Attack of the condo craters

Hopefully things won’t get as bad here as they already are in the U.S., where the image of stalled condo craters is nothing new. Some two dozen Seattle condo construction projects are now on hold. Last fall, in Chicago, work screeched to a halt on the Spire, billed as the world’s tallest residential tower. The move left a perfectly round, eight-storey-deep hole near the city’s lakefront. In some U.S. cities, officials have even ordered developers to fill holes back in. In cases where developers go bankrupt and no other companies step in to take over, the fear is local taxpayers could be on the hook to plug the holes.

The image of those gaping pits is starting to worry city planners here at home, who are starting to rethink their approach to major condo projects with an eye to more failures. After all, a lot can go wrong when you have a giant hole in the middle of a city. If the pit fills with water it could erode the walls and threaten surrounding buildings, not to mention providing mosquitoes with an urban swamp in which to breed. And if left too long, the walls will eventually begin to decay.

As it is in Vancouver, a developer can halt construction for six months before the city threatens to withdraw the building permit. Sometimes projects do come back to life. For example, earlier this month, workers returned to a gaping hole in Vancouver dug for the glitzy The Residences at the Ritz-Carlton, four months after the project was put on hold pending “design changes.” Still, if a hole remains dormant for long enough, officials will step in to make sure it is properly secured and monitored, says Will Johnston, Vancouver’s chief building official. That’s already happened in Calgary, where last November city planning officials took responsibility for safeguarding a hole dug for the Manchester Station condo project. The tougher question of what happens if big projects are indefinitely put on hold is one Vancouver and Calgary are only now just starting to consider. “We don’t know if we’re going to see more of this or not,” says Johnston. “But my worry is: what if this goes on for three years, and we have 20- to 30-m holes dug and left sitting there?”

Abandoned condos don’t just cause problems for cities—the buyers who had hoped to live there will end up with huge headaches, as well. Before the first pile of dirt is moved, developers typically pre-sell 60 to 80 per cent of a project’s units, collecting deposits of up to 20 per cent of the sale price in the process. The money gets put into a third-party trust. If a project is cancelled, buyers get their deposits back. But the fact is, a developer can delay a project for months before having to return the money, leaving buyers stranded while they wait for a refund.

The fear is, if condo prices fall far enough, it will make more economic sense for buyers to walk away from their pre-sale agreements and risk being sued rather than complete the deal. After all, if you made a $50,000 down payment on a pre-sale agreement to buy a $900,000 condo, but your condo is only worth $700,000 now, you’ll only lose $50,000 by walking away, but you’ll overpay by $200,000 if you go through with the deal. If enough people walk, more projects might be put on ice. And just the sight of condo craters sitting empty threatens to further drive down consumer confidence. “When you see a project where nothing is happening, it becomes a symbol of what’s happening in the economy,” says CIBC’s Tal. “It impacts the psyche of potential investors and consumers.”

Even some realtors are starting to express concern. “There are still cranes building condos downtown so somebody is getting financing, but let’s face it, most people in Canada don’t have any idea how bad the world economy is,” says real estate agent Jim Sparrow. “I think you’re going to see a lot more pain before it gets better.”