BMO Real Estate Forum: Ontario Outlook
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BMO recently hosted a forum on the real estate outlook for Ontario. Mike Beg, SVP & Head of Real Estate Finance and Hesham Abourahma, RVP, Real Estate Finance were joined by BMO Senior Economist Sal Guatieri and Barry Fenton, Co-Founder, President and CEO of Lanterra Developments to discuss macro-economic trends as well as local dynamics within the Ontario real estate market.
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Mike Beg: Good morning, everyone. I'm Mike Beg, SVP, and Head of BMO's Canadian Commercial Real Estate Finance Business. Thank you all for joining us today, September day. Real estate has experienced highs and lows over the last decade, and certainly, it's been an interesting 18 months, but through it all, we have continued to bring industry leaders like you together, a Testament of our commitment to you and the sector.
In addition to my national real estate finance teams that oversee the majority of BMO's construction and turn lending for residential and non-residential commercial real estate, BMO in recent years has established and built up a national business properties team as well, requiring unique business operations management. Under Roy Dias management, it covers seniors housing, hotels, student housing, storage facilities, data centers, studio, finance, parking, et cetera. You get the picture. Essentially, all the real estate sub-sectors where specialized operations day to day management expertise is more required for delivering ongoing performance.
Bottom line, between our two groups, BMO has a diverse and strongly going commercial real estate business driven by stable pre and post-pandemic economic growth and demographic demand where the main pre and post-pandemic issue is tight supply across most asset types and locations across Canada. Historically, this forum was an in-person breakfast session just prior to the Geneva center for autism's annual golf classic. While we are proud to have hosted a second pandemic golf day for the second consecutive year, we're hosting this outlook portion in a virtual setting.
We're joined by some today that might not be as familiar with the golf event. I, therefore, like to take a moment to thank the Geneva center for their partnership and share a bit about that organization. For over 20 years, BMO has been with the Geneva Center for Autism to make an impact in the lives of children, youth, and adults, with autism spectrum disorder. All proceeds raised at this year's annual golf classic helped with the reopening of their facilities so that families can make a safe return to the critical programs they depend on.
We'd like to also give a special mention to the folks at Access Storage & Storage Vault, our lead sponsor, for their generous and continued support of this tournament. We have a lot to cover. I'll walk through the agenda quickly before we start and introduce two close and trusted respected colleagues whose council I have greatly valued over the years. First, Sal Guatieri will kick us off with an economic update for Canada as a whole focusing a bit on real estate sector. Sal brings 20 years of experience analyzing the US and Canadian economies and financial markets. He's a well-respected commentator on economic and financial trends and is regularly quoted in the national media and printed press.
Then we will be joined by Barry Fenton, Co-Founder, President, and CEO of Lanterra Developments. Lanterra is a significant force in the real estate industry, not only in the greater Toronto area, but throughout North America. Barry is also a resident guest speaker on BNM for his insights on the real estate market, and there is no stronger or more thoughtful voice for the high-rise condominium construction industry than Barry.
We will then have a round table covering the topics and answer questions that were submitted. Moderating today is BMO's Hesham Abourahma, my team leader for Ontario. As Regional Vice President, he brings over 20 years of experience in the financial sector, including real estate finance lending and investing in private equity-backed transactions and the design of institutional strategic initiatives.
Before we get started, if you are watching the event on a desktop or laptop, you will see a chat box below the video screen. Please feel free to use it at any time during the presentation to submit questions to the panelists. Additionally, below the video screen, you'll see a link to a survey. We welcome your feedback so we can shape future events like this one. With that, I'm turning it over to you, Sal.
Sal Guatieri: Thanks, Mike, and good morning, everyone. Last year's conference, we asked the housing market immune to the pandemic and we thought, for the most part, yes, given government support programs, low interest rates, and expected improving economy. We clearly didn't expect the market to heat up to a boiling point earlier this year with record sales and accelerating prices. That was great news for builders, who though hamstrung by restrictions, higher costs and labor shortages are rising to the challenge with the strongest housing starts in decades.
We believe Ontario's housing market will remain pretty strong for some time to come, driven by low-interest rates, young millennials, rising immigration, and a healthy economic backdrop. Of course, this assumes no nasty surprises from this pandemic. Next slide, please. The good news here is that it does seem like this current fourth wave for Canada is leveling off. Now the bad news is we really don't know what will happen this winter when we start moving indoors, and typically, we see caseloads rising.
What we do know though, that with each new virus wave, we're seeing less damage to the economy and that's partly because businesses and people have adapted their behavior. That's good news and as well, given Canada's high vaccine rate, what it should mean is less need for those aggressive restrictions that clamp down on the economy, so less damage to the economy.
