In recent years, condominium boards and managers have been navigating rough waters when it comes to reserve fund planning. Whether calmer seas lie ahead or more storms are brewing remains uncertain.

The 2008/2009 financial crisis had a significant impact on reserve funds. From 1994 to 2008, the spread between the 5-year guaranteed investment certificate (GIC) return[1] and the consumer price index (CPI) was 3% on average, with interest 3% higher than inflation. This meant, in theory, that money invested in GICs would accumulate interest faster than inflation would erode it. Early high balances could help ensure future financial security through interest accumulation. After the 2008/2009 financial crisis, the government intervened with “economic easing” policies, which resulted in lower interest rates. The average interest/inflation spread dropped to just 0.8% for the 2009 to 2019 period. Savers, including condominiums, were being punished, and borrowers/spenders were being rewarded to ensure economic growth. Then COVID hit, and the world went upside down again. From 2020 to 2023,  the GIC rate was an average of 1.7% below CPI. In that situation, delaying spending was ill-advised. In 2024, things were heading in a better direction, with the GIC interest/CPI inflation spread improving to 2.6% but this is declining again in the first half of 2025.

Worsening the situation is the fact that reserve fund project costs often rise faster than the Consumer Price Index (CPI). While the Building Construction Price Index (BCPI) is sometimes used as a benchmark, it primarily reflects new construction costs and does not accurately capture the factors driving reserve fund cost inflation. These costs are more heavily influenced by skilled labour availability and local market conditions than by material prices, which are the main drivers of the BCPI. Historically, reserve fund costs have increased at rates higher than CPI but usually lower than BCPI, except for the COVID 2021/22 period, during which costs surged 20–25% above CPI each year. For certain major components, such as window replacement—the largest expense for many buildings—inflation has remained persistently above CPI and BCPI for over a decade.

The result is that almost all condominiums have faced contribution hikes that have significantly outpaced wage growth. This has been ongoing for the last three or four years and is likely to persist for the next three to five years as the recent post-COVID Notices of Future Funding are implemented.

Several other significant market forces are likely to impact condominiums in the coming years. First, Trump and his tariffs are going to disrupt the economy, contributing to inflationary pressures. Second, the worst downturn in the new condominium sector since the 1990 to 1995 period will have a ripple effect on existing buildings. Third, the push toward decarbonization by 2050 will require buildings to transition from natural gas to electricity, a shift that will come with significant costs.

In the first six months of 2025, CPI rose by 2.0%, suggesting a full-year inflation rate closer to 4%, well above the federal target of 2% and outside the acceptable range of 1% to 3%. This rise can be attributed, at least in part, to the impact of tariffs and the uncertainty surrounding future trade policy. Until the status is resolved, we can only hope that the Bank of Canada will be able to bring inflation back toward target in 2026.

Meanwhile, the condominium development market faces serious challenges. High construction costs, elevated mortgage rates, and a lack of certainty about capital appreciation have dampened investor interest in new units, resulting in a growing surplus of vacant inventory. According to Urbanation’s Condominium Market Survey, only 1,035 units were sold in Q1 and Q2 2025 - the lowest sale volume since the early 1990s. Over 24,000 units, either under construction or recently completed, remain unsold. Between 2024 and mid-2025, over 20 projects, representing over 4,000 units, were cancelled as condominium developments. While some were converted to purpose-built rentals, many have simply stalled. Pre-sale units averaged $1,187 per square foot, while resale units averaged just $903, resulting in failed closings in cases where lenders declined to finance the full purchase price.

The slowdown in the new condominium market may offer one silver lining -  reduced demand for construction materials and labour could lead to more competitive pricing in the building restoration sector. The BCPI for the first half of 2025 rose by only 0.3% and could potentially turn negative, like what happened in 2009. While it is unlikely that we will recover the 40% cost increases seen during the COVID period, even a 5% drop would provide welcome relief for condominiums planning major repairs. That said, optimism is tempered by broader concerns: rising unemployment and falling property values will continue to weigh on condominium owners’ finances.

Finally, the push toward decarbonization introduces new financial risks. Some of the associated costs will hit reserve funds, but some are not currently reserve eligible, requiring condominiums to set aside additional funds or pursue external financing.

So, what should a condominium do if it is currently updating its reserve fund study?

Tariffs: If your reserve fund is not expected to be depleted within the next three years, there is no need to adjust for tariffs at this time. The standard three-year update cycle will naturally capture the impacts of the tariffs in due course. However, if your fund will be drawn down significantly during that period, it is wise to build a contingency into your plans. A buffer of around 20% of projected expenditure over the next three years, in addition to standard construction contingencies, is a reasonable precaution. Contracts should be signed consecutively, not concurrently, in case there is a significant unplanned overrun on one project.

Inflation: Inflation is the most challenging number to predict. Historically, building repair costs have tended to inflate at about 1% above CPI. With a federal CPI target of 2%, inflation can be expected to be about 3%. That said, extraordinary inflation of individual components, such as window replacement, will need to be reflected on an update-by-update basis.

Interest: Interest rate assumptions should remain conservative in the near term. The Bank of Canada is unlikely to make major policy rate changes, particularly amid ongoing tariff uncertainty. This means a rate of about 3% for money that can be invested for a five-year term, and lower if the funds are needed sooner. In the longer term, while we might hope for a return to pre-2008 interest/inflation spreads, it is more prudent to assume interest will hover around 1% above inflation. Consequently, a long-term interest rate assumption of 4% is likely reasonable.

Decarbonization: Each condominium will need a decarbonization roadmap to understand the financial impact on its community. This is not a simple add-on to the reserve fund study, but rather a separate analysis that will plan the upgrading of the building systems, taking into consideration the project timing in the reserve fund study. A separate article in this edition of CM Magazine discusses decarbonization in more detail.

Communicating with Owners: It can be frustrating for owners to see reserve fund contributions increase, especially when the costs in question may not be incurred for many years. However, it is important to understand that reserve funds protect a condominium’s long-term financial health and promote fairness by ensuring that all owners pay their fair share of repair costs.

Sally Thompson, P.Eng., is Managing Principal at Synergy Partners Consulting Ltd and author of Condo Questions and Answers – Ontario Edition. She specializes reserve fund studies, performance audits and cost sharing agreements for Ontario condominiums.
synergypartners.ca

View PDF View Flipbook Back to Latest Issue