< Previous“Toronto is one of the busiest construction markets in the world and arguably, for a time, it was the busiest construction market in the world.”JULY 201810The world’s leading bankers and analysts are closely watching the Canadian real estate market, chiefly hot markets in Toronto and Vancouver, trying to make sense of the perceived volatility that many speculate will result in a bubble and a subsequent crash.Written by Jessica FerlainoRecently, prices in Canada’s hottest housing markets have skyrocketed to record highs and though the government is taking action to cool these markets, there is still concern that these conditions will be unsustain-able over the long term. While bubble conditions are certain, a crash is not guaranteed. What is unique about the Canadian real estate market, espe-cially in contrast to the United States is that, even if a bubble did exist in markets like Vancouver and Toronto, the reality is, while the market is certainly vulnerable, the impacts are more likely to be felt locally and perhaps regionally, as national averages would prevent the entire market from collapsing.The Canadian real estate market is no stranger to booms, bubbles and recessions. In the 1980s and 1990s, lenders were relatively aggressive, which had a role in the failings of the market. As a result, lending behaviours were overhauled and legislation was enacted to prevent similar downturns in the future. When the global financial crisis materialized in 2007 and 2008, the Canadian economy and markets like the Toronto real estate markets were just starting to regain strength from the struggles of the previous decades. These markets remained fairly insulated, partially due to an increase in foreign invest-ment, and withstood the crash. Prices continued to rise and many speculated that these conditions would result in a bubble. The threat of a bursting bubble has long been a concern, especially in markets like Toronto and Vancouver where prices continued to climb for years. In Vancouver, according to the Real Estate Board of Greater Vancouver, single detached homes have increased 33 percent in value in the last 15 years, going from $400 000 to $1.75 million since 2002. For many, these statistics are reminiscent of housing markets like Phoenix, Las Vegas and San Diego prior to the global financial crisis. 11CONSTRUCTION IN FOCUS Between 2016 and 2017, construction permits in the province of Ontario increased almost 25 percent. During this time, a bubble was starting to form. Prices continued to rise and houses were selling higher than the asking price, leaving many people priced out of the market. In October 2017, Swiss banking giant UBS ranked the Vancouver and Toronto markets in its international top five bad boy list, claiming that the risk of a bubble in these markets was more severe than in Hong Kong, Amsterdam and London. While there is no doubt that these markets are highly vulnerable, the severity of the fallout has yet to be determined. According to John Mollenhauer, president and CEO of the Toronto Construction Association, the Toronto real estate market is likely to fall into a recession by early to mid-2020. “It used to be easier for economists to predict the cycles and there are a few reasons it’s been very difficult in recent years,” he said. These reasons include low interest rates, which have been intentionally maintained artificially by the government, initially used as stimulus but also in part to prevent the system from collapsing under significant Canadian debt. Currently, Canada’s private sector debt to GDP is now 218 percent, which means a sudden change in interest rates could leave many Canadian homeowners unable to make their mortgage payments and could risk a catastrophe much like the one experienced by the United States in 2008. In the next year, almost half of Canadian mortgages are to reset, which could spell disaster for a number of individuals and families who are already stretched to the limit from a financial perspective. This will inevitably impact the strength of the Canadian economy and its various sectors including the housing market. Despite the various factors influencing the Canadian housing market, Toronto remains an active market for new construc-tion in the industrial, commercial, investment and residential sectors, specifically high-rises as they address the scarcity of land challenges that urban centres pose. As Mollenhauer noted, “Toronto is one of the busiest con-struction markets in the world and arguably, for a time, it was the busiest construction market in the world,” with building permits continuing to be on the rise, especially for condomini-ums. Record numbers of condominiums are currently under construction and this is the segment expected to be hit with the most substantial price increases. Vacancy in Canada’s hottest markets is still very low, though according to the 2016 census nearly 100 000 or 4.5 percent of all homes in the city remain unoccupied. After years of booming prices, prices are starting to correct themselves and as prices decrease, so