Next slide, please. For Canada, one of the most vaccinated countries in the world, that's clearly a positive development. The relationship between cases and deaths is much weaker in highly vaccinated countries. Those with over half of the population vaccinated and Canada is now up to over 3/4 of the eligible population vaccinated. We're seeing far fewer deaths now running about 1/5 than we were back at the peak in January. Again, the vaccines are helping to limit the severity of the illnesses, the death rate, and hopefully will limit or preclude the need for a return to restrictions for this country.
Next slide, please. Of course, if we don't go back to meaningful restrictions, that would be very welcome news for some of the hard-hit industries in Canada, that are still acting as a bit of a drag on overall economic activity. Entertainment, restaurants, hotels, travel-related areas, still struggling. They were making a pretty nice comeback in previous weeks but things have kind of stalled out a little bit because of this fourth wave. The good news is, number one, those industries account for a relatively small share of overall GDP, and the other bigger sectors have come back quite nicely, in fact, they're pretty well operating back or above pre-pandemic levels.
Manufacturing, construction, Business Services, for example. Next slide, please. For the economy, well, it's been a case of-- The economy has partly adapted to those restrictions. We were surprised though, that GDP actually contracted in the second quarter, got off to a rough start with the restrictions early in that quarter, but things raising up by the end so we were anticipating a continued expansion in the second quarter. We saw a pretty strong growth in the first quarter.
Stats Canada did throw us for a bit of a loop though with estimating a bit of a contraction. There are those headwinds, the lingering restrictions and anxiety amongst consumers in particular, people still reluctant to travel, to eat indoors, for example. Of course, the supply chain disruptions partly are probably largely related to the pandemic on a global basis are just continuing much longer than anyone anticipated. The great example, of course, that microchip shortages that have hamstrung the auto industry are restraining both production and demand because of the shortage of new models.
Those disruptions are also leading to higher prices, which are eating into spending power a little bit. That's it. There's still a lot of tailwinds now, and that's why we do expect the economy to rebound quite nicely in the second half of this year at close to 5% growth, and we were likely to see close to 5% growth for this year as a whole, and continued solid growth and just below that, through next year. We're all itching to travel more and hitting doors, and go to concerts.
A lot of pent-up demands for some of these services. We've accumulated a treasure trove of household savings, at least in aggregate, because we've spent a lot less during the pandemic, and because of the income support programs. Commodity prices, though they pulled back quite a bit in some areas are still quite elevated energy prices in particular. That's going to give places like Alberta, Saskatchewan, Newfoundland, quite a jolt this year.
Of course, the global economic recovery will continue, we believe, and that will be a big help to Ontario's exporters. That's why we see Ontario's economy growing around 4.5% this year, and perhaps even a little faster next year. There's plenty of fiscal policy support still to come. Next slide, please. Now the key theme of this election campaign is just spend, spend, spend, really, there's no party looking at much in the way of fiscal restraint all three of the front running parties plan to just keep spending the floodgates open for quite some time and few are looking at least material tax increases, at least in the near term to slow things down.
Most importantly, they are planning to extend some of these key business support programs, especially the hiring subsidy to encourage job growth. On the housing front, well, all three of the front leading party's plan to address housing affordability with both demand and supply-side policies. In particular, they're all targeting non-resident owners, and they promised additional housing units, those measures to various degrees will help at least at the margin, I think some of those supply-side measures are coming out a little too late as far as cranking up, construction over at least the near term.
I think at this point, the only thing that clearly will improve affordability now is an outright decline in prices. Although longer-term, new construction will help on that front. Next slide, please. Where the fiscal policy support is very helpful, though is in driving down that unemployment rate and we were above 13% during the shutdowns. We're now about half that rate. Still about one and a half percentage points above pre-pandemic levels, but we think the jobless rate will get below 6% by this time next year.
We're definitely moving in the right direction. We still have quite a few restaurant and hotel travel-related jobs to recover. Once things open up more fully, and some of the pandemic concerns of bait I think we'll we'll get there. Things clearly moving in the right direction on the jobs front. Next slide, please. Now, unfortunately, all this fiscal stimulus in both countries Canada, the US has also juiced inflation a little better simply because they've supported demand perhaps a little too well.
We're clearly seeing inflation spark this year, some of that simply reflecting that dramatic upswing in commodity prices, until recently, especially lumber prices, for example, which rose fourfold, although they've now pulled back quite significantly. As well, because the pandemic has extended a lot of supply chain disruptions that's had a material impact in raising inflation, especially auto prices.
Of course, some of the pent-up demand for air travel and hotels has led to a fast rebound in some of those prices. Overall, we generally think inflation will remain contained, it probably will peak later this year, here in Canada at over 4% for the CPI. Then we see it pulling back to under 2.5% by late next year, global competition, for example, and something called automation anxiety, which will probably keep a damper on wages.
