Monday Market Minute | Jun 5, 2023

Construction costs squeeze development margins as builders face a double bind

What Moved

CMHC data showed housing starts declining nationally, despite the housing supply crisis that dominated political discourse. The disconnect was straightforward: construction costs had risen 35–40% since 2020, while construction financing sat at 8–10%. The math on new development simply did not work for many projects. Hard costs per buildable square foot in the GTA exceeded $400, and municipal development charges continued to escalate. Several prominent condo projects were deferred or cancelled.

Why It Matters

For private markets investors, the construction cost squeeze created a paradox. Housing scarcity supported existing asset values and rental demand, which was positive for private REITs and MICs with existing portfolios. But the inability to build new supply meant the scarcity would deepen, eventually requiring government intervention or a meaningful rate decline to unlock development. Construction lenders with active development loan books watched project budgets carefully — cost overruns were the primary risk in the current environment.

Signal to Watch

The BoC's June 7 decision loomed large. A surprise hike would further strain already-challenged project economics and could trigger a wave of development loan restructurings.

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