Ep 2: Covid and our Condo Market

March 7th, 2021

Costas Kivelos:
Welcome everybody to condo investing with Costas and this week’s episode is tackling something that is on the top of everyone’s mind for the past year plus; COVID but I’m not going to get into whether our government’s done the right job, the wrong job, whether we have enough vaccines, whether this is even a pandemic or not. What I’m going to talk to you about is what I care about more than anything. I always want people to be healthy but I want to make sure that we’re still making money because quoting Gordon Gekko “Money never sleeps” and that is more evident than ever now. Now, throughout history, during times of crisis, some people have made vast fortunes. These are the people that go against the herd. These are the people that when everybody else is scared, they dig in deep, find the courage and make a move and that’s what we’re going to talk about. 

Now, there’s a lot of people that have followed me and invested in the pre-construction world in 2020. We had uncertainty across the globe, economic uncertainty, health uncertainties. We didn’t know for the first part whether there was going to be a tomorrow but now, when the dust is settled, whoever invested last year has done phenomenally well already. So, let’s get started. Let’s recap. New year’s Eve 2019, the World Health Organization, that there was a new virus coming out of Wuhan, China. Some governments were quick to act on this, other governments like our own we’re not. I was actually traveling throughout Europe and it turns out COVID was rampant there in the month of January when I was there. I actually got a little sick when I was there and who knows, maybe I had COVID, maybe I didn’t. Nobody even knew that there were tests back then and the test that they have now, there’s a large group of people that saying they’re invalid, anyways.

Regardless, this happened and this was new on the world stage. The world did not know how to deal with it because it was the unknown and man, traditionally, since the start of time, is fearful of the unknown. Now, what happens when the unknown blankets the planet? Hysteria fear and that’s what was happening near the end of the first quarter of 2020. So, what happened specifically in Toronto and in Canada? Well, with respect to real estate and pre-construction, we were set to have a record year in pre-construction sales for 2020, we were forecasting greater sales, more volume than the record year of 2017. We’re already the number one market on the planet for pre-construction but we are ready to catapult, hurdle into new unforeseen territory and watch our prices skyrocket. An example of this was project by one of my favorite developers who will be on our show later this year. They had a project right in the downtown core, across from Metro hall. Major tower, they signed 400 units in eight days. Wrap your heads around that. 

We were signing deals for our clients from noon until 1:00 AM three days in a row. It was chaos, it was mass, massive people sitting there trying to get into sign, mob mentality but everybody was there for one reason because condo investing in Toronto makes you money. Now, shortly thereafter, when COVID had hit the Canadian shores, our government decided to lockdown and this meant a complete change, a complete overhaul to how we do things. The pre-construction market essentially froze. It was like someone pressed the pause button. Sales centers were closed, no sales were happening, projects that were about to launch were put on ice. The only people that were still talking condos were a few of us platinum agents that kept our marketing budgets running but for everybody else, nobody knew when stores were going to open up, nobody knew when the never-ending [0:04:23] was going to finish. Nobody knew what tomorrow held in store for us and the last thing on people’s minds was real estate and this is what happened to essentially all Toronto real estate near the end of the month of March, 2020. 

Now, what we saw after this is we saw a couple months later, starting end of April early May, we saw confidence build up and this was seen in the resale aspect of the industry where limited inventory led to an increase in prices. Now, originally, a lot of realtors and I’m not going to say lesser realtors but a lot of people that didn’t pay attention to true market fundamentals and were actually doing their forecast based on hysteria and remember, you never want to invest when you’re emotional. Don’t let someone invest in you your money when they’re emotional either. What we saw was an increase in prices. Now, why did this happen? This happened because unlike 2017 where we saw a drop in resale which was caused by the media scaring people and bad realtors listing their client’s houses on the market when numerous other houses were for sale, essentially bad realtors and bad media flooded the market and prices dropped but what we saw in 2020 was the reverse. 

People were holding onto their properties and during the times of economic uncertainty, it’s a time to hold real estate, not sell real estate and the Canadian market is very educated, very mature and very wise and I’m very proud of consumers and fellow realtors that actually handled this properly and helped us weather the storm. So, when we had limited inventory, we saw buying still present, a demand for it and we saw prices start to increase. Now, the pre-construction world is different but with prices increasing on the resale side, what we noticed was when the developers were first to launch their project and this started happening in June because as lockdowns were lifted and conditions were eased, we started to see pre-construction pick up again. The summer of 2020 saw a launch of a few projects. Not what we expected in the spring but still a fair bit and every single one of these projects did phenomenally well. We had projects that were 10 stories, we had projects that were 50 stories but all of them sold well and prices were high and they stayed true but one thing we did see was instead of prices dropping because that’ll never happen with demand, developers went to their financier’s and said, “Let’s see what we can do for clients.” and due to the economic uncertainty of COVID, we saw extended deposit structures.