Next slide, please. We just really hold the key to whether inflation is sustained at these higher rates. So far, wage growth in Canada remains fairly calm, averaging just over 3% or so. Like most measures, likely to pick up a little bit as the unemployment rate falls, but we're not really counting on wage growth accelerate as long as the unemployment rate remains somewhat elevated.
The question is will businesses be able to pass that higher wage bill loan to customers? We think There's going to be enough competition out there to discourage a full pass-through. We do think inflation will remain relatively in check over the next couple of years. Next slide, please. That should encourage the central banks to keep policy rates on hold for quite some time. Now, we still don't see the Bank of Canada raising its policy rate from near-zero levels until about this time late next year and the Fed probably even a little bit longer.
The Fed is still dragging its heels on slowing its asset purchases and actually unwinding some of this stimulus and that's still keeping long-term interest low. Now, the Bank of Canada has started to so-called taper its asset purchases, but it's still buying long-term debt securities, and that's keeping long-term rates low as well. We think the interest rate environment will remain very supportive of the housing market for still quite some time to come. Next slide, please. Of course, the housing market has just feasted on these lower interest rates.
We hit records home sales back in March of this year, kind of cooled off a little bit. Some of the frenzy has come out of the housing market, but we're still seeing home sales right across this province and across the GTA at above normal levels and pretty solid, pretty robust home sales across the province. Price growth although it's decelerated a little bit from that record pace of earlier, 24% year over year for the benchmark price, still running pretty high, 22% now in July year over year. The monthly increase is still outpacing family income growth, and that's becoming a bit of a concern going forward.
Are we worried? Well, yes and no. Yes, because affordability is fading fast across, well, the country and the province, not just in the Toronto and Vancouver regions as was customarily the case. No, I would say to the extent that demand fundamentals remain quite supportive of the housing market. Next slide, please. Now, affordability as you can see from this chart, is just for the greater Toronto region, but the trend is pretty similar elsewhere in the province.
When we look at average mortgage payments as a percent of household income, we saw that big upturn through 2016, '17 as prices accelerated, then things leveled off a little bit as eventually central bank cut rates in the past year before accelerating once again. Affordability deteriorating because prices just ballooned so rapidly, so much faster than incomes, and fully offsetting the decline in interest rates. You can see what would happen to affordability mortgage service costs if interest rates they rose a couple of percentage points.
I would certainly do some pretty good damage to the housing market. We almost certainly would see some correction in prices. The hope though is that interest rates will stay relatively low for quite some time longer and more importantly, that price gains will continue to moderate and eventually come in line with family income growth so that affordability doesn't fade much further. Next slide, please.
Talking about some of these long-term demand fundamentals, well, millennials are continuing to be a force in the housing market. The youngest are getting into the housing market for the first time. Older millennials raising families are looking for bigger properties, perhaps outside Metro areas so they're still supporting the market and that trend will persist for at least several more years. At same time, they're getting pretty good support from their parents. One study suggests about $100 billion is being transferred from older generations to younger ones each year and that goes a pretty long way to supporting the market, even if just a fraction of money ends up in the housing market. Next slide, please.
Well, prior to the pandemic if you asked me what would happen to the housing market if immigration was cut in half, I surely wouldn't have said it would boom and prices accelerate but that's exactly what's happened of course, to the housing market despite the plunge in immigration to this country. It's hard to predict where immigration will be in the next year so much depends on the course of the pandemic and travel restrictions, but the federal government's annual immigration target is now above 400,000 that's up from 350,000 [unintelligible 00:20:04].
The trend should clearly pick up and coming years and that will provide a pretty good support to the housing economy and housing market. Next slide, please. Of course, now there's no question demand will remain solid. The question now is can supply keep up and take some of the pressure off prices except for a period. In the mid-2010s GTA's new home inventory has consistently run below long-run norms, and that, of course, is pushing more buyers outside the region looking for less expensive homes and it's also keeping upward pressure on prices.
We really need to see home building step up to the plate even further to take some of that pressure off prices. Next slide. Then the resell market, unless we build a lot more new units, we're going to continue to see resale demand running well ahead of new listings and that's going to continue to pressure house prices higher not just in the Toronto region but across the province.
Again, we do need to see home builders pick up the pace somewhat. Next final slide, Chris. Just to recap. Next slide, please, Chris. Yes, great. This economic recovery is likely to continue at a pretty robust space for the next year so we will require this fourth wave of the virus to ease off and for us not to see a severe increase in caseloads come the winter. Also, probably will [unintelligible 00:21:52] somewhat. Inflation likely to stay elevated for a while but we don't see it running away. If that's the case, interest rates should remain relatively low for at least the next year supporting the housing market.
Ontario's home sales and price gains likely to stay pretty healthy for the next while with that fundamental support from low-interest rates, growth in the number of millennials, getting into the market, and a return of immigration to this province. The big concern is affordability and builder costs, those will remain a challenge for quite some time so we're really neat to see a supply ramping up to meet demand in this province. The onus now is on builders to increase supply going forward. I'll leave it at that turn the Podi over to Hesham.
