“I was told that it costs the developer an average of $1,000 a month to keep each completed unsold unit in the development. Ouch!”

“A few anecdotes from today’s trip to Surrey:
-prices on brand new townhouses are (and I quote the sales personnel) “not set in stone. Not anymore” Also “there’s room to move there” as well as “the days of pre-sales are gone”. Offers are welcome – low ball offers are expected.
-I was told that it costs the developer an average of $1,000 a month to keep each completed unsold unit in the development. Ouch! So private sellers can supposedly just hold off and take their places off the market “for now” – developers… not so much.
-majority of units that I saw today are now priced ~5% below the original prices that were announced last fall. Plus, like I said “there’s room to move”

vanpire at VCI January 19th, 2013 at 7:22 pm

23 responses to ““I was told that it costs the developer an average of $1,000 a month to keep each completed unsold unit in the development. Ouch!”

  1. One thousand a month may be on the low side. Consider the debt carrying costs if the project was not done with a huge line of credit. What are the values of the units to estimate that after subtracting the theoretical markup? Then throw in a cleaning contract to keep the places spic and span for presentation, some staging, electric, gas, insurance, grounds fees, taxes, legal and whatever else I can’t think of right now…….

    One thousand sounds conservative to me.

    Now add that figure to the discount to get an idea of what it is really costing in terms of lost sales as the months tick by. I am betting that they built a healthy margin into the projected sales price too which is now vapourizing before their eyes.

    Someone is going to be losing sleep if these don’t start moving fast.

    • The one thousand carrying cost (if that is accurate), will fade into insignificance when compared to loss of market value.

      • You can say that again. I was only trying to add up the current losses of the builder. The suggestion here is that he may not evenbreak even on some of those units if they sit too long.

      • …”will fade into insignificance when compared to loss of market value”…

        Yep. By a strange coincidence, that’s exactly what them MGM CitySlickers said, too ED…

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    • @Farmer According to BoC’s data, builder and developer loans (non-mortgages or LOCs) was only $8.9 billion. Most developers have mortgages and must earn enough cash flow to make monthly payments. I’m not sure about Van’s pre-market, but in Toronto, developers only completed 50% of what was scheduled for 2012, so there’s a backlog now with prices declining in new condos, but more so in the resale market.

      Developers and pre-buyers can’t possibly compete with resales being discounted. They won’t drop prices because they can’t. How many speculators would opt-in to lose 5-10-15% of money they don’t even have? Keep in mind that many presales were deposit structures, so that 20% DP was spread out over time, years even.

      I said it before and I’ll say it again: the US started with a subprime crisis, Canada will begin with a preprime crisis.

      • Thanks Watchdog. In essence you are saying that builders are paying the same mortgage rates as everyone else. They are not building using discounted rates or LOC’s at effectively zero.

        In other words, if spring is a bust (it will be a bust) then these guys will be getting very anxious to unload units as quickly as possible. Every month they sit unsold comes off the bottom line.

        Hold long enough and you incur losses.

        I don’t think many who are using their heads will wait until they actually see negative returns before discounting though. The concern about preservation of capital versus return on capital will likely induce some to do some very quick price slashing and they will unload them into a market that is already falling fast.

        And that is how a housing slowdown snowballs.

      • Real Estate Tsunami

        Farmer,
        From my experience, developers pay higher mortgage rates.
        If in doubt, you can check with the Canadian Western Bank,
        which specializes in lending to developers.

      • That would make sense as spec building is risky. So much has changed over the years. I have no idea what they are actually doing anymore since all the old rules seem to have been broken in pursuit of growth.

    • That’s right. Perhaps the cheapest of units is $1000 a month at today’s rates, that is a theoretical minimum.

  2. Does anyone know what is happing with the new condo building on 12th beside the biltmore in Vancouver?
    I walk by it now and then looks done yellow fence around it with a sign that says two bedroom sale.

  3. South Surrey is hooped.

    • Yep, I’ve got a developer friend who says nothing is moving in the residential space out there and even Surrey in general is dead.

      • I saw 2 sold stickers in the last month, 1 on a condo, and 1 on a tear-down doublelot.

        Frankly, I was shocked as it seems like its been a year since I saw a sold sticker anywhere out here (White Rock/South Surrey). I know there’s been some sales obviously, but I run around the neighbourhood nearly every day taking different routes and it is extremely rare to see houses sell, most houses just stagnate on the market and then get delisted.

        Not saying the markets picked up at all, seems as dead as ever, but just pointing out my surprise at actually seeing a sold sticker here, that’s how bad its got.

      • Real Estate Tsunami

        Same here. Two of our hockey parents are small builders.
        They say, it’s like the tap has been turned off.

      • the condo market doesnt look good in WR either, 1 tower nearing completion, and 2 smaller condo units (18 and 7 units each) nearing completion on Marine Dr….. Then another small tower and what looks like a 20 unit or so condo on the beach under construction, should both be completed by year end i think….. Tons of supply already, plus tons of new supply coming onto the market.

    • I get email alerts for all south surrey sales (in 4 areas) at $1.2 million or above and January 21st was the first and only sale of the month… Inventory in the sub areas I am tracking is 157. The MOI is over 100 months!

  4. Real Estate Tsunami

    It’s about time that someone brings up this topic.
    While it’s true that some of the large developers have deep pockets, there surely (don’t call me Shirley) must be a limit on the losses that they are willing to take. Also many of these empty projects are being financed by banks and credit unions. They are not charities and will get antsy as well.
    The other issue is shadow inventory. I noticed there are many completed but unsold Townhomes here in Ditchmond. Only a few of them are listed on MLS.
    Currently, there are 320 Townhomes listed on MLS. My guesstimate is that there are about 100 units sold by the developers’ own agents.
    Which means that there are actually 420 units for sale, a 30% difference.
    Currently, there are about 14,000 units listed on MLS. Extrapolating the 30% shadow inventory gives us a total inventory of 14,000 + (14,000 * .3) = 18,200. If my assumptions are right, of course.

    • Yes, banks could start calling in loans on the guys who are too leveraged and not being proactive about clearing off inventory. But that means they will end up forcing sales if the project is the only collateral. We will find out soon enough just how easy lending was for developers and how much risk is on the banks books in Vancouver.

  5. Just imagine what a very slight increase in interest rates would do. $1000 per month seems awfully low anyway.

  6. The $1000/month is incredibly low. Just consider financing / opportunity costs of the money they put into the place. A $1 million new home may have $750K put into it. Take 5% of that and you are looking at over $3K/month.

    The $1K/month would make sense for an apartment or small townhouse where the land costs are negligible.

  7. I posted before that our townhouse strata corp is running low on money because about half of our 35 units are not owner occupied (project completed October 2010). A few are rented out but most are empty. This is a new complex on the westside. Not one unit has sold since January 2012, that’s ONE year ago. The unit owners just haven’t been paying their strata fees. Note that the project was “sold out” about 6 months before completion. I don’t know if it’s developer holding companies who purchased these units or offshore investors, but people are already defaulting on their strata fees. A lien has been placed on these units and they can’t move it until they pay up. So I’m sure they’re losing a lot of money but they sure aren’t in a hurry to lower their price and sell.

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