And this really assisted people because Canadians, for the most part, I’d like to think they’re knowledgeable and they understood that COVID is temporary and COVID is temporary. Temporary in a sense that it’s a pandemic because what it really is, is endemic and it will be with us for a while because just like the government can’t stop climate change with attacks, they won’t be able to stop a virus with a few masks. What we need to do is learn to live with it and our real estate market evolved better than anyone. So, when we saw the increase first in the resale market and then we saw the restart-up of the pre-construction world and we saw both markets were very, very healthy and that led us to believe that the fundamentals of our economy when it comes to real estate are strong and true. We have a supply and based… supply and demand based real estate economy in Toronto and this is more important than anything when you’re looking to invest because it is not speculation, there is no bubble because if it was, then the wheels would have fully fallen off and we didn’t even get a flat tire. That’s how strong our real estate market is. 

So, what I want everybody to do is take a minute and think if our market can still grow, can destroy the disastrous forecasts of major thing tax like CMHC, major banks like RBC, everyone bet against the market, except me and some other realtors and those people that actually have their finger on the pulse. Listen to the people in the trenches, the people that are doing the dirty work, the people that live and breathe real estate and we all said that we were going to have a great year. So, unlike 2017, when the market crashed because we flooded the market, 2020 saw extreme and great success because instead of flooding the market with inventory, we held back and my hat goes off to the people of Toronto that secured and kept their houses that’s there number one investment of their life and didn’t destroy them with some bad decision-making. So, now that we’ve established that our market, whether the COVID storm fairly well, let’s get into some actual numbers. 

What I like to do all the time is, I like to bring up points of discussion of what you will hear talking to other peoples about real estate and what they will tell you is that the condo market crashed, houses are doing really well but the condo market crashed. Though, my response to that is, you’re an idiot because the condo market didn’t crash. The rental market dropped but why did it drop? And before we get into that, let’s get back, let’s go to the original point about the crash of the condo market. For condo market to crash, it means the price per square foot has fallen into the toilet essentially but that’s not the case because we are up year, over year in sale prices. So, the price of a condo selling in December 2020 was up from the price of a condo selling in December 2019. So, it didn’t crash. What we did see was a drop in rental rates in the city of Toronto but in the outskirts, in the suburbs, in the periphery, we saw some regions where the rental rates actually increased and why is that? 

Well, in a past episode, I told you about how many people come to Toronto every year and I also told you that’s new immigrants. I also told you about how many foreign students come to Toronto. Now, that number combined is just shy of 200,000. I think we’re at about 180. Now, if you have one fifth of the immigration because I think that’s what it was, from 100,000… I’m sorry, 140 in the GTA to about 25, just under 30,000 and you lose 40,000 students, you’re short 110, 120,000 people per year. Now, if rental rates drop by 10, 15% in some areas, 20, I think rental rates fared quite well because remember this is temporary and if you had bought a condo with First Access Condos and myself, the condo would have increased in value so much that you would probably still be able to service your carrying costs and your monthly debt with the lower rental rate. If you had bought a condo with another agent who didn’t get you first access, then you probably wouldn’t be able to do that and that’s why it’s most important in paramount that you always use a platinum agent. 

Now, you don’t always have to use me and you can always feel free to call me for advice but you should always get you someone that gets you first access. Now, we’re going to be going to commercial shortly but I’m just going to recap. Our market fared really well, nothing tanked, nothing dropped and we had a drop in rental rates only but not prices and why was this? Because we never flooded the market. Now, absorb that. Our market is fundamentally strong. It doesn’t crash during a pandemic, it doesn’t cross with record unemployment, it doesn’t crash with record decrease drop in immigration. Essentially, our market is bulletproof and that’s what I’ve been telling people and that’s what I’ve been arguing with people and whoever listened to me has done extremely well. We have the number one real estate market on the planet, the healthiest, the strongest, the fundamentally most strong and that’s why go to firstaccesscondos.com, check to see what new projects are coming up and reach out to me [email protected] but always remember, click that you saw us on TV because we have special incentives just for our viewers. Now, we’re going to go to commercial and come back shortly. Thank you. This was Costas Kivelos. See you soon.