too does the rate at which new listings are coming to the market. One of the reasons for the price drop is the reduced demand for homes and this reduced demand is attributable to changes to mortgage restrictions or what is being called policy-based volatility. Tighter mortgage restrictions went into effect on January 1, 2018 and target the majority of potential homebuy-ers. The only people who are not impacted by the changes are those with enough money to make a cash purchase. To buy a home, under the new stress test, homeowners are now required to qualify for mortgages based on either the Bank of Canada’s posted rate for a five-year fixed rate product or two percentage points higher than their contracted mortgage rate, whichever is higher. The rules have had a destabilizing impact on weaker housing markets that, unlike Toronto and Vancouver markets, were not in need of market cooling measures. Markets like Calgary, Regina, and Saint John were particularly hard hit, suffering collateral damage from these legislative changes. These markets are likely to insulate the national market in the event that a bubble in the country’s hottest markets were to burst and if weakened, they stand to bear the brunt of a national housing market crash. This is likely to be exacerbated by the fact that interest rates are likely to increase, which will further impact housing affordability, meaning that buyers and sellers alike will have to re-evaluate their homeownership goals. In Mississauga, Canada’s sixth largest real estate market, declines are becoming the norm. In a market that is inextrica-bly linked to the Toronto market, home sales have declined 30 percent while average prices have dropped 9.5 percent. The greatest struggle seems to be in higher-end listings, and the condominium market is the only market segment without a pronounced decline. Many people are starting to see the market soften and while buyers are on the hunt for improving prices, sellers are having a hard time accepting the lower value of their homes. Having seen what their house was worth only a year ago, some people are less inclined to list as they are attached to an anchor price that is no longer attainable. These trends are indicative that both buyers and sellers will have to readjust their expecta-tions. According to the Canadian Real Estate Association (CREA), national home sales are down almost 14 percent year over year and had fallen to their lowest levels in more than five years as of April 2018. JULY 201812The number of newly listed homes fell to a nine-year low, with listings down 4.8 percent and sales down 2.9 percent from March to April. In the Greater Toronto Area, home sales are down 33 percent. This year got off to a very slow start with CREA reporting that sales in all markets were down 60 percent, though 60 percent of these markets were considered balanced. The confusion related to value stems from the fact that supply is constrained, interest rates are still relatively low, and there is still a compelling demand story, though the reality has shifted. Valuation depends on many factors, including services and amenities in the neighbourhood, transit access and market con-ditions of the time. In hot markets, unsatisfied demand persists. The shift in the market not only has to do with natural economic cycles but also legislation that has been enacted to help the market incrementally correct itself from a bubble situation. Over the past year, as prices decreased, bubble conditions began to deflate, lessening the risk of the bubble bursting and mitigating the impacts of such an event. Changes have been enacted incrementally to prevent the market from constricting. Recently, The Office of the Superintendent of Financial Institutions (OFSI) attempted to slow down the hot housing market by imposing a fifteen percent tax on foreign buyers who were believed to be driving down vacancy and driving up prices in markets like Toronto. In addition to the foreign buyer tax, in order to quell the boom that was taking place over the last couple of years, the Ontario Government instituted a number of changes, expanding rent controls, developing a plan to ensure property tax parity for new apartment buildings, and laying the ground work for municipalities to implement a vacant home tax. While the actions of the various levels of government are having a positive impact on the market temporarily, there is still optimism that prices will return to strength once the new market conditions are adapted to, which means the market is not out of the woods yet regarding the return of bubble conditions. Looking at the figures, there is no doubt that the Canadian real estate market is vulnerable and that bubble conditions exist; however, an exact timeline and the severity of the fallout has yet to be determined, especially as governments intervene, market conditions change, and as prices return to strength in Canada’s hottest markets. It’s certainly a market to watch.