There was a time when condos were considered real estate king. In fact, this was the case for over two decades. Throughout the 2000s, hundreds of thousands of condo units were added to the GTA’s housing market. Conversely, there were only about 1,000 purpose-built rentals being built per year. Fast-forward to today, and the rental landscape is stronger than it’s ever been, according to a real estate outlook released by PwC, correlating to a spike in this kind of construction activity.
In this article, we’ll explore the trajectory of Ontario’s multi-family segment, from the condo boom of the 2000s to today’s resurgence of purpose-built rentals.
- In Canada, condo construction has far outpaced the construction of purpose-built rentals. Since 1990, purpose-built rental units have constituted less than 9 percent of all new units built in Ontario.
- Today, the condo boom has cooled off, as more people are turning to renting than ever before
- Another factor influencing the cool off of the condo boom is a dip in immigration levels as a result of the ongoing pandemic. The number of permanent residents admitted to Canada dropped by 64 percent last year.
- Conversely, the purpose-built rental segment is strong and poised for growth. Approximately 72,000 rental units were under construction in Canada by the tail end of 2020. That number is up by over 12,500 units from the year previous and is five times higher than it was ten years ago.
- In Ontario, the purpose-built rental segment is heartier than it’s ever been. There are currently 2,458 units under construction in the GTA, with an additional 9,207 units proposed. These numbers are fuelled by population growth aided by immigration and interprovincial migration, a mass decreased interest in homeownership, and a lack of rental supply.
- The purpose-built rental segment is drawing in an increasing number of development companies and institutional investors. As investment dollars are put into the segment, much-needed rental supply will be added to Ontario’s housing market, posing a solution to the housing supply deficit.
Cooling down from the condo boom
In the late 1960s, condos represented a solution to Canada’s unaffordable housing market. According to data released by Urbanation, 11,697 condominium units were added to Toronto’s housing market in the 1970s, 30,881 units were added in the ’80s, 49,503 units were added in the ’90s, 103,683 units were added in the 2000s, and 109,497 units were added in the decade following 2010.
More broadly, approximately 410,562 condo units have been built since 1990 in the province of Ontario. Meanwhile, only 143,091 purpose-built rental units have been constructed over the same time period. In other words, purpose-built rental units have constituted less than 9 percent of all new units built in Ontario since 1990.
But the condo market has since cooled off substantially and condos are no longer leading the market. According to data released by the Toronto Regional Real Estate Board, condos in central Toronto registered the most significant decline in sales in October 2020, falling 8.5 percent compared to the same time the year before.
The owes to a number of reasons, the leading one being the mass exodus from central Toronto to the outskirt suburbs. As working from home becomes the new norm, people want more space and better affordability, which they’re more likely to find in smaller cities such as Hamilton, Niagara, Sudbury, and Sault Ste. Marie. Another factor that has influenced the condo cool is a dip in immigration numbers—in terms of international students and permanent residents—and this can be observed on a national scale. According to data via the Association for Canadian Studies, the number of permanent residents admitted to Canada dropped by a whopping 64 percent last year.
Purpose-built rentals are poised for growth, nationally and provincially
According to information released by the Canada Mortgage and Housing Corporation (CMHC), approximately 72,000 rental units were under construction in Canada by the tail end of 2020. That number is up by over 12,500 units from the year previous and is five times higher than ten years prior.
Purpose-built rental construction activity is on par with market demand, and big players are in steep competition to get a stake in the game. Last year, there was $8.3 billion invested into Canada’s purpose-built rental segment according to CBRE, with large corporate developers like GWL Realty Advisors, Camrost Felcorp, RioCan REIT, Allied Properties REIT, and Urbancorp embracing the segment.
To add, the rental supply offered by these developers differs from the rental stock of decades past. In fact, future purpose-built rental supply is expected to be competitive with condo developments; (think luxury-style amenities).
Now that we have a general sense of Canada’s purpose-built rental segment, let’s take a look at Ontario’s piece of the pie. There’s no doubt that demand for purpose-built rental apartments has re-emerged in Ontario. A report from Urbanation cites that there are currently 2,458 units under construction in the GTA, with an additional 9,207 units proposed. These numbers indicate that purpose-built rental supply construction is poised to be at its heartiest in a decade.
Some factors that are fuelling the purpose-built rental boom in Ontario are population growth aided by immigration and interprovincial migration, decreasing interest in homeownership, and a lack of rental supply.
Are purpose-built rentals the answer to Ontario’s housing crisis?
Ontario is in the midst of a deepening rental crisis, which is expected to worsen in the coming years. That said, findings from the Federation of Rental-Housing Providers of Ontario (FRPO) have indicated that there is potential to add 176,000 new rental units throughout Toronto and the surrounding regions. This is significant because rentals pose an affordable and stable housing option for those who can’t afford to own property or would simply prefer to rent rather than own.
Adding more dedicated rental buildings to the market could help to supply the rental segment sooner rather than later. This is because developers can forgo the time-consuming sale cycle associated with condo units and rental units can be added to the market quickly and occupied soon after that. This time-saving aspect is bolstered further by the fact that many dedicated rental buildings are being marketed whilst in the construction phases. In other words, these buildings can achieve full occupancy before they officially open their doors.
Understanding investor interest in purpose-built rentals
For institutional investors and developers, embracing a rental strategy is a smart way to make optimal and lucrative use of commercial spaces. Below, we discuss two big reasons why investors and developers are being drawn to the rental segment.
In light of the looming housing crisis, activity within the purpose-built rental sector is being incentivized by things like rent control on new builds (on a provincial level) and low-interest loans for the development of new rentals (on a federal level).
In addition to cutting down on turnaround time, eliminating the sale cycle also decreases the costs associated with development projects. This includes costs associated with hiring a marketing team, showroom staging, and other sales collateral. Capital that would have been put towards marketing and selling the property can then be used to maintain the property in the future.
Long-term ROI potential
Finally, whereas condo units yield a one-time fiscal gratification upon sale, rental units tend to generate consistent, rolling revenue through rent collection. Rents can also be renegotiated on a yearly basis, in keeping with market fluctuations. As such, purpose-built rental buildings represent a long-term value investment for developers and investors.