2020 has been largely defined by persisting uncertainty. That said, while many sectors are still suffering the effects of the ongoing coronavirus pandemic, real estate has been one of the few industries to emerge strong. In Ontario, the multi-family segment has fared especially well, due to declining rates of homeownership and peaking demand for rental units. Looking forward, year-end market conditions bode well for the health of the multi-family market in the year to come.
Keeping abreast of emerging trends in the sector is one way to stay ahead of the market, while ensuring you’re making sound investments that will serve you lucratively in the future. This article unpacks some of those trends, as well as what investors can expect from the multi-family real estate segment in 2021.
- Multi-family residential assets (including moderate income, workforce apartments, and market rentals), are amongst the best real estate opportunities going into 2021.
- The coming years will see a rental supply shortfall, aided by high rates of immigration, rising levels of unemployment, and lack of supply. Ontario will register a shortage of 200,000 rental units over the course of the next decade.
- Rental demand mainly owes to two demographics, millennials and Baby Boomers, both of which value the mobility and flexibility associated with renting, particularly in these uncertain times.
- Homeownership in Ontario will become increasingly unaffordable. The average cost of homes is expected to increase by seven percent in 2021, to $713,093.
- Multi-residential construction has seen the strongest uptick since COVID-related restrictions on new home construction sites were lifted in Ontario in May, experiencing a 10.1 percent increase in starts, compared to single-detached homes at 2.6 percent.
- There are 13,358 purpose-built rental suites under construction throughout the GTA; a year-over-year increase of 21 percent. There are 67,090 purpose-built rental suites proposed.
- There will be an increase in demand in submarkets that offer better affordability and value for cost, such as Niagara, Sudbury, Hamilton, and Sault Ste. Marie.
- The Ontario Government will directly and indirectly bolster the province’s multi-family segment though pro-immigration programs, record-low mortgage rates, and large-scale asset purchases meant to raise the price of the bonds, lower yield, and make it cheaper to access credit.
The multi-family market will continue to boom
Recent findings via PwC Canada’s Emerging Trends in Real Estate 2021 report suggest that the multi-family residential assets (including moderate-income and workforce apartments), are amongst the best real estate opportunities going into 2021.
Although some pandemic impacts may put a damper on demand for very dense housing types, interviewees emphasized that shelter remains a core need and noted the stability the multifamily category can offer right now. (Emerging Trends in Real Estate 2021)
The report says it well; pandemic or not, housing is a staple. And given the economic uncertainty of the times, multi-family poses accessibility, affordability, and flexibility.
In 2021, the desirability and importance of multi-family offerings will coincide with the strong and continual demand for affordable housing and market rentals. In the wake of the pandemic, demand for rental units is expected to peak, as factors such as working from home, income loss, and the desire to be closer to loved ones lead people to leave their permanent dwellings in search of rentals that are (a) more financially manageable, and/or (b) in a more desirable location.
Demand will be further driven upwards given predicated supply shortfalls throughout the province in the years to come. According to a rental market report released by the Federation of Rental-Housing Providers of Ontario in June, Ontario will register a shortage of 200,000 rental units over the course of the next decade.
On another note, 2021 will see a steep decline in tourism—and subsequently, the need for hotels and short-term rentals. This could end up benefiting the supply end of the multi-family segment. Operators of hotels and short-term rental properties are likely to enter the secondary rental market as a means of recapturing the revenue they’ve lost.
Home buying will continue to cool
While owning a home might have been a lifelong goal for generations past, more of today’s potential homeowners are turning to renting. 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 trend owes to millennials—who are historically priced-out of the housing market—as well as the ageing Baby Boomers generation, many of whom are attracted to the segment because of the flexibility and hassle-free amenities often associated with multi-family living.
What’s more, homeownership in Ontario is predicated to becoming increasingly unaffordable, with the average cost of homes in markets throughout the province steadily rising. One source states that it’s expected to increase by seven percent in 2021, to $713,093, making the market that much more unaffordable. Another source cites that the average benchmark price for a home in Metro Toronto will be 1,029,800 by January of 2021, dipping no lower than $1,012,600 for the remainder of the year.