“The confusion related to value stems from the fact that supply is constrained, interest rates are still relatively low, and there is still a compelling demand story, though the reality has shifted.”13CONSTRUCTION IN FOCUS While the concept of creating thriving communities is making a welcome comeback in the real estate development industry, it is rare to hear of a residential and commercial property developer that caps long-term residents’ rent after five years. In honor of its founder, the late Robert Lay Grubb, Jr., Grubb Properties’ multi-family units are built with quality living in mind.JULY 201814Written by Pauline MüllerMr. Grubb’s dream was to give people homes they could afford, and in those days, it was often African-American families who were denied home loans in certain neighborhoods. To help these families own homes, he started a finance division to make this dream a reality. Today, Grubb Properties is represented in Charlotte, Cary, and Lexington in North Carolina and Atlanta in Georgia and is wholly owned by its directorate and its team. Corporate Communications Manager Emily Ethridge told us a bit more about this exemplary firm’s work. “Mr. Grubb was all Grubb Properties is a full-service developer and property operating company with its own finance and investment teams, as well as a dedicated con-struction division. It also provides complete management for commercial and multi-family properties with property managers, regional managers, and a host of support services such as maintenance. The firm started in 1963 and spent its early years building residential units in Davidson County, North Carolina. Over the course of the next fifty-five years, its portfolio steadily expanded to where it is today – an accomplished, southeastern real estate giant with as much heart as the man who first started it. 15CONSTRUCTION IN FOCUS for helping people when he started out, and now our latest project is continuing that legacy of helping people,” she says. “Our motto is ‘People who care, places that matter.’ We’re trying to build the places that matter to people. It’s been in our DNA since day one,” says Emily.For Grubb Properties, construction is about building multi-fam-ily products that allow people to form proud communities, and this is part of why its long-term rentals deal was introduced. As a result, the company has tenants who have lived in its properties for over twenty years, and one even boasts ninety-eight families who have lived there for over five years. “Grubb Properties thinks about the bigger picture – keeping in mind that at the end of the day, we’re building people’s homes,” says Emily.“Mr. Grubb was all for helping lower income people when he started out, and now our latest project is continuing that legacy of helping people.”Being upfront is part of the firm’s signature style. It also prides itself on the fact that it is very clear from the beginning regarding what will and will not work and insists on honesty from everyone involved, including its partners and financiers. This ensures a win for everyone involved, from its tenants to its investors.The company’s growth is very healthy, and its latest flagship project is contributing in a very positive way. The Link Apartments brand – a high-quality, yet affordable value-orient-ed housing solution for working people – is changing the face of urban living and also offering suitable apartments for young people who are starting out.JULY 201816Most folks in its ideal market earn between 80 and 120 percent of the area’s median income, including many who are working in health care or education. Through its focus on location, basis, and design, the company is able to build new apartments in desirable urban neighborhoods that are still affordable to that group, which is broadly underserved by the current housing market. Each building’s community amenities are also great and include a fitness center, dog park, pool, beautiful club-house, and typically a lovely outdoor area to hang out. The interiors have modern fixtures and fittings, with kitchens sporting granite counter tops and ergonomic design. Despite all the lovely trimmings, these units are kept exceptionally afford-able thanks to strict building standards and realistic expendi-ture goals. So far, the project is so successful that the company has become particularly popular for these sought-after apartments, and its reputation for being a trustworthy and efficient property manager is fast spreading throughout the southeast and beyond.Grubb Properties has evolved in many ways over the years. From building homes to acquiring and operating larger multifamily communities in the seventies, it became North Carolina’s biggest investment condominium builder in the 1980s, pioneering the conversion of apartments to condos. In the nineties, the company started buying, improving, and releasing around 700,000 square feet of existing office space and 2,000 apartment homes. At the time, the focus was much more on adding value rather than on development, which only really started taking off in the early 2000s when Grubb Properties started taking on large developments and new construction in a big