The condominium’s grim reapers: Coronavirus and recession
They also raise to a crisis level chronic condominium governance problems of litigiousness, construction defects and disrepair, soaring insurance rates, owner apathy, poor management and fraud.
A man is pictured preparing for guests in his Toronto Airbnb rental apartment in December 2017. THE CANADIAN PRESS/Chris Young
The Conversation (abridged)
Randy K. Lippert Professor of Criminology, University of Windsor
Stefan Treffers PhD Candidate, Sociology, York University, Canada
29 April 2020
The coronavirus pandemic and the ensuing economic recession pose serious issues for condominium life. They also raise to a crisis level chronic condominium governance problems of litigiousness, construction defects and disrepair, soaring insurance rates, owner apathy, poor management and fraud.
Many of these issues were identified as early as the 1970s in the United States and Canada. But they have remained largely unresolved for decades, and are only now culminating in an existential threat to this form of housing.
Introduced across North America in the 1960s, the condominium model rapidly spread to become a major form of new housing stock in large North American cities.
Yet the condo has had lingering ailments since its birth, and the new grim reapers of coronavirus and financial strife could bring about its demise. Several troubling trends were developing before the global pandemic and recession.
Condo bankruptcies in 2008
First, the 2008 sub-prime crisis and recession led to many bankruptcies of condo corporations and similar homeowners’ associations in the U.S.. If the crisis 12 years ago challenged the feasibility of the condo model in the U.S., this pandemic-fuelled recession will surely test it there and in Canada too.
The risk lies in the collective nature of condo ownership. When a condo unit is foreclosed or abandoned, there is one less owner paying common fees for building upkeep, with the balance shifting to remaining owners. Boards can place liens on units to cover fees, but that may fail when units in a troubled building become difficult to sell. Enough foreclosures will see a condo corporation lose its financial viability, likely leading to its demise.
The trend in both countries has been toward large-scale and other absentee investors purchasing condos to extract rent and accumulate wealth. This includes the explosion of Airbnb and short-term rentals.
Typically, non-resident investors want condo boards to forego needed infrastructure repair and maintenance to keep common fees low and maximize profits, which can accelerate condo building deterioration.
In the current recession, aging infrastructure and disrepair may reach a crisis due to defaulting unit owners, fee non-payments and extreme special assessments of thousands of dollars (imposed by boards on all owners to cover funding shortfalls) that can drown remaining unit owners before they can abandon ship.
Growing litigiousness in such crisis environments, including costly board lawsuits and liens against individual owners at the expense of all owners, would further erode condo feasibility. Besides loans or tax deferments, government bailouts of condos are doubtful.
Condo defects, disrepair
Second, construction defects and extensive disrepair have been endemic to the condominium model.
Condo buildings reach old age and boards realize after years of austere budgets and inadequate reserve funds that piping and other infrastructure were not designed to last 40 years or more. That disrepair leads to further fees for condo owners.
Third, there’s a condo insurance coverage crisis in Canada. Premiums for mandatory building coverage have skyrocketed recently.
For condo corporations in British Columbia that renewed their insurance policies at the end of 2019, “around 90 per cent saw premium increases of 50 to 100 per cent” but some were in the 300 to 600 per cent range.
Many Canadian homeowners with unprecedented levels of household debt fear they cannot make next month’s mortgage payment due to COVID-19. These massively higher insurance costs could push some condo owners off the mortgage cliff and lead to some buildings being denied coverage altogether.
This could in turn lead to a collapse of local condo housing markets.
Coronavirus and condos
Coronavirus has brought serious challenges to already weak governance. Condo boards are required to monitor COVID-19 infections in their buildings with no training, and cannot divulge who has tested positive due to privacy concerns, making the crisis even more difficult to manage.
If transparency was an issue before the pandemic, even fewer meetings may keep residents in the dark about vital governance decisions.
Effective and transparent condo property management is essential during these uncertain times, but its quality has been long suspect due to no or limited regulation in most jurisdictions.
The catalyst for some of Ontario’s latest condo statutory reforms, in fact, was the millions of dollars bilked from numerous condo boards by Channel Property Management in Toronto in 2015. But even after new reforms, government regulations exempt condo property managers from getting licensed if they were previously designated as managers.
Despite more government oversight in North America, large-scale fraud in the industry, including by condo boards and developers, will likely be exacerbated in the current recession when there is even less scrutiny amid more urgency.
Fears of close proximity
More fundamentally, shared spaces that define condo living have become more difficult to manage amid the coronavirus.
In many condos, gyms and other amenities have been closed. But elevators, essential for mobility, cannot be shuttered.
Traditionally, elevators have served as small interactive spaces where residents chat and catch up; now they are spaces of anxiety and fear. Are friendly chats in condo elevators a thing of the past?
But all is not lost. If coronavirus leads to the collapse of the short-term rental market, more affordable long-term rental units will become available. We may also see more condos being reverted to rental buildings, in keeping with trends to increased purpose-built rental housing.
Some condos will survive the grim reapers’ arrival, but few will flourish without effective regulation and efforts to realign the condo model so that it’s less about profits and more about community and co-operation.
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I hope that the above essay is too pessimistic.
Condos are a troubled form of home ownership with most owners having little understanding just how complex the building systems are. I think of condo towers being like ocean-going ships. Both are complex man-made "machines" in which a lay person has no hope of understanding how they work.
The coronavirus turned out to be the financial catastrophe that most knew was coming but did not know when the crisis would happen or that it would hit this hard.
What I am concerned about is:
Some owners will default on their monthly maintenance fees. How many depends on the owners' financial situation. Pensioners and those with secure employment should be safe. Those who live pay-cheque to pay-cheque will be hard hit. I expect the worse will come this autumn.
Short-term rental defaults may hit the newer condo buildings that were designed for short-term rentals. Selling prices for those units should drop and some units will switch to one-year leases.
There will be a lot of pressure in some condos for the Board to reduce maintenance fees and to loot the Reserve Funds to make up the short-fall. (Dispite the Condo Act forbitting it, dipping into the Reserves is surprisingly easy to do.)
In Ontario, defaults on the monthly maintenance expenses will not hurt many condos if the affected units have mortgages. When the Form 14 (pre-lien) letter goes to the owner and to the mortgagee on record, the mortgagee will pay the owed expenses. Then the owner is in big trouble.
Residental condos that have small retail shops on the ground floor may take a hit by bankrupcies or demands for lower maintenance fees. I expect to see a lot more empty retail units as I drive along Toronto’s streets.
Condo amenities have been closed. How can they be re-opened? Will condos allow large groups in the Party Rooms? Can they re-open the gyms? How many people will be allowed at one time? How often will they have to disinfect the machines? How do they schedule who gets to use what and when? How about the hot tubs, swimming pools, saunas and the change rooms?
Condos may need to absorb higher security and cleaning costs.
We will understand more in six to eight months. I worry that a lot of businesses, big and small, will not survive this. Many of the temporary layoffs will become permanent. I already know of grown children moving in with their parents.
What is the future of condos? I think they are here to stay. I'd like the government get into public housing on a grand scale so condo units stop being used as rental stock. (Not possible because of the huge costs involved.)
I don't see condos disappearing as a form of home ownership even though a lot of older ones are in bad physical shape. By the way, the new ones may not be much better. Plumbers and managers tell me that some of the new towers leak like colanders.
For years now, I have expected to see the older rundown condos being condemned by the city inspectors but there is still no sign of this happening.
—H. Marshall