Hesham Abourahma: Great, thank you, Sal, for that update, very insightful. While there are a couple of issues obviously, I think I took away the big tagline of saying you're not worried about the housing industry and there's a lot of things there to support it so thank you very much for that. I'd like to now hand it over to Barry Fenton. Who's the President CEO of Lanterra Developments. Welcome, Barry.
Barry Fenton: Thank you. Welcome. I'm actually in an exciting place today. I am in Lecce, Italy, which is a fun place to be.
Hesham: That's fantastic. I usually see your Andy Warhol pieces in the background, so I figured something must be up.
Barry: I picked an Italian landscape instead but it's a pretty exciting place to be. It really lets me recharge my batteries so thank you for having me.
Hesham: Excellent. I'd like to hand the mic over to you. Sal just took us over with a bit of a macro view on the market but we'd love to get your outlook on the Ontario market specifically and certainly from your perspective as one of the statesmen of the industry so over to you
Barry: Thank you so much, Hesham. I want to thank Michael Beg and his team and the whole BMO group for continuing to support Lanterra and to continue to believe in the market. I didn't come here with any notes or anything else written on a pad of paper. I usually just tell you the way it is and I think sales information prior to mine was very interesting. I'm on the front lines. I'm partners with Mark Mandelbaum and Lanterra Developments and we've been doing this gig for many years so it's not our first rodeo.
We have now delivered to the community at large in Toronto approximately 21,000 condo units. We also have a portfolio of office buildings and retail and commercial, so we've been around. The truth of it the market doesn't always go up. We are very fond of the condominium business. We know that there's a lot of people watching today that want to own real estate. In fact, approximately 70% of people in Canada are proud owners of real estate right now, so they get it. I appreciate Sal's comments and he's a technical guy and he's very smart. I economist, by the way, one of the best in the industry.
He's going to tell you the way it is and he bases it on baseline information. I actually believe that the market is still very robust, has a lot of latitude to go. For example, in the last four years, the condominium market per se has appreciated approximately 40%. We in Canada are the number one country for appreciation in the last year. In fact, we've gone up from last year, this time, 27% and house appreciation. I think we are first and Beijing is in second place.
The market, in general, with interest rates low and with a lot of demand, and in our industry, especially the condominium business, there's a lack of supply right now. It only keeps the market could ground it. There's a great base to it. My own assessment of the market, in general, is that I think four years from now if BMO would like me to come back and chat it up, I think that the market per square foot will be substantially higher. I think there's many reasons for it. Two main reasons would be the fact that interest rates continue to be low.
I think that even if we have an increase in interest rates over the next two to three years, I think that it will soften and that we will not see large increases. Second of all, there really is a demand for wanting to own real estate. Again, as I suggested a few minutes ago, there's a very, very big demand for ownership and proud to be owners of real estate. Third of all, in our business, which is mainly the condominium business, we at Lanterra, were very proud to be instrumental in assisting the City of Toronto with some of the other large developers and creating this really large mass of wanting to recreate the thread of ownership in downtown Toronto.
Between infrastructure and between explaining to people that you can live in something like 800 square feet and have a fantastic experience, we've been able to convince people of that concept and people are buying in. The other thing is that I always look at the rental market. I must tell you that when COVID appeared on us, I was wondering how we in the condo business were going to get the reaction. The truth of it is, from my own experience with Mark, we were in the process of leasing out a project down at ban Wellesley. It was a new apartment building that we had built and literally leasing stopped on us.
I can tell you that in the last eight weeks out of the 75 unit apartment complex, we've leased out 95% of them now. There's no question that when COVID appeared, we had a stall, even in the condominium pricing nothing went down, but just things froze for about three, four months, but now we're back to it. The market is vibrant. We have a lot of room to move up. When you look at what creates for why people want to purchase condominiums, they need living accommodations and they want proud ownership and there's a demand for it. It's interesting.
I'll let you go because I know I could sit here and talk all day long, but the interesting thing about Lecce, which I really, really tried to bring back to Toronto is that when I walk around Lecce, which is probably sitting that's a thousand years old, where people congregate are in these beautiful common areas, just outside of buildings, and I get it. People are used to living here in smaller spaces, but kind of enjoying themselves and communicating with others in these great spaces attached to these buildings.
Without talking about Lecce in detail, I think that the market, in general, has a lot of way to go. If you ask me if I was concerned about anything, I'm not accept for the fact that in the last year and a half, I've seen increases in construction costs go up about 15% to 20%. We don't have any choice, but to have to pass that on to our end purchasers, but at the end of the day, I think that there's a real economy of scale of owning real estate.