way. “Despite all the lovely trimmings, these units are kept exceptionally affordable thanks to strict building standards and realistic expenditure goals.”17CONSTRUCTION IN FOCUS Its astute business acumen has led the company to become a vertically integrated real estate operating company with a vast portfolio of achievements, including over four million square feet of commercial space and over 15,000 residential units in acquisition and development projects throughout America’s southeast.Grubb Properties’ next project is one that follows nearly ten years of working closely with the town of Chapel Hill, North Carolina. The Glen Lennox Apartments and Shopping Center has been under the company’s ownership for over thirty years, with 440 apartment homes less than one mile from the University of North Carolina at Chapel Hill. The company is about to start redevelopment after listening closely to the needs of residents and neighbors and figuring out exactly what type of development would suit the area best. Its caring approach and building close relationships with communities have led to its success over the years.The company is no stranger to receiving accolades for all this good work. Its impressive list of awards for 2017 alone includes SatisFacts’ Superior Company Score Award and Downtown Raleigh Alliance’s Imprint Award for its Link Apartments Glenwood South. Link Apartments Glenwood South also scored thirty-second place out of a total of 60,000 commu-nities in an online reputation poll by Multifamily Executive Magazine. This building, Link Apartments West End, and Sterling TownCenter Apartments, were also awarded National Green Building Standard certifications last year, while its property at 525 North Tryon in Charlotte was awarded the U.S. Green Building Council’s LEED Silver certification.Leading the company’s vision and reputation for integrity is Chief Executive Officer Clay Grubb. “He cares very deeply about this and is very thoughtful. He always thinks long-term. He con-siders the bigger picture nationally and how that really affects peoples’ lives,” says Emily. “We have a reputation for being a good company because we have honest people who work hard.” And this connection to its market’s everyday experience is what really makes Grubb Properties different.This caring for people is also reflected in the length of time that its workforce of around two hundred employees has been with the company. There is a wonderful sense of teamwork, some-thing that recently won it Charlotte Business Journal’s award for one of the best companies for which to work. Its support of its team’s growth is visible throughout the firm, with Vice President Sherry Long perhaps being one of its finest examples. Sherry started out as a property manager fifteen years ago, and today, she is at the forefront of the company’s investor relations. The collaborative landscape allows space for advancement, and as a result, people flourish. “We really encourage people to learn new skills and grow and move up through the company. We think that’s a big part of our success,” says Emily. Employees are also encouraged to and supported in giving back to their communities. Grubb Properties provides its people with forty-eight hours of paid leave each year to volunteer at causes of their choice in just one of the many ways in which it helps make the world a kinder place. This year, the company is also partnering with Habitat Clay GrubbChief Executive OfficerJULY 201818for Humanity in Winston Salem, North Carolina where it will donate a house, and the entire company will take time out to help build it.The company’s caring also goes beyond its employees, com-munity, and market to the much greater sphere of the envi-ronment. Green Building Standard certifications are a top priority where applicable, and, as a former board member, its CEO has played an active role in the policy-making of the Environmental Defense Fund (EDF). The company also takes part in the EDF’s Climate Corps fellowship program, assist-ing graduate students in creating and implementing positive environmental change initiatives.It also supports the housing market in various ways. One of the greatest market challenges that Grubb Properties is set to solve for its clients this year and in the future is the rising cost of construction. This is mainly ascribed to rising demand but is also due to a lack of suitable land in desirable areas. To this end, the company is working closely with local govern-ments and municipalities to build its new Link Apartments at an affordable price. The apartments can be seen in Charleston, South Carolina and Raleigh, North Carolina; and new develop-ment is underway in Winston-Salem, North Carolina and will soon come to Chapel Hill, North Carolina and Atlanta, Georgia. Introducing this quality product into more good communi-ties no doubt makes Grubb Properties’ new brand the link to affordable, quality family living for everyone.“We have a reputation for being a good company because we have honest people who work hard.”19CONSTRUCTION IN FOCUS Next >