From Bloomberg News
Gehry Too-Tall Condo Towers Built for Bull Market: Mortgages
By Katia Dmitrieva and Sean B. Pasternak - Oct 5, 2012 10:51 AM ET
Architect Frank Gehry is designing three condo towers in Toronto that would be North America’s tallest residences. His latest contribution to his home town comes as the Canadian government is trying to cool the market after home prices surged 85 percent in the past decade.
The three sculpture-like towers, funded by theater promoter David Mirvish, will rise as high as 85 floors beside a century- old theater and near the Gehry-designed Art Gallery of Ontario. The skyscrapers, with a combined 2,600 residential units, will compete with hundreds of other projects in a city with more residential buildings under construction than anywhere else in North America.
Enlarge image Gehry's Tallest North American Towers Signal Canada Condo Peak
“We’ve definitely reached a peak and we’re on the way down,†Ben Myers, executive vice president of Urbanation Inc., a real estate research firm, said in a phone interview from Toronto. “We didn’t anticipate these kinds of super projects coming onto the market.â€
The building boom coincides with slowing property sales and prices after Canadian Finance Minister Jim Flaherty in June imposed tougher mortgage lending rules for the fourth time in as many years. Existing home sales fell 19 percent last month from a year earlier, based on data compiled by Bloomberg from six regional real estate boards. Sales in Toronto dropped 21 percent, even as prices rose 8.6 percent.
Toronto condo sales were down 29 percent in September over the same month last year, according to the city’s real estate board. Prices of units rose 8 percent to C$377,422 ($385,000). The average sale price for a home in Toronto surged to C$465,412 in 2011 from C$251,208 in 2001.
‘Condo Bubble’
“Of course the condo bubble in Toronto is on my mind, but we’re in the early beginnings of it,†Gehry said on Oct. 1, at a press conference about the project at the Art Gallery of Ontario. “The culture of the city and the condo boom has nothing to do with me. That’s your problem.â€
Even as the market is softening, a record 224 condo projects with 58,995 units are under construction in Toronto, according to the most recent data from RealNet Canada Inc., which tracks housing across the country. More than a quarter of these are in the same area as the planned Mirvish, Gehry project along King Street, west of the city’s financial core, according to RealNet.
Flaherty criticized “continuous building, without restriction†of condos as the central bank signaled record consumer debt and the chance of a sudden housing correction are major risks to the economy.
‘Economics Work’
The government shortened the maximum amortization period on mortgages the government insures to 25 years from 30 years, and lowered the maximum amount homeowners can borrow against the value of their homes to 80 percent from 85 percent. Canada also capped mortgage debt payments at 39 percent of income and limited government mortgage insurance to homes worth less than C$1 million.
Gehry, the 1989 winner of the Pritzker Architecture Prize, was born Ephraim Owen Goldberg on Feb. 28, 1929, in Toronto, where his grandparents, Polish Jews, had settled.
“You can make architecture comfortable, it can engage, and Old Toronto had that,†Gehry said at the press conference. “My buildings are on budget, on time, they deliver some kind of feeling, people like them, and they pay off somehow. The economics work.â€
Dancing Building
He became a pioneer in using computer software to turn whimsical designs into precise building plans, and turned little-known Bilbao, Spain, into an international travel destination after he bested two competitors for the job of designing the New York-based Guggenheim’s branch museum there. Gehry’s first foray into designing skyscrapers, the 76-story rental apartment building at 8 Spruce St. in Lower Manhattan, opened in 2011 as New York’s tallest residential building.
Gehry’s Nationale-Nederlanden Building in Prague became known as the Dancing Building, or simply the Fred and Ginger, after dancers Fred Astaire and Ginger Rogers, because of the way one tower appears to be embraced by the other.
Gehry’s Toronto towers are not the first ambitious project he’s embarked on as a market was reaching a peak. Construction of the architect’s 450,000-square-foot Guggenheim Abu Dhabi museum was halted in October 2011 by Tourism Development & Investment Co. as the emirate scaled back plans made before the financial crisis.
