Reserve Funds

January 24, 2025 Published by Golden Horseshoe Chapter - By Ryan Griffiths, Lyndsey McNally

Condo Economic Update – Reserve Funding Levels

From the Volume 22, Winter 2025 issue of the CCI GHC Condo News Magazine

Over the last few years, our economic climate has seen significant financial pressures impacting condominium corporations, particularly in the construction sector. While your average Canadian has been struggling to adapt to increased living costs related to consumer inflation and mortgage rate increases, condominium owners have also been facing increases in condo fees related to project costs and savings for longer-term capital repairs through their reserve fund contributions.

What can you expect for 2025?

Construction Inflation Update

The condominium industry has widely discussed the inflationary crisis that we faced during the Covid-19 pandemic and beyond. From Q1 2020 (pandemic start) to Q2 2024, the residential construction price index for the Greater Toronto Area (the closest geographic census data to the Golden Horseshoe Area) increased by 83%. This is in addition to the consumer price inflation that impacted the operating portion of condo fees.

The good news is that in 2024, we have seen inflation levels come back down to reality – although we haven’t seen any deflation in construction costs. Below is an excellent visual from Statistics Canada, showing the slow down in construction inflation for residential buildings:

Source: Building Construction Price Indexes Data Visualization Tool

Reserve Fund Study Updates

As condominium corporations update their reserve fund studies, we are continuing to see the impact of construction price inflation. Although many condominiums have already completed at least one reserve fund study update since inflation started skyrocketing, it will be another year or two before the market has fully adapted. Many condominiums are facing substantial increases to their required contribution levels because it’s not just current projects that are impacted, it’s all future projects as well that have increased in cost.

It is important to understand that in comparison to the 83% project cost inflation discussed above, the average condominium corporation is assuming a ~3% inflationary adjustment in their studies. This would mean that the condo corporation was planning for a 12% increase in project costs over the same time period. The difference between a 12% increase and an 83% increase on a multi-million dollar project can result in a significant shortfall.

It is necessary for condominium boards and owners to expect that project costs have increased, and reserve funding will need to increase as a result, and boards need to be prepared to explain this to their ownership.

Project Tendering

The impact of the increase in pricing of materials and labour is being witnessed in the resulting bids from major project tenders. Many condominium corporations are facing sticker-shock when opening bids for major capital repair projects. The current political climate may also continue to impact pricing. This makes it crucial for condo boards to carefully manage and plan their tendering processes to avoid unexpected cost overruns, and to carefully consider the future cost impact of project deferral, if, this is even a viable option. The longer you defer necessary work, the more expensive it becomes.

Net-Zero

There is a strong global push towards reduction of greenhouse gas emissions. It is estimated that 30% of Canada’s emissions come from buildings, and therefore the Canadian government and municipalities are targeting buildings, including condominium corporations, to force a cultural shift in how we plan to maintain and renew our buildings. Increasingly, it is becoming apparent that deep building retrofits are going to become necessary especially for aging condos. The City of Toronto has established a goal of net-zero by 2050, and it is expected that other Canadian municipalities will follow suit.

Are we ready? Absolutely not. There is much work to do to help condominium corporations achieve a net-zero goal and it’s important that we start to focus on this issue as an industry.

How can we adapt?

In this market, challenges are normal and expected. Condo boards and owners should anticipate fee increases as a result of rising costs. These increases are necessary to maintain the longterm financial health of a condominium corporation and to ensure that there is enough funding to keep our communities well-maintained and to help retain value for every owner.

However, these increases can be difficult for some owners to manage. Condominium corporations can consider special assessments and loans to help them minimize the financial impact to the individual unit owners. Boards should consult their reserve fund planner and a lender that specializes in lending to condominium corporations to investigate these options. Increasingly we are seeing that it is more important than ever to approach project planning proactively, and to consider more detailed studies about our emissions and how we can reduce them when we plan major repairs or replacements.

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Ryan Griffiths is Managing Director at CLG - Condominium Lending Group, and works exclusively with Condominium Corporations, Property Managers, and other stakeholders across Canada to develop and implement customized financing solutions.

Lyndsey McNally
lyndsey.mcnally@condolending.com