Rescuing the Rental Segment: How Ontario Could Emerge Strong from a Deepening Rental Crisis

Real estate, like any other asset, is heavily contingent on supply and demand. And while a certain degree of tension between supply and demand is certainly healthy and can serve to bolster economic growth, significant disparity between the two can have dire effects on the housing market as we know it. Speaking specifically to Ontario’s rental segment, in both its current and projected states, lack of supply combined with rising demand has resulted in a market imbalance that stands to benefit few involved.

Ontario is in the midst of a rental supply shortage that is only expected to worsen in the years to come. In June, the Federation of Rental-Housing Providers of Ontario (FRPO) released a rental market report which indicated that the province is projected to register a shortage of 200,000 rental units over the course of the next decade. For a province that is persistently and increasingly dependent on the rental segment, the sheer magnitude of this number is disparaging to say the least.

The FRPO’s report also revealed that rental demand in Ontario—as of 2019—was twice as high as what the FRPO predicted in 2017. Below, I explore the series of strong fundamentals driving the province’s inflated rental demand, how concentration of that demand has shifted to submarkets due to COVID-19 and lack of supply, and the future and prospective developments that could potentially restore a healthier relationship between supply and demand in markets across Ontario.

Understanding Ontario’s rental supply deficit

Ontario’s deepening rental crisis begs the question: how exactly does a supply deficit of this seriousness occur in the first place? The causation in this case is two-fold and I explore the factors contributing to high demand and lack of supply in the province’s rental segment below.

The fundamentals driving rental demand

In 2019, Canada welcomed a record-breaking 341,000 immigrants into the country. Of that national share, 45 percent of newcomers chose to settle in Ontario. Breaking this down data further, 153,340 immigrants settled in Ontario last year, in 2019. That number is up from 111,955 in 2017 and 137,435 in 2018.

Due to persistently high rates of immigration and attractive opportunities for employment, Ontario registers record-high population inflows year-over-year. In fact, according to demographic trends and projections released by the Ontario Government, Ontario’s total population has almost doubled over the course of 50 years, from 7.8 million in 1971 to 14.6 million in 2019. That’s a growth rate of 1.3 per cent, or 140,000 persons annually. The same source cites that Ontario’s share of the Canadian population sat at 35.7 per cent in 2019.

Though population growth fueled by landed immigrants undoubtedly contributes to high rental demand, another significant driver of that demand is non-permanent residents, such as foreign students. Per the FRPO’s report, roughly 40 percent of total net migration was comprised of nonpermanent residents over the past two years. As such, purpose-built multi-family housing, which can effectively pose as student housing, has proven to be a lucrative niche for investors in recent years.

One last driving factor to consider is the significant decrease of homeownership rates across Ontario. According to a 2017 report prepared for the FRPO by Urbanation, homeownership rates in Ontario peaked in 2011 and have been declining ever since. This is in part due to high housing prices combined with tighter mortgage qualification rules, rendering the housing market unapproachable for young and first-time buyers in particular.

The rental housing supply gap

As demand within the rental segment has steepened, supply has continued to fall short. According to information compiled by the Ontario Government, rental housing construction in Ontario has lagged behind demand for some time—and this has a lot to do with the type of supply being prioritized. Per the government’s data, only 6.1 percent of housing completions in Ontario since 2001 have been purpose-built rentals. Meanwhile, 28.9 percent of housing completions have been condominium units, which tend to have average monthly rents 63 percent higher than purpose-built apartments.

Supply classification aside, current projections via the FRPO for the 2017-2021 period indicate that Ontario is under-building by 24,500 units annually. As aforementioned, this roughly translates into a shortage of 200,000 rental units over the course of the next decade.

Suffice to say, current apartment supply is simply unable to absorb rising rental demand, with the average cost of rents steadily rising in regions throughout the province. According to data via the Canada Mortgage and Housing Corporation, average market rents for purpose-built apartments in Ontario have been registering steady growth since 2016. More specifically, average market rents rose by 3 percent in 2016, 3.8 percent in 2017, and 4.9 percent in 2018.

Low vacancy can be observed at both a province-wide and submarket level, with rates dropping to around 2 percent in Brantford, Sudbury, Guelph, Kitchener, London, and Niagara as of last year. And it’s important to note that these numbers don’t take into account the socioeconomic conditions driving rental conditions in 2020, the result of which has been apartment dwellers migrating to outskirt municipalities, creating more demand and tighter market conditions in regions such as Hamilton and Niagara.

An observable shift in the concentration of demand

The consequences of steepening rental demand can be observed in submarkets throughout Ontario. This is particularly true for regions throughout Southern Ontario—including Barrie, Guelph, Hamilton, Kitchener, London, Windsor, and St. Catharine’s-Niagara—which have become popular destinations for former urban dwellers leaving the city core due to modified working arrangements engendered by COVID-19 and changes in household formations, as young people begin to start families.

In an interview with the Financial Post, Conrad Zurini, a Hamilton-based broker of record at Re/Max Escarpment Realty Inc., cites that millennials make up a large portion of rising demand in regions such as Hamilton and Niagara. “It’s this flight to affordability and greater value…People are looking for more space. A home has to be an office, maybe two offices, a classroom, a gym. These homes have become much more than they were before.”

Supplying Ontario’s purpose-built rental market

According to the FRPO’s findings, meaningful progress is being made towards improving rental supply. As of 2019, construction of purpose-built rentals rose by 14 percent to their highest level since 1992. This could mean that the current supply deficit could decline by one-third year during the 2027-2031 period. To add, incoming purpose-built rental supply will be most notable in the GTHA, with 13,213 total units under construction. Of that number, 10,240 units will be under construction in the City of Toronto, 845 units in the Peel Region, and 846 units in the Hamilton-Grimsby area.

More notable still, is the potential rental infill development sites undertaken by Urbanation and proposed in the FRPO’s report. The exercise, geared at the intensification of the purpose-built rental segment, identified 950 existing purpose-built rental sites as being highly likely to accommodate infill development. This roughly translates to a potential of an additional 176,074 units. Of that number, 137,999 potential infill units were identified in the City of Toronto, 19,179 in the Peel Region, and 9,735 in the Hamilton-Grimsby region. Furthermore, Urbanation found that a mere 8 percent of these potential infill units had a current development application, resulting in an inventory of 161,266 units that could be targeted for rental intensification.

What’s next?

In an interview with Toronto Storeys,  Ricardo Tranjan, Senior Researcher with the Canadian Centre for Policy Alternatives, asserts a clear onus when it comes to remedying the rental supply deficit, “Affordable housing, that’s the job of governments; they need to be actively involved in the housing market: building, buying, renting, regulating, and supporting not-for-profit operators.”

Tony Irwin, president and CEO of the FRPO, sings a similar tune. Irwin—like Tranjan and others invested in the sector—acknowledges that while the infill development potential exercise outlined in the FRPO’s report is certainly promising, meaningful steps must be taken at a bureaucratic level to ensue immediate impact and supplement the supply that Ontario so desperately needs. According to Irwin, something the municipal government could do in the interim is expedite approvals for land, “By leveraging these sites and fast-tracking them, we could put a dent in the problem.”

To add, the government could provide incentives for developers willing to supply the multi-family rental segment, rent protection, and more initiatives like the HousingTO 2020 -2030 Action Plan, geared at approving new affordable rental homes and improving housing outcomes for residents.

By |2020-10-05T13:56:36-04:00October 5th, 2020|Commercial, Multi Family Apartments|0 Comments