 1 million between 2020-2022. The GTA has received about one-third of the country’s migrants, or about 100,000 people, in the past couple of years, Lierman says.

But a May 12 report from The Conference Board of Canada estimates the number of people coming into the region will drop to 65,710 due to the pandemic in 2020. While the government aims to announce a post-COVID immigration plan before its annual announcement this fall, a 35% decrease in the number of migrants in the GTA will certainly impact the rental sector.

Swing back to renting

When you look at longer-term trends, the ratio of renters to owners is shifting back to what it was earlier, says Peter Norman, vice-president and chief economist, Altus Group, which provides data to the real estate industry.

During the early 2000s, there was a long downward trend in interest rates and there was still relatively affordable housing. Younger people, in the 20-29 age group, were skipping rental and buying condos. The ownership rate was about 33%, with about 66% renting. By 2011, about 40% owned and 60% rented, Norman says.

But with ballooning housing prices, that trend started turning around. In the past five years, it has started reverting to earlier ratios. Now the demand for rental housing is about one third. Over the past five to six years there has also been a shift away from owning condos as an investment, Norman adds, with condo sales moving back to owner-occupier.

Now, the recession from the economic freeze due to the pandemic is expected to slow the rental pool of young people leaving their parents’ homes.

Price break for renters

Average rents in Toronto were flat compared with the same time last year at about $2,375 for the first quarter, or until the end of March, of 2020, according to Urbanation.

However, April was down about 3.5%, compared with April of 2019, according to Pasalis. This comes on top of rents that have been trending downward since August, he adds.

Though Urbanation’s Lierman would not be surprised to see average rents down about 5% in 2020.

There have been two to three years of rapid rental increases, says Altus’s Norman. “This recession will halt the upward movement on rents.”

Longer-term lens

The long-term trends beyond the direct impact of COVID-19 are still positive for Canada, Lierman says. Big investors, like REITs, look at revenue in a longer time frame and, though they may slow development, the longer-term outlook for rental still makes sense for these investors.

“This is not a recession in the traditional sense of a recession,” says Brown. “This is a health crisis that carries with it some of the similar financial challenges but the rebound effect should be much quicker and stronger.” He adds: “We are still dealing with an undersupply of homes in a market with high demand.” He notes that, “Real estate investments are still seen as a stable investment with strong future growth.”

The bottom line

Longer-term, the Conference Board expects Toronto’s labour market to recover to some extent next year, with employment growth of 2.7%.

And once the immediate crisis is over, Canada will likely continue to need large numbers of immigrants to replace an ageing demographic and help the economy recover and grow. As the country’s largest economic engine, the GTA will likely continue to attract a sizeable number of immigrants, who make up a significant percentage of those who rent. This, combined with more people looking at renting over ownership because of job losses and a recessionary economy, will likely mean the demand for long-term rentals will stay strong, and large investors are not indicating a retreat from purpose-built apartment buildings at the moment, industry experts say. And those condo investor-owners who are prepared to rent their units longer-term will likely benefit from a market that is still unlikely to meet future demand.

All these figures come together to paint a future that looks a little brighter for renters and a little worse for condo investor-owners who had counted on income from short-term rentals like Airbnb.

Those are among the insights offered by CIBC World Markets managing director and deputy chief economist Benjamin Tal during a May 5 Real Estate Forums webinar.

“It’s not a recession, it’s not a depression, it’s something in-between,” Tal said of the unprecedented position Canadians, and people around the world, find themselves in. “It’s basically a frozen economy.”

Tal expects a “recessionary recovery” to be long and in a “zig-zag” pattern, with volatility to be found in valuations, expectations, gross domestic product (GDP) growth and consumer confidence. The end point will be finding a vaccine or effective treatment for COVID-19.

Tal anticipates governments continuing to play a large role in the economy, as relief payments to get people through the crisis evolve into a more permanent universal basic income system.

