Maroc - STOREYS.COM - A La Une - 04/Jul 13:37

Are Presales Dead? An Insider Answers (And Explores) The Question

Are presales dead? I’m seeing a lot of online chatter about this question. Is the investor gone? Will high density presales ever be the same again? Let’s jump into it.In short, to answer the question, I’m going to go out on a limb with a strong “no.” But before I explain that answer, I will admit that again this year, presales have been very soft — especially in downtown areas, and particularly in Ontario vs. BC. Presales are difficult to execute right now, for a number of reasons (which I will get into), but: we will live to presale again.Development Crash CourseBefore we dive into presale life or death, we need to understand, very generally, how development works. In an easy example, let’s assume that a condo tower is going to cost $100M to build (this is light, by the way). To build a tower that costs this much, a developer needs to finance it. For the banks to give the developer that kind of money, they require certainty of repayment. Certainty comes by way of one of two things: equity, or sales commitments. Equity these days is just cash, and although the public believes developers have it falling out of their pockets, the reality is that development is a very cash-intensive business, for which many upfront costs can’t be leveraged. Soft costs in the years leading up to a project’s launch can be measured in millions, and are paid for with cash, usually before construction debt kicks in (feasibility, environmental, planning, architecture, public consultation, presentation centres, marketing, etc).Since a developer needs cash to get their project going, they rely heavily on “presales” to give the bank the certainty required to back the loan. So, the developer will try to conserve cash by collateralizing as much of the loan against sales as possible (usually 60-70% of the gross revenue of the project, which ensures the bank gets paid back). This Is Where Problems OccurProblem 1When that much money is being loaned, you can imagine the impact rising interest rates will have on that loan’s interest. It goes up by millions. This puts more pressure on the proforma, and the developer must sell for more money to cover the loan. This is problem number one: if a developer can’t make enough to cover the costs, they won’t even start, wasting their own cash. So in today's environment, many presales are on hold — or canceled — because interest costs have eaten up all profit potential.Assuming the numbers could be made to work, who will buy these homes? Well, another condition of the loan is, those presales need to be secured within a certain timeframe. This puts pressure on the developer to sell 60-70% — fast. But owner-occupier buyers need time to consider their options. It’s an emotional decision; they need to feel like it’s their home. Naturally, finding hundreds of buyers prepared to make this weighty decision in the required timeframe is very difficult. And the bigger the building, the more buyers you have to find.AVESDO data nugget: At the peak of the market, on average, 90+% of launched homes were absorbed within 30 days. Today we are seeing an average of closer to 20% in 30 days, with presale requirements taking as much as 9-12 months to achieve. Investors can make decisions based on the numbers. The math is quick and easy, so they are the best target for these quick initial sales to meet the bank's requirements. There is an entire segment of the realtor community that primarily deals with these buyers, so a developer only has to reach a relatively small count of realtors to access a very large number of investors. (This is compared to the owner-occupier community, which requires thousands of interested parties to be distilled, one by one, into a small number of serious buyers.)AVESDO data nugget: 92% of all purchases nationally in 2024 had a buyers agent on the dealProblem 2The Canadian government, at all levels, has gone to war with investors. An investor is motivated by income, or capital gains, or both — and both are being attacked. Governments protect the tenant more than the landlord, which creates significant income risk. They have restricted nightly rentals, which cuts off another income source. And even for those who can navigate a challenging income environment, they are now taxing the gains more. All of this doesn’t even consider that our interest rate environment makes that leveraged investment more expensive, requiring more income to make it work, or requiring the potential for more profit at the end to achieve the same return. And when money can be placed in a safe high-interest investment these days, why would you take the risk on real estate? Thus, investors have largely left the movie, and developers of high-density projects don’t have a buyer who can help them meet their time-sensitive presale requirements.AVESDO data nugget: We currently have visibility to 43 projects — representing 11,000+ units — that were expected to launch in 2024 that are still on hold or delayed, nationally, within our system. This is holding up a total of 92 projects — and almost 23,000 units — slated to launch in the next few years; that includes phases or buildings of those first 43. If they are in our system, it means they were all close enough to consider launching.READ: Expert Reflection: Hot Takes (And Hot Tips) On The 2024 Federal BudgetThe above captures why high-density presales are “dead” — for now. But more on that