‘Risky Period’
The Toronto condo project “does seem a bit late,†said David Madani, an economist in Toronto with Capital Economics. “It’s definitely a more risky period to be thinking about building, particularly when inventories are very high and there’s already a backlog of work under construction.â€
The strongest sign that government efforts to damp the housing market came with the August home sales data, which showed sales falling the most in two years. That was the “first full glimpse†into Canadian housing after the mortgage rule changes, Sonya Gulati, senior economist at Toronto Dominion Bank (TD), said in a note to clients Sept. 17. The weakness in August home prices and sales was expected and the regulatory-induced cooling will continue for the next eight months, she said.
“The Canadian housing market has indeed ratcheted down its growth pace,†she said in the note. “In most local markets, it has reversed course with price and sales contractions becoming more the norm.â€
The Canadian housing industry fared better during the economic downturn than the U.S., said George Carras, president of RealNet. The main reason is that subprime mortgages made to people with poor credit history weren’t as prevalent. Banking regulators also required Canadian banks to have higher capital reserves, meaning none of the country’s lenders required government bailouts.
No Bubble
“I don’t think there is a bubble,†Flaherty told reporters yesterday. “I think there was the danger of a bubble in Toronto and Vancouver. I’m actually comfortable with the fact that we’ve seen some moderation in pressures.â€
Myers at Urbanation said there’s certainly potential for pricing to go down in the market. “But the unknown in the market is the fact that we have a high percentage of investors and if the market declines, we don’t know what their strategy will be,†he said.
“We are essentially in year 16 or 17 of an increasing market so it’s very hard for me to finally say ’yes, this is the time when we’re going to see major declines in the market.’â€
Right Pricing
The Mirvish, Gehry project has a better chance to succeed than most condos as long as “pricing is right†because it is a landmark project in the city and “investors are looking for Triple-A sites, which would have the better appreciation going forward,†he said.
The housing market in Toronto has “normalized,†James Ritchie, senior vice president at Toronto-based Tridel, said in a phone interview.
“There are opportunities for many more new developments over the next 10, 20 years in this city,†he said. Even with the growth, this year will “pale in comparison†to last year’s “velocity,†and the city will add about 16,500 new unit sales in 2012, he said. “By any standard on this continent, it’s still pretty darn good.â€
Mirvish says he’s not concerned about a housing bubble in Canada’s biggest city. “I can’t factor in a condo bubble,†he said at the unveiling of the building design this week. “Frank’s 83 and I’m 68. The bubble will take care of itself.â€
‘Mamma Mia’
The second-generation theater executive is the son of the late Ed Mirvish, best known for founding Toronto’s “Honest Ed’s†discount department store. Together, the father and son built Toronto’s Princess of Wales Theatre in 1993, which will be leveled for construction of the three towers. He also owns and operates the Royal Alexandra Theatre, which will remain operational beside the new development.
Theatrical productions Mirvish helped to bring to Toronto include “Mamma Mia,†“The Producers,†“The Lion King,†“Les Miserables†and “The Lord Of The Rings.â€
The buildings are “transformative,†and their mixed use is exactly what Toronto needs, Mirvish said.
“I want to see the building accommodate the evolution of the city, and initially what there is in the city is demand for smaller units,†Mirvish said. “We’re drawing attention back to the center of the city; we’re giving it a sense of pride.â€
The project, under review by the city, would compete with other recent residential housing developments, including the Trump International Hotel and Tower, which opened this year, and the Holt Renfrew Tower, built on top of the luxury department store of the same name and due in 2017. The Mirvish towers will be up to 285 meters (935 feet) high, taller than both of these.
Art Collection
The towers will also include retail space and a public 60,000 square-foot museum to house artwork collected by Mirvish. The target market isn’t luxury condo dwellers but young people looking for smaller spaces, Mirvish said.
The first of the towers will need to be 70 percent sold to begin construction, estimated by the end of 2013, and the first tower should be completed in seven years, Peter Kofman, president of Projectcore Inc. and the project developer said.
“Regardless of what we see today, we have to be responsible, we have to be prudent,†Kofman said. “It could be one tower, two towers, three towers depending on where the market is.â€
In a crane-lined city with much condo competition, the project signals the tail end of the condo boom, Myers at Urbanation said.
“You have to stick out,†he said. “Just bringing on your regular tower may not do it anymore - unless the pricing is low.â€
To contact the reporters on this story: Katia Dmitrieva in Toronto at
edmitrieva1@bloomberg.net; Sean B. Pasternak in Toronto at
spasternak@bloomberg.net