Deglobalization will continue and two distinct trade blocs, respectively led by the United States and China, will be established. While Canada was trying to diversify its economy by lessening its reliance on the U.S. before this crisis, Tal now expects that to revert.

As well, Tal believes many companies will start thinking less in terms of profits and more in terms of resiliency.

More medical-related products and other essential goods will be produced domestically and there will be a move from “just-in-time” to “just-in-case” inventory systems.

Tal’s Canadian real estate market overview
“What we’re seeing now is not a market that’s functioning normally,” Tal said. “When you have the number of transactions going down so rapidly, and you’re basically frozen, the signal that you’re getting from the market is a misleading signal.

“It’s not a real signal because it’s biased and very small.”

Tal said real estate valuations being made now have very little value and people should be careful about making decisions based on the current economic situation.

“For the real estate market, if this recovery is going to be relatively long, it means that interest rates will remain relatively low,” said Tal. “That’s positive.

“I think the damage to the real estate market isn’t as significant as perceived.”

Tal expects the Canadian economy to emerge from the recovery phase in 2022 or 2023 and that “the demand for real estate will remain very strong.”

Impact on Canada’s housing market
Tal said the Canadian housing market was at a “very, very, very good” starting point before the current crisis.

This is easing the pain brought about by housing activity dropping 70 per cent compared to a year ago. Supply and demand are both down.

“We’re seeing some significant delays in completions, especially in the high-rise segment of the market,” said Tal.

Problems include getting materials from other countries and increased physical distancing on construction sites, which reduces productivity by 40 to 50 per cent.

A total of 30,000 condominium completions were projected in the Greater Toronto Area in 2020, but the final tally won’t come close to that.

Housing starts will slow dramatically across Canada, contributing to a lowering of the GDP. While things will improve next year, Tal doesn’t expect the numbers will return to pre-crisis levels.

There were large job losses across Canada in March and April, a high proportion of them low-paying. Most of those people live in rental housing.

Tal is adamant, however, that the Canadian rental housing market is not in danger of collapse.

Somewhat surprisingly, Tal said the rent payment rate among those low-income earners was higher than for Canadian renters in higher income brackets.

He attributes this to many low-earners now receiving a $500 weekly Canada Emergency Response Benefit payment from the federal government, which they’re using to pay rent.

Many also live in rent-controlled apartments where they’re paying well-below-market-value rents. They’ll do whatever it takes to pay to keep living there.

While reports claim 85 to 90 per cent of apartment rents were collected in April, Tal thinks that number will go down in May.

The number of immigrants and non-permanent residents in Canada will decrease this year. A large percentage of those people are also renters, which will decrease demand for rental housing.

Tal expects that to be balanced out somewhat by a reduction in supply due to a lack of apartment building completions, so the vacancy rate increase won’t be dramatic.

Commercial real estate sectors
There have been predictions of a collapse in office building values because of reduced demand owing to an increased number of people working from home.

The pandemic accelerated that trend but Tal expects it to be offset, to a degree, by the desire to dedicate more space to each employee as a means of physical distancing.

“Vacancy rates might be rising and I think that rent inflation will go down a little bit, as we have seen in every recession,” he predicted.

“But at the same time, I think that those who predicted that this market will collapse are overstating the damage. I don’t think that the move towards people working from home will be as dramatic as perceived, given the productivity aspect.

“Even if you lose 20 per cent of people working in the office, you will have to build bigger, which means that you have a situation in which the demand for space will be relatively steady or maybe reduced a little.”

The momentum of e-commerce started years ago and will continue to build, but at a faster rate. More people have started online shopping by necessity because most stores are closed and people aren’t leaving their houses.

This will have an obvious impact on retail real estate, which has already encountered challenges over the past few years.

“High-quality retail will remain in demand, and in fact it will improve,” said Tal. “I see significant damage to low-quality retail. This means that you will see e-commerce taking over.”

Tal didn’t address industrial real estate, beyond saying he’s still bullish on the sector.