Photo: James Bombales

The cost of constructing a high-rise condo building in Toronto is only expected to go up in 2021, potentially putting some new developments in a risky and unpredictable position.

Last month, Altus Group released its 2021 construction cost forecast for high-rise multi-family buildings in major Canadian cities. In the initial report, which was released to Altus Group subscribers, the real estate data company predicted that Toronto would see an estimated cost increase of five percent this year, falling somewhere in the range of three to six percent.

Based on the other cities assessed in the report, rising costs in Toronto would be among the highest in the country. Costs in Vancouver were anticipated to increase by three percent for the year, within a two to four percent range, while expenses in Ottawa and Montreal would jump by three to four percent in 2021, within a range of two to five percent.

However, the estimated costs for Toronto could soar even higher this year as rising commodity prices and a highly active market continue to add on to the cost of building in the city.

David Schoonjans, Senior Director of Cost and Project Management at Altus Group, told Livabl that since the initial publication of Altus Group’s 2021 construction cost forecast, he has calculated new numbers as of last week. Now, high-rise multi-family projects in Toronto could see costs escalate into the seven to eight percent range this year.

Construction cost increases of this magnitude in Toronto are not unheard of. Schoonjans explained that record-setting new home sales in 2017 led to a glut of projects on the market throughout late 2017 and into 2018. In 2018 alone, construction costs went up by 10 percent, and some projects were cancelled as a result, Schoonjans said.

“You’re at the point where 10 percent in a single year [and] a relatively minor delay can eat your entire profit margin, and projects get into trouble,” he said.

Photo: James Bombales

Schoonjans explains that new development project revenue is fixed before building costs are. A combination of delays and higher construction costs can chip away at profits, adding to the risk of project cancellation.

“Definitely, the higher it goes, the more the risk becomes that projects get cancelled and are failed projects,” explained Schoonjans. “The cost increases alone, on their own, wouldn’t do that. It’s the cost increases combined with some sort of delay between fixing your revenue — your sales — and fixing your costs.”

“I think a lot of developers learned from things back in 2018 and [understand] that it’s almost a core competency for them now to be able to shorten that timeframe between sales and construction start as short as possible,” he added.

One of biggest contributors to high-rise construction expenses in Toronto is increasing formwork costs. The price of formwork, which is a temporary mold that holds together poured concrete, has gone up significantly over the past five years, explained Schoonjans. The lack of available formwork contractors and the decline of labour productivity has been raising formwork expenses since 2016, he said.

“Formwork is your single-largest trade in a high-rise residential building,” said Schoonjans. “The combination of its cost increase and its relative importance as a weighting in the overall building is what causes it to be the highest contributor to cost increases.”

Forecasting construction costs has also become more difficult. The COVID-19 pandemic has “thrown a monkey wrench” into the predictability of supply and demand for certain commodities this year, Schoonjans explains, with unpredictability around price increases being the biggest risk to construction.

Schoonjans points to the World Bank as an example, whose predictions about construction resource costs have shifted wildly in the six-month period between their industry reports. Schoonjans says that in October 2020, the World Bank predicted that the price of aluminum would rise only one percent in 2021, but this estimate has now been updated to 29 percent as of April 2021.

Although lumber prices have gone up significantly, the material isn’t a big component of high-rise buildings or their expenses, Schoonjans said, unlike townhome or single-family home projects where lumber makes up a significant part of the overall cost.

Photo: James Bombales

“It’s a very difficult time to forecast your costs, and I think a lot of developers, the difficulty they’re having is not just forecasting the cost, it’s even when they go to fix their construction prices, at least for some things, nobody is willing to guarantee a fixed price for them,” explained Schoonjans.

Although costs aren’t expected to decrease in the Toronto region in the foreseeable future, Schoonjans anticipates that cost increases in 2022 will be less dramatic compared to 2021. Even if new home sales were to abruptly stop, it would still take years to get through the projects that have already broken ground to free up capacity, he said.

“These projects take years to build,” said Schoonjans. “[Even with] a complete stop in sales today, we’d already be saddled with a huge amount of construction that’s already gone ahead.”

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