An expert from Altus Group says construction costs for Toronto residential towers are expected to rise five or six per cent in 2021, a spike that if it worsens could prompt developers to rethink projects.
Altus Group recently issued its national 2021 forecast for construction cost escalation for highrise multi-family builds. The report said Toronto cost hikes will surpass other major Canadian cities, with an estimated overall increase of five per cent for the year and an estimated range between three to six per cent.
But just days after the report was released to its subscribers, Altus Group senior director for cost and project management David Schoonjans said, he took a look at the latest World Bank commodities price report and concluded Toronto price hikes might well end up in the top end of the range, closer to six per cent.
At that level, the inflation becomes a problem, he said.
“People go, oh, a six per cent increase, that’s not very much,” said Schoonjans. “Well it’s a lot, because your entire development probably only has a 12-per-cent profit margin on it, maybe less. So, when you look at it in those terms, if you’re delayed by a year, you’ve eaten up half, maybe more than half, of your development margin, it doesn’t leave a lot of room for error.
“It doesn’t have to go out very much from six per cent before you start having projects failing.”
A key factor in Toronto’s feared cost escalation is increases in formwork costs, similar to the trend seen prior to 2019. Schoonjans noted Toronto’s hot tower market circa 2018 caused even greater construction cost hikes than Altus is now forecasting.
“The thing with 2018 relative to highrise residential buildings is there was record-setting condo sales in Toronto in 2017…A lot of what was driving that back in 2018 too was just huge, huge increases in formwork.”
Among materials, timber and steel prices have shot up and concrete has risen but not as much, said Schoonjans. A major material in formwork is formply, which has seen huge increases. Plywood has gone up 270 per cent in a year, he said. Overall in the past five years in Toronto, formwork has almost doubled in price.
But a major component of formwork costs, Schoonjans said, is labour, which has not really gone up in terms of wages.
“There’s been some impact from the pandemic as far as labour productivity, although I think that’s turned out to be not as big an issue as people were afraid of for most of the trades,” he explained. “They’ve kind of figured out how to deal with that without a huge impact.”
But where labour is more of a factor, Schoonjans said, is capacity during a hot market. It’s difficult to increase labour supply to respond to demand because skilled labour is relatively scarce.
“So I think that’s the biggest driving cost for formwork is just the inability to expand fast enough to meet the demand. Just because of huge, huge demand and inability to ramp up and all of the challenges that go with trying to expand quicker.”
Different building sectors use different materials and trades is varying proportions, Schoonjans said, so a wood-frame residential building is dealing with “crippling” lumber prices right now that are adding up to $24,000 to the cost of a house.
Similarly, the high price of steel has had a big impact on warehouse projects that use a lot of the product, he said.
But for highrise concrete buildings, the hike in commodity prices has had a lesser impact, although residential builders have certainly been hit by high rebar prices and similar materials.
Schoonjans doesn’t expect the hot Toronto market to diminish any time soon, mainly because major projects take so long to complete.
“I think a lot of people don’t realize this but the massive sales that we had in 2017, and the projects starting in 2018, a lot of those projects haven’t actually finished yet, certainly the bigger ones. And the fact of the matter is for the past several years, we’ve been starting more condo units in Toronto than we’ve been finishing.
“So there’s more condos under construction now than there’s ever been really. And increasing every year, not decreasing.”
Altus Group forecasted that highrise residential costs would go up three per cent in Vancouver this year, between two and three per cent for Calgary and Edmonton, and between three and four per cent for Ottawa and Montreal.
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