I think that the Toronto marketplace is incredible. The one part of the market that I never really understood was when people started to move out to places like Hamilton and they started to move out to places like Burlington and [unintelligible 00:30:10] and other places for housing, there's no question that that market really heightened up in valuations, but I think you're going to see a lot of people now moving gravitating back to Toronto. I think that Toronto was really going to be the place to be. In Canada, it's the number one place to want to invest and be in.
When you compare it to markets like New York where a year ago, the marketplace was $3,000 a square foot and Toronto was at something like $1,200 or $1,100 a square foot, there's so much more way to move on the upside. What I love about our marketplace is that there's real stability. We haven't increased 30%, 40%, 50% in the year because there's a long way to fall.
I hope that we continue to grow. I can respectfully suggest that banks like BMO have always been supporters of ours and our industry. They believe in it. They're very smart bankers. On that note, Hesham, if you want to ask me a few questions, I'd be happy to answer them, but hopefully, I've given you a positive spin on where I think the market is. I'm very, very confident in the longevity and the future of this business.
Hesham: No, look, I appreciate the comments. That's great to hear. We saw the decline in terms of rental and vacancy within the actual core. To your point, we're starting to see that come back again and again as some international students come back, people are back into the office slowly and now gradually and whatnot, you're starting to see a bit of an uptick there.
What I'd like to ask you is if we focus on Toronto itself, and I know you're typically traditionally building in the core but we've seen a ton of activity in [unintelligible 00:31:52] five regions, some in Mississauga and Scarborough in [unintelligible 00:31:55] I know you yourself have ventured a little bit out into the Don Mills area. We'd love to get your comments on that core versus a little bit outside within the GTA.
Barry: There's no question that the marketplaces in outskirts of Toronto have done well over the last year. I can tell you that when it comes to purchasing land in downtown Toronto, where, for example, when Mark and I went and we acquired Maple Leaf Square and basically, that was all the land between the Skydale and Air Canada Center, we paid something like $20 a foot. If we had to replace that today, we'd probably be paying something like $250 a foot per buildable foot to acquire a piece of land. I can tell you that in the outskirts, we haven't seen that type of escalation. There's no question that that marketplace has done well.
In fact, truth be known, we launched a very large project in the west end of the city at 4,000, [unintelligible 00:32:57] and it will have approximately 1,400 units. I believe we're now about 70% or 80% sold across the board. We're achieving probably in per square foot three-quarters of what we would achieve in Toronto. The market is good in the outskirts, but certain people want to live a little bit further away, and with the transportation system now being created where you can get LRTs and a whole bunch of other stuff that the province or city is putting together, there is a more affordable way of living in the outskirts.
Hesham: I think, certainly, the better infrastructure which hopefully continues to come along with the Eglinton LRT and whatnot I think it's starting to open up more and more segments of the city. You're spot on with that, for sure. Barry, from your perspective, next 12 months, short-term, 12, 18 months, what do you see, from your perspective, a developer's perspective that are the biggest challenges that you may face?
Barry: Number one, construction costs. They seem to keep creeping up on me and other developers in the business. I think that the ability to acquire land is becoming a lot more tougher now, as they say, and I also think that the city is on a great job helping us get through zoning processes, but I think that is a bog down now. I think that when someone acquires a site and they expect to be able to hit the market within a two-year period for rezonings, I think that's not realistic anymore. What that is going to do, by the way, is cause probably an increase in pricing probably more than we think because they'll be continued demand, but less supplying.
If I'm going to say, those concerns, those are concerns, but I always look at the other side of the rainbow and the truth of it is that owning real estate, whether it's high rise condo or low rise, people want to have assets like that, they need to have assets like that and they will have assets like that. That takes away from the concerns that I just mentioned a few seconds ago.
Hesham: Understood. You touched a little bit on the rental market and I know, typically, condo developers, they build the high-rise condos and look to close on a project in three, four years and move on to the next one. We've certainly seen an uptick and purpose-built rentals within the City of Toronto in the last 18 to 24 months. I think you were looking at a couple of projects yourself. Can you tell me just the shift in mindset there?
Barry: Well, in our case, Mark and I decided to build some apartment buildings. One is for just to have a little bit of variety in our portfolio, but as well, the numbers now are making more sense than they did in the past. Of course, in our business, when we go out into finance loans based on construction for condos, there's a certain equity requirement, when you're building apartment buildings as a separate type of equity that's required. Basically, more equity is required for building rental buildings. What we're seeing now is there's such demand on the rental side and you're now able to achieve rental rates that actually can support building apartment buildings.
It's a business for today. I can respectfully suggest that we have a couple of very large tracks of land that we are now going to be looking at to convert from condominium building to residential apartments. We think the model works, but again, we're only as smart as the next person and we have to be able to make sure that when we go out and work on a project that it has to make economic sense, but the rental complex for sure makes a lot of sense. I actually think that the rental rates are going to continue to do very well now, right across the board over the next two to three years.
