The Perfect Storm: Understanding Construction Cost Escalation in the Greater Toronto Area (GTA)

In recent years, the multi-family property development landscape of the Greater Toronto Area (GTA) has been transformed into a battleground of fluctuating costs, leaving developers astonished as they review their pro formas. Costs have surged on almost a weekly basis, creating a perfect storm of economic pressures that all stakeholders must navigate. In this article, we delve into the myriad factors driving this volatility and escalate costs, providing a high-priority checklist for those involved in the GTA’s multi-family development sector.

How Did Construction Costs in the GTA Get This Bad?

Over the last five years, the construction costs in the GTA have skyrocketed, increasing by approximately 50%. This relentless climb in costs is accompanied by significant volatility fueled by a confluence of global events. Since 2016, the number of high-rise apartment unit construction starts has consistently outstripped completions, resulting in over 110,000 high-rise apartments currently being built.

The acceleration in costs can be attributed to several pivotal events. The first surge occurred in 2017 due to record-setting sales of new condominiums, which drained existing capacities. A more severe escalation began with the onset of the COVID-19 pandemic and was fueled by geopolitical instabilities. The impacts are widespread, including work disruptions, broken supply chains, trade barriers, and soaring commodity prices.

Typically, construction cost increases hover between 2% to 4% annually, but on more chaotic occasions, these spikes have exceeded 10%. As we break down the factors influencing these skyrocketing costs, we can categorize them into hard costs and soft costs.

Hard Costs: The Backbone of Construction Expenses

Fixed Revenue with Climbing Costs

In 2021, construction costs for residential buildings rose by about 10%. With rapid interest rate hikes from the Bank of Canada—raising the benchmark rate by 125 basis points in just four months—loan costs for construction have also skyrocketed. This scenario creates a precarious balance for condominium developers who must sell 70% of their units before construction even begins, fixing their revenue at a time when costs are unpredictable.

On the purpose-built rental side, financing often requires a leap of faith. Costs continue to soar, which reduces profit margins and heightens risk—particularly problematic in an environment where costs are expected to rise by an additional 7% to 10% in 2022 alone.

Mass Supply Chain Disruptions

Recent years have seen significant disruptions across global supply chains, instigated by events such as the COVID-19 pandemic, the Russia-Ukraine war, and localized natural disasters in Canada. Shipping delays have now tripled from historical averages, disrupting the flow of vital materials and exacerbating already inflated construction costs.

Skyrocketing Commodity Prices

The price of commodities has seen dramatic fluctuations since the onset of the pandemic. Prices have doubled since the summer of 2020, driven by both heightened demand and supply shortages exacerbated by geopolitical instability. Lumber, in particular, has been at the forefront of this demand surge, influencing overall construction costs.

Formwork Costs

Formwork can constitute up to 25% of the total cost of constructing a high-rise building, and recent shortages have pushed associated costs significantly higher. Unlike other commodities, the pricing for formwork is largely local, further complicating cost management.

Labor Challenges

The construction sector is facing an acute labor shortage. With a rising number of retirements from the skilled labor force and historically low recruitment levels, finding qualified tradespeople has become increasingly challenging. This shortage extends beyond physical labor to professional roles—engineers, architects, and planners are also in short supply—extending project timelines and increasing development costs.

Soft Costs: The Hidden Expenses

Interest Rate Hikes

The Bank of Canada has recently taken aggressive steps to control inflation through interest rate hikes, which have effectively doubled the required financing for new construction projects. This increasing cost of capital is significant for both cash flow and loans, adding another layer of complexity to project viability.

Rising Development Charges

Development charges in Toronto have spiked dramatically, now 80% higher than in 2018, with another 46% increase phased in over the next two years. For instance, the charge for a one-bedroom unit could rise to $52,367 by 2024, compared to $35,910 today. These rising charges are making it even more difficult for developers to plan financially.

Capacity Constraints: The Core Issue

Perhaps the most pressing issue fueling cost escalation in the GTA is a lack of capacity. Key factors contributing to this include:

Growing Demand

Ontario faces an acute housing supply shortage, with the province needing an estimated 650,000 additional housing units to meet the needs of its growing population.

Immigration Imbalance

Current federal immigration policies are further intensifying demand for housing while restricting the availability of labor needed for construction. The skills gap remains a significant barrier to fulfilling housing requirements.

Inaccurate Growth Projections

Projected housing supply growth figures have consistently underestimated actual demand, creating a deficit of available units in the GTA.

Sluggish Construction Pace

While demand for housing continues to soar, the pace of construction has lagged behind. Despite a doubling of building permits, the capacity to fulfill project timelines has only expanded marginally.

Government Policies

New regulations have introduced additional complexities to the construction process, such as inclusionary zoning policies and stringent environmental standards. These regulations, while noble in intention, add to the financial burdens developers face.

The Result: A Foreboding Future

The sheer volume of changes affecting both hard and soft costs is unprecedented. With rising costs accompanied by stagnant revenue growth, profitability in multi-family projects is increasingly under threat. Anecdotal reports indicate a surge in project cancellations, with developers opting to halt plans rather than risk financial loss.

As a result, the price of a condominium unit could require an increase of $100,000 to $150,000 purely to accommodate rising costs. This could lead to a dire shortage of housing and increased pressure on affordability in the GTA.

In our forthcoming articles, we’ll explore innovative strategies for stakeholders in the multi-family development environment to navigate today’s unprecedented uncertainty and maintain a profitable trajectory.

Understanding these complexities is crucial for all stakeholders, from developers to policymakers, as they look to build a more sustainable and affordable future in Toronto’s ever-evolving housing market.