Tips from a CEO: Navigating Toronto’s Condo Crisis as an Investor

If you’re a resident of Toronto, you may have noticed that many condos seem empty—it’s especially noticeable at night when in many buildings over half of the windows are dark and lifeless. This isn't just your imagination. Toronto is in the midst of a condo crisis, with many condos being empty and staying empty. As the CEO of Marrisa Holdings, a private equity firm, my job is to make sure that my investors get the best returns possible. Here are some things to keep in mind if you’re also thinking about investing in Toronto condos right now.

It’s important to acknowledge that this condo crisis didn’t come out of nowhere. In fact, condos used to be a great source of equity for those investing in residential properties. A story segment by the CBC did a great job of breaking this down. Back in 2016, the condo market was booming. Prices and interest rates were such that an investor who bought and rented a one-bedroom apartment could expect as much as $500 per month in profits. Today, doing the same thing will land you $1,000 in debt each month. To combat this, many landlords might consider simply raising the rent, but that’s just not feasible; renters would have to be paying over $3,000 to keep their landlords in the positives, which isn’t affordable or appealing.

Historically, these losses would be fleeting and you would end up back on top because of rising prices. Between 2017 and 2022, this was exactly the case; condo prices climbed, bringing in lots of profits for investors. But recently, prices have come to a standstill, and have even gone down in some cases. This means that if investors hold on to their current assets, chances are that they will continue to lose money, which is why many are now quickly trying to sell before their losses accumulate.

Even for those looking to pre-buy and resell condos—as opposed to becoming landlords—the difference between today’s market and the market just 5 years ago is staggering. Before, investors would be able to reliably see returns by putting money down on an upcoming condo, waiting for it to be built, and then selling it at a higher value. However, with the current market, things are trending the other way. In many cases, instead of the value increasing while a condo is being built, the value stays where it is… or even drops.

The result? An extreme buyer’s market, with over 9,900 condos for sale as of June 2024. Typically, buyer’s markets are great starting points for investors; with lots of available properties, you would usually have little trouble finding yourself a condo to rent out, or an upcoming building to invest in. However, in this case, the investors are the ones leaving the market, desperately trying to sell off their tanking assets. There is a big reason for this: the so-called “shoebox problem”.

This problem is the result of the steadily diminishing size of most condos. Since the condo market mostly caters to landlords, the square footage is no longer the focus. The buyers don’t live in the condos themselves, so they only really care about getting the best value for their money—so size has fallen to the wayside. This balance between size and rent was sustained for a while, but the current combination of tiny size and high rent is so extreme that it no longer works. Those who can afford the rent no longer want to, since the space is so minimal. Larger condos are still being bought and rented fairly smoothly for this exact reason: renters want spaces where they can live long-term without the fear of outgrowing their space.

The instability in today’s condominium market is a sign of things to come. We can expect prices to drop significantly, which means that now is a bad time to be investing in these smaller condos. My advice to you would definitely be to go for quality over anything else. You should always be weighing the likelihood of success when it comes to investing, and this is no different. Consider investing in larger condos, which are still at a pretty stable place, or consult with experts on what other investing opportunities are out there. The market changes very quickly, so it’s important to always be looking at trends and finding the best path forward.

Remember that your focus should be on value and stability rather than chasing risky or low-quality assets. Sustainability is much more important than short-term yields.