Costas Kivelos:
Welcome back everyone. I hope you had a nice break. I hope you got a chance to absorb all my insight and my comments on my thoughts on our real estate market and COVID and why we weathered the storm fantastic, phenomenally well. Now, what I’m going to do is, I’m going to go back and I’m going to recap and talk a little bit about our rental drops and actually tell you what happened to our rental markets and why it dropped and I’m going to go into detail. So, if you think of COVID in respect to our rental pool in Toronto as a trident, remember that three prong spear? Okay, so, there’s three points of attack and we got hit by three different hits like a three-punch combo. Usually those are good enough to knock anybody, even the most seasoned fighter road but not our real estate market. We weathered it, fight well. We did stumble a little, hence, the drop of 15 to 20% in our rental rates but in the reality of the matter, we fared extremely well. So, let’s see what first happened.

When our cities went into lockdown and went international travel became more difficult because it was never banned, okay? What happened was we had a drop in immigration numbers. So, we’re used to seeing about 140,000 people a year coming to the GTA, a hundred plus thousand to Toronto proper. Now, what happened was I think the final number was we received only about 20% of that. So, we had between 20 and 25,000 new immigrants as opposed to 100, 140. That’s a substantial drop. What else we saw and a second point was we also saw a drop, freeze, complete closing of tourism. So, what does… how does that really affect our rental market? Well, over 10 years ago, Airbnbs and short-term rentals started and everybody has heard of them and the vast majority of us have stayed at one or another in a course of our travel history. Now, Toronto has a lot of tourism. Over 1,000,000 people a year come to the city, little known fact. They’re great for the economy. They also came to the rise up of Airbnbs. 

Now, when the tourism got suspended and we didn’t have any tourists, these Airbnb units, the vast majority of their owners, took these units and inserted them into the rental pool. They wanted to rent out their units. So, we flooded our rental market with Airbnb units, approximately 5,000 plus at a time when our immigration numbers were cut to a fifth. So, imagine that. We have one fifth immigration flooding the market with 5,000 additional units, hence a drop in our rental rates. The shortage that we had decreased a third below and the third prong on the COVID trident was foreign students. It is little known but UFT alone has over 24,000 foreign students a year coming to the city of Toronto. When you add Ryerson and other colleges downtown, we’re between 40 and 50,000 university college aged students coming into our city every year. These people rent, over 95% of them rent. College university campuses are quite small. So, the vast majority of this 40 to 50,000 pool of individuals go into the rental market. Now, what does that do? 

We have 40,000 eliminated. We have 110, 120,000 eliminated. We’ve basically lost close to 150,000 renters. We’ve added 5,000 new units and lost that many renters from the pool. So, the fact that our market dropped by 10, 15, even 20% in some areas is a testament to how strong our fundamentals are, it’s a testament to how much of a shortage we have, it’s a testament to CMHC and RBC saying that we need 32,000 for CMHC, 24,000 from RBC new units every year back in 2019. This validates those statements made by those two institutions and validates what we at First Access Condos have been telling our clients and why we’ve been investing our money. Now, for Toronto to sell the most pre-construction units across the globe year over year, there’s a reason behind it. Remember I’m a real estate investment consultant because over 75 to 80% of my business is investing your money. 

Now, the reason we’re so successful in volume of sales is because there’s a demand for the product and there’s a demand because, one, capital appreciation, the value goes up. Two, there’s a large, healthy rental pool for your unit. So, your unit rents up and even though prices dropped for rental units, sales prices stayed true. These are important fundamentals behind this. So, now that we’ve talked about what happened to the rental pool, let’s talk about what’s going to happen this year 2021 in our forecast. Back in my spring webinar and it can be found on First Access Condos YouTube, in 2020, April 3rd, I spoke about my forecast in the effects of COVID and so far, I have been fairly accurate. A lot of the things I said were echoed by economists like Benjamin Tal. So, what I predict is once foreign students come back in the start of this third quarter, late second quarter of this year, we’re going to see 40,000 students coming back. 