later.Now we return to the question at hand: will they ever come back? Simply put, yes.Reason 1 For The Return Of PresalesOn the “buy” side, in Canada, there are no capital gains on primary residences, which makes a home investment attractive. It also means many Canadians have made a lot of money on their personal homes, so they like (and trust) real estate as an investment, and have a propensity towards it. Real estate is also much easier to understand and do the math on, when compared to stocks or other investments. This, in turn, attracts a broader segment of the population — most condo investors are middle class “ma and pa” investors, with one or two “investment units”. The bottom line is, in most market cycles, it makes sense — and works — and provides large segments of buyers for developers to target.Reason 2: Profit PotentialIt can be very profitable for the developer. Much more than rental or other asset classes. So, as much as there is incentive to consider rental right now (and disincentive to proceed with condo), this is only a moment in time. When condo works again, the profit potential will be enticing. Reason 3: Development Is A Creative PursuitDevelopers are often makers at heart, and love the thrill of design and seeing their vision come to life in a finished building that will be there for generations. They are city builders and creatives, and rental buildings and low-density projects don’t offer the same “canvas” opportunity because, in most cases, the math and restrictions force budget design. Developers will do their best to find ways to create via high-rise condo development before giving up on it.Reason 4: Cash Won’t Cut ItAs mentioned earlier, given the size of developments, and the debt requirement, it makes very little sense to build with cash (and only a minuscule number of people could even do it). So, presales are a banking necessity in the multifamily condo game.Reason 5: Multi-Family Is The FutureGiven the price (and ongoing cost) of a home these days, single-family homes are going to go extinct. They’ll be replaced by multi-family homes in increasing densities, in direct correlation with land prices for an area. And, as just mentioned, multi-family all but requires presales to proceed. Therefore, less single-family, more multi-family equates to more presales. Reason 6: Turning TidesThis will be a bold statement: our current government (at least at the federal level), who have created the landscape for such a terrible housing environment — and the circumstances that make presales unworkable — will soon be out of power. The polls clearly show that the people of Canada have had enough, and want a new way forward. This author believes that the people want many of these policies reversed, and there will come a time, very soon, where presales make sense for the investor, for the developer, and for the health of our housing market in Canada once again. Reason 7: Success Can Still Be Found, ActuallyMany projects are still being presold, and are successful. In order to hit presale marks, developers are launching smaller projects with lower presale demands. They are launching projects in markets where land values and development extraction fees allow the proforma to work at achievable prices. They are changing up the product types, and building density in a series of lower wood-frame or mid-rise concrete buildings where they can pace the sales, rather than doing it all in one tall tower. And, top-tier developers are able to negotiate with banks to arrive at more favorable presale terms.Further ThoughtsI’ll close with a note of personal experience, from when this same situation arose in 2008. At the time, I was working for a major developer in Vancouver, and the market said, “no one will ever sell a presale again.” Then, in 2009, the conditions improved to the degree we were able to launch a 180-unit point tower in the Vancouver suburb of Burnaby — the first presale in greater Vancouver, post global financial crisis — to a lineup of owner-occupiers and investors who swallowed it up. Presales were on across the region again. History tends to repeat, and I believe it will again.At Avesdo, we have watched tens of thousands of units withheld from the market over the last two years. In the last two weeks, since the BOC cut interest rates, we have seen 21 new presale projects launched between the GVRD and GTA — this is compared to 23 in the entire quarter last year. And we have a full launch calendar ahead of us. Much of the product is lower density, and none have been the super-urban downtown projects with high unit-counts we have seen in the past. Investors have shown up alongside owner-occupiers and absorptions have been steady, for the most part, with some still struggling while others hit home runs. All this to say, signs are already pointing to a presale comeback.If you are a seasoned developer wondering if now is the time to launch your next building, or if you’re a single-family builder looking for advice on how to launch a multi-family project with confidence, talk to one of our experienced Sales Advisors today.This article is authored by Ben Smith, President of AVESDO: a Canadian software company harnessing the power of data to help real estate professionals make better, faster, and more informed sales decisions.______________________________________________________________________________________________________________________________This article was produced in partnership with STOREYS Custom Studio.