Hesham: I was reading an article this morning showing the rebound in one-bedroom, two-bedroom rates back from where it was in 2019 to 2020 and we're almost back to level off. You see the impact of COVID and all of a sudden we're back within about an 18-month period. I tend to agree with what you say for sure.
[crosstalk]
Barry: Sorry. We also have to appreciate the fact that, Sal mentioned a very interesting point before and that he suggested that there was going to be something like immigration of 300,000 or 400,000. I actually thought it was about 250,000, but that puts a lot of pressure on the rental side. In fact, it's good pressure. It's good pressure from a real estate developer and someone that wants to delve into real estate. The rental market places is just going to be supported by the demand by people. We are not going to have enough supply in order to deal with the demand. Sorry, I didn't mean to interrupt you.
Hesham: A viable option in terms of an alternative as opposed to just being able to purchase a condo or purchase a home. I think rental as we see in Europe and other places around the world, that is an option that we need to offer to folks here in Canada.
Barry: That is the case for sure. If you go back in history in this business, close to 70% of Canadians own real estate right now, and what's thrusting the market right now is half of the population, I believe, between 25 and 35 years of age, want ownership of real estate now. They're probably closer to 70%. I think that the rental market is good and it's great for certain people, but I think that, overall, when you have a base of people wanting ownership of real estate, in fact, that would probably take a little bit of pressure off the rental market.
Hesham: I want to switch gears because I know you are active on the US side. Just one, two minutes, just your view on the US market and where you're active there and what you're seeing.
Barry: Thank you very much. We have a very large track of land with some other partners in New Jersey and an area called Journal Square. It's just right across the waterways from the world trade center area. It's about half a million square feet and we're building rental buildings there. About a year and a half ago, what was happening in New York was that people were moving outside of New York for tax purposes and as well the rental markets in New York were just screaming high. A lot of people now were moving outside into New Jersey and we've found a really really creative opportunity with some others to build the product.
The interesting thing about that market right now is that when COVID hit, to be quite frank, the lending market shut down. It reminds me a lot of what happened in 2008 when there was a liquidity crunch in Canada where you couldn't borrow $1 even if you were doing everything right. That was probably, for me, the most scariest part of my career over the last 60 years. The marketing in certain parts of the States no question dampened for example in Miami and in New York but those markets have come back substantially.
As I suggested at the beginning of my speaking here, what I was telling you is that I am concerned. What I like about Toronto is that there's a consistency. There's a consistency of 10% a year increase, there's a 8% a year of increases but what happens in New York, from a condo selling standpoint, is that you can see a drop 30% and then back up 30% or 40%. That, to me, is like a roller coaster which I don't really like to go on.
From a rental market standpoint, I think the projects that we're doing in the States have a lot of wind behind the sails and they have a lot of consistency but overall, I think the market in the States will be very buoyant. I think you can see now what's happening. I read a lot of the reports and the US market has literally turned around 360 from hitting a low and it's probably at a higher level now than it was a year and a half ago. Hopefully, Hesham I've answered your question but maybe not because I like to wander when I speak.
Hesham: You absolutely have. It's always just fascinating for us and especially with our North American platform at BMO, we see really both markets and get an idea of there are very greater swings within the US market versus what we deal with in Canada. Fundamentally, very very different markets. Just great to hear what your thought of it is.
Barry: Just to leave you on this note, I know we're going to do some other stuff now, but really from the viewer standpoint, I'm not selling stuff here, we are very much a believer in this market. We very much are appreciative of what you at Bank of Montreal have done for us because you really need to have strong financial partners. No question about it. I think that for the viewers on the other side of the screen, you have to appreciate the fact that five years, six years, seven years from now.
I think we're going to be looking at substantial increases in certain markets and I think our condominium business will be great. I think the low rise will be great and I think that when you compare Canada to other parts of the world, I think that we've seen nothing yet. We are so much stronger than sometimes presented about where people want to live. As I would tell everybody, lookout, and let's go forward.
Hesham: Great outlook. I love the positivity. I think it aligns with Sal's comments earlier as well. Maybe we can pull in Sal and Mike. We're going to do a bit of a roundtable, a bit of a Q&A. Sal, I'll start with you. I just want to ask you. With the federal election obviously around the corner, I know that you touched on it earlier within your presentation, but do you see any particular party or any particular policy that will really address the affordability and the supply of housing within Canada?
Sal: Well, Hesham, I don't see anything with respect to the demand policies that are going to improve affordability of anything. They're just going to, in some way, stoke demand. That's going to end up in higher prices but some of the supply-side measures to encourage construction of lower-end units, repairing of buildings as well I think are beneficial. The problem is they're going to take time to eventually show up and increase supply and improvement in affordability.