When vaccines are starting to get rolled out and the government figures out where they’re getting them from, we’re going to see more restrictions lifted and we’re going to get back to our lives sooner than later. Tourism will be the third factor to this and then Airbnbs will go back to being Airbnbs and most importantly, the liberal government announced late last year that they’re increasing their immigration targets from 300,000 a year to 400,000 a year to make up for the loss of immigration for 2020. What that means is of those 4000, 60% of them or 240,000 a year will be coming in through the investment economic stream. These people will be bringing money and the vast majority will want to come to the center of the Canadian universe which is Toronto. When we factor all those things together, we are ready to see a huge increase in the demand for our Toronto real estate and especially for demand in the core. If you ask anyone across the globe where they want to live, I’m sorry but they’re not going to say I’m coming to Canada to live to Mississauga or I’m coming to Canada to live to Brampton or my dream is to fly to Canada to live in Whitby. They’re coming to live in Toronto and these people will move to the core of the city and our condos are mostly in the core of the city. 

Now, I’m not saying that you shouldn’t buy condos in the periphery or in the suburbs because where there’s money to be made, you’ll find First Access Condos but what I’m seeing is for the downtown core that has taken the major brunt of the hit from COVID when it comes to rental rates, this is temporary. By the third quarter of this year in September, when these factors that I spoke of come into play and rejuvenate, reenergize and start rebuilding the temporary loss in the market, what you will see is you will see us revert back to 10, 12, even 15% increases in rental rates year over year. Mark my words. Take a stat from September of this year and then take a stat of September 2022 of rental rates for one bedrooms and watch the increase. You heard it here first, this is my forecast. The rental rate of late August, early September 2021 in comparison to the rental rate of early September 2022, you will see an increase in the cost of renting a one bedroom in the city of Toronto of 10 to 15% minimum.

I wouldn’t be surprised in summers if it’s not larger. So, what this means for you, the investor, watching me is that you should take heed to this next thing, I’m going to tell you. This is a golden opportunity to invest your money in our real estate market and especially in pre-construction condos. Remember, buying a condo today, your condo won’t be ready for four to five years. We’re going to bounce out of COVID in the next 18 to 24 months fully. This virus is not going anywhere. We will learn as a world, how to deal with it better and it will become endemic instead of pandemic and it’s going to be something that’s just there and we live with and once we figure this out, whether it’s through vaccination, education or whatever the people that are smarter than us decide, okay? We’re going to learn to live with it.

And what this means is, by the time your investment is built, we’ll have close to 500,000 more people moved into the city, a city whose infrastructure couldn’t handle the population 10 years ago. This is a golden opportunity to buy don’t delay, go to www.firstaccesscondos.com and find out what projects are coming first before anybody else and call me. It’ll be the best investment move of your life. Now, we spent a lot of time this episode on me giving you my opinion on the state of our condo nation in the GTA and the effects of COVID on our real estate market but why we’re really here and why you’re watching my show is to know how much money you can make because we are here to make money. So, what I want to do now is take the time and go over our purchase where myself and a lot of my clients followed me in the Yonge and Eglington area of Toronto. 

We made a purchase back in November of 2015 and usually these condos take from anywhere to four to five years to build. So, we’re going to use an example of a 1+den which around 600 square feet at a project known as 150 Redpath. Now, this 600 square foot condo had a purchase price of 372,000. That works out at a price per square foot, you’re going to hear the term PSF a lot, the abbreviation, of $620. That means 20% down, initial down payment, which is what you need for condos, worked out to $74,400. Fast forward to 2020 and 2021. That price per square foot in the area has skyrocketed to over 10… over $1,050 a square foot and that’s being conservative. Some units are selling for $1100. Now, if we take our 600 square foot, 1+den and recalculate its value, when we take the new price per square foot and multiply it by the 600 square feet, we’re at $630,000 conservative. So, if you subtract the old purchase price from the new selling, price market value price, we’re left with $258,000 in gross profit. Now, when it comes to every investment we need to talk percentage and the percentage return was 347% gross return on an initial investment of $74,400. Now, this is a gross return. What you would have net, because remember at the end of every condo project, when you’re registering, there are closing costs. In addition to the land transfer tax and your legal fees, you’re going to end up netting anywhere from about 260 to 265%. 

That means that every year you had an annualized return appreciation on your investment of 50 to 60%. Now, take those numbers and compare them against any other investment and I believe we not only fairly well but we beat most of them. Thank you everybody for watching. Don’t forget to tune in every Sunday 10:00 AM. We’re here waiting for you. In the meantime, if you want to get the most up-to-date information on upcoming condo launches and get in first, firstaccesscondos.com. Don’t forget to click that you saw us on TV. We have excellent incentives just for you. Thank you.

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