I think the best thing the governments could do at all levels is just remove the shackles from builders. Reduce restrictions whether it's zoning or any other constraint and also try to reduce fees and costs for builders, taxes, for example, because that's the only way if the private sector, the builders themselves can really crank up production supply will we see a notable improvement in affordability in this province outside of prices actually correcting lower.
Hesham: I appreciate that answer. Mike, anything you may want to add to that, just with regards to affordability and supply?
Mike: Yes. When I joined the local homebuilding Association on the board for build here in Toronto. I did that not make connections, we know everyone and they know us but it was really to take a stronger vocal view on supply and from my point of view, we just need to think in terms of adding the story or to transit corridors and nodes, no matter where they are and we need an approval process for various industries projects that instead of five or seven years can get something approved, in two to three years.
That seems to be the consensus time period when a talk to clients would be a more rational approach. That requires some reverse engineering, and it requires some partnership at federal, provincial, and city levels to make that happen. I think that we, by design, have an accommodative monetary policy and we need it because we're coming out of a pandemic in a recession and by design, we have an immigration policy that I think all three political parties support. Canadians support these things, and these are our values so we need to match up the supply side with it.
It may sound repetitive and whatnot, but I'm looking at 30 questions in the chat and unfortunately, we can't get to them all but most of them are on this supply topic and someone asked a question about the rural markets, okay. Not to be Toronto or downtown-centric. Are those sustainable trends? Yes, as a general rule of thumb, when you have 30%, 40%, 50% year over year, price increases anywhere, whether it's downtown, or in a one to two-hour drive of places Toronto or Vancouver. You have a higher likelihood of a correction.
On the other hand, the demand factors are strong, the supply factors are tight. I point back to the last time we saw that happen in Toronto and Vancouver, more of an urban surge in price levels. We had a 10% or 15% loan prices for about 18 months, and then it was back to normal. That is the future reality. We're going to have this periodic kind of bubble period that will not be severe because the supply is tight and demand is strong and the only way to fix that is to come up with a better supply model. Maybe I'll leave it there with your question on supply.
Hesham: Sure and thank you both for that. Go ahead, Barry.
Barry: Mike, I just want to say you're spot on but, the interesting thing is that, when the party goes, people seem to think there's a problem. There really isn't the problem here and I think that in life, sometimes things don't go straight up but when you have a great base and real estate, to me, is a great base and I think that we're going to come back seven years from now or six years from now, the market is going to be substantially higher. Perfect example is in 2009 and maybe, Sal, you can tell me if I'm incorrect but in 2009, the average selling price of a house was something like $379,000.
Today, 2021, September, the 14th, and I'm in Lecce, we're only six hours ahead, the average price of a house is over a million dollars. We have had a few headwinds. We've had COVID, we've had a few other issues go down in the last 10 years. We've had some political stuff going on in the States but when you have a good asset, and you have something that people need to have, want to have, and should have, real estate's a good game. Again, Mike, you're right. I mean, there is an issue with supply and demand.
Listen, let's be frank if Sal and the other economist decided to convince people that we should go from three prime being three and a quarter percent in Canada to 8% or 9%, we're going to have a problem. There's no question about it but I don't see that happening for the next 20 years, 30 years. I think we're all good. The only other thing I wanted to mention to you was that I think that we have a lot more interest in Canada now for the market, because of the way the currency works. We're not dollar for dollar, we're $1.30 or $1.28. When you're in Europe, you're $1.50. I think that attracts a lot of substance to our Canadian marketplace as well.
Mike: I could offer something very quick on that point too to build off of Barry's because there was a question in the chat about how do you increase supply? I talked about federal, provincial, and city-level but I do think it's not only density along the corridors, but different options for density and product types. We're seeing creative uses that can be brought to bear with modular home construction with carriage home construction that doubles maybe the amount of occupancy you can have on an existing residential lot. There's Mainway access.
I'm seeing this in downtown Toronto where you have the century-old homes that have a garage in the back. You can build a couple units above the garage and still keep the garage.
Whether this all works from a traffic point of view, I think it certainly can be helped to work from a traffic point of view. We're moving to more sustainable forms of transportation in the future that don't require everyone to own a vehicle and a lot more bike riding and what not.
There's many options here for increasing density and more sustainable and climate-friendly, frankly, green-friendly products. There's a win there on both fronts in terms of, funding, more affordable options. I'll just throw that out because that was one of the questions in the chat.
Hesham: I wanted to touch on something else as well, just given and Sal you mentioned it just with regards to supply chain disruptions. Barry, how are you dealing with some of that with a lot of supply coming online? Then on top of that, we always hear from our clients just as far as the trades are concerned and labor and some of the issues there. Just curious on your take and how are you counteracting that?
Barry: Well, I'm not really sure and Hesham, just help me out here. You're suggesting that we have too much supply coming out now and that's going to cause a problem?
Hesham: Because all the new towers coming online and all the development, there's a real shortage as far as labor and trades. We hear that often and it seems to be like a real issue in Canada if we think about it on a long term perspective. Just curious how you guys at Lanterra are thinking of that?
Barry: Well, it's interesting because I'm on the front lines. I can respectfully suggest and just my own information because I'm on the front line as I suggested. I think that we have less supply coming out now than we did two years ago and three years ago. I happen not to a hundred percent agree that there is so much of an issue with labor. There's no question that we have an issue with some labor. We have an issue with some commodity pricing, but I don't want to say this in a bad way. I think a lot of this sometimes is created by the trades themselves. I'm hoping that things settle down, but if we need to build a building, we'll build a building.
If we need to get supplies, we'll get supplies. I just think that there's a lot of great trades that we use a lot of great opportunities for people to figure out ways to build things. I'm not concerned at all about supply. I would've been two years ago to be honest. As things trail out and come out, we'll have no problems building them. My bigger concern has always been trying to get the product to the community as fast as we can because that is a problem. A lot of it is because of the red tape in the government areas. Just to summarize, I think that the supply issue will never really be an issue because we'll always have the ability to figure out a way to build stuff.
Hesham: Great. That's good to hear and hopefully, it's not a long-term issue. I just know that we need more people entering that part of the supply and the labor force if you will. Sal, just one for you. Go ahead.
Sal: Sorry. If I could just weigh in on that. Actually, when you hear all these stories of labor supply shortages, that's really not in construction so much in some other industries that were not impacted very much by the pandemic. It's really in some of the hard-hit industries, restaurants, hotels in that, and a lot of the lower-paying industries where workers are just fearful of going back returning to their jobs because of health concerns. They're moving into industries that pay more and expose them less to the pandemic virus. That's where we're seeing the labor shortages both in Canada and the US as some of these other industries hit harder by the pandemic.
Barry: Sal, I made this comment from my own experience where Mark and I at Lanterra are partners with Maple Leaf Square Sports and Cadillac Fairview in the Maple Leaf Square project downtown and part of that complex has a hotel. I can respectably tell you that, over the last six months, one of the biggest issues for us has been trying to find staff in order to--
We don't manage the project, Le Germain does. Le Germain have had problems managing to they're having troubles finding staff to come back to work. I think, Sal, your point is right on and I think that the issue of labor is not so much from construction. People just think that when you hear a comment that labor has an issue, that everyone relates it to everything. I think that you are correct that the hotel industry and restaurant industry is tough to locate people now to working.
Mike: I should probably interject very quickly and just say the focus of today has been weighted to the builders' segment and housing, mainly because we do a separate income property outlook, but our non-residential and residential income property book trends have fully recovered across the banks really over the last half of last year and so very stable. To Sal's point and to what Barry just said, there is that sliver, I think Sal's team estimated around 4% or 5% of GDP that can't recover until social distancing is gone.
Social distancing is definitely not completely gone yet so those segments are still hurting. I think the expectation is relatively stable trends. Retail has a generally positive outlook subject to that and office probably a 10% or 20% demand adjustment, I think, over a couple of years, it'll find a new re-established base, and then it'll pick up from there, very much tied to economic growth. On the non-residential and income property finance side, we have a generally stable outlook subject to those comments that Barry and Sal touched on.
Barry: That's spot-on, Michael. You're so accurate about that comment and in fact, I'm the office component as well. I think what I'm hearing from pension funds and others who loaned the office component is that there's going to be probably a more demand for having to pay more because of the spacing issues and stuff. I think that you are right, Michael, that the market on the other side of the equation, which is the commercial and resident, retail and industrial stuff, it's going to pick up pace again for sure.
Hesham: Excellent. Well, on behalf of BMO's, we're near top of the hour. I want to thank everyone for joining us this morning. We hope you enjoyed this morning session. We really appreciate you taking time out of your day to join us. Thank you very much for that. I do want to thank our guests, Sal and Barry, for giving us their views on the market, macro and micro. These guys always say it like it is, and we really appreciate it. I'm always taking notes, getting a little smarter as I listen to these folks. As a reminder, today's call will be recorded and there will be a playback. You should receive an email later this week with some playback details, and this is it for us. Thank you very much. Take care and be safe.
Mike Beg
Head, Real Estate Finance
Mike Beg as Head, Real Estate Finance, Canada is responsible for management of BMO’s Commercial Real Estate Finance group and its client relationships across …(..)
View Full Profile >BMO recently hosted a forum on the real estate outlook for Ontario. Mike Beg, SVP & Head of Real Estate Finance and Hesham Abourahma, RVP, Real Estate Finance were joined by BMO Senior Economist Sal Guatieri and Barry Fenton, Co-Founder, President and CEO of Lanterra Developments to discuss macro-economic trends as well as local dynamics within the Ontario real estate market.
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