Another factor to consider, going into 2021, are rising rates of unemployment, engendered by the pandemic. As of September 2020, Ontario’s unemployment rate was 9.5 percent, down from 10.6 percent in August. Though projections via the government of Ontario assert that the rate will drop to 4.1 percent within the next five years, things will likely worsen before they get better, as the pandemic persists. With more people unemployed in the province than in years past, the chances of home buying picking up in the year to come are incredibly slim.
Multi-family construction will surge
COVID-related restrictions on new home construction sites were lifted in Ontario this past May, and as the industry has recouped, multi-residential construction has seen the strongest uptick. This segment has seen a 10.1 percent increase in starts, compared to single-detached homes, which has only seen a fraction of that increase, at 2.6 percent. This momentum is expected to continue well into 2021, given the strong demand for multi-family offerings.
According to a Greater Toronto Area Multifamily Market Report via Colliers Canada, there are 13,358 purpose-built rental suites under construction throughout the GTA, which is a year-over-year increase of 21 percent. The same source cites that there are 67,090 purpose-built rental suites (and 73,800 units total, including condo construction), proposed, as of the second quarter of 2020.
That all said, in the year to come, the construction sector will face some unique, pandemic-related challenges when it comes to multi-family building. For instance, with social distancing in effect, the design and layout of common areas and individual units will need to be adjusted. Moreover, the pandemic has given rise to the need and desire for more square footage, to reflect the new norm of staying in, telecommuting, and the multi-use nature of the home.
Outskirt submarkets will flourish
While Toronto was once the prime place to invest in real estate, the effects of COVID have changed the game entirely. This past year, we have observed what is commonly referred to as a mass exodus of urban dwellers (including office workers who have shifted to working from home), relocating to the submarkets surrounding the City of Toronto. In recent months, some popular places to settle include Niagara, Hamilton, Sudbury, and Sault Ste. Marie.
As it is, we have seen spiking demand in such submarkets that offer better affordability and value for cost. This demand is further illustrated by deepening housing supply shortages in Niagara and Sudbury, the suddenly overheating housing market in Hamilton, and record-low low vacancy rates across Ontario.
Another facet of multi-family demand to consider is Canada’s recent pro-immigration announcement. In October, the Government of Canada announced plans to bring in over 1.2 million new immigrants into the country over the next three years. Historically, Ontario has been the province that receives most of Canada’s newcomers, and numbers are only expected to rise. By 2045–46, annual immigration in the province is projected to rise to 180,400.
In 2021, Ontario cities—particularly those that tout affordable cost of living and attractive opportunities for employment and academia—will have to quickly adapt to accommodate this continual interprovincial migration. In other words, more housing supply will have to be proposed and executed to keep up with population growth and subsequent growing demand for multi-family housing.
Government participation will bode well for the sector
Ontario is in the midst of several initiatives and adjustments that will, directly and indirectly, bolster the province’s multi-family segment. These include programs that encourage immigration into Canada and Ontario, such as the Ontario Immigrant Nominee Program and the federally-funded Rural and Northern Immigration Pilot. Additionally, Canada’s mortgage rate has been set at a record low of 0.99 percent—effective December 4, 2020—and the Bank of Canada is behind many large-scale asset purchases (such as commercial paper, bankers’ acceptances, corporate bonds, and federal and provincial government debt), which will help to raise the price of the bonds, lower yield, and make it cheaper to access credit. These are just a few of the developments that will have an investor-friendly impact on purchasing property through financing.
What’s next for multi-family real estate?
Like any other industry, multi-family real estate (and real estate in general), will hinge on Canada’s economic recovery in the wake of the pandemic. Given that we are still very much in the midst of it, it’s hard to make any predictions about the sector with total certainty. That said, the end of 2020 shows clear promise for multi-family real estate throughout Ontario. So, for those invested in the sector, you’re likely in a better position than most.
For those hoping to invest in the sector, now is a good time if you have the financial latitude to do so. But before you settle your hard-earned funds, make sure you are studying the market. Find out what the demand is like right now and the factors that will influence it in the future. And beyond the real estate market, study other factors that will contribute to the city’s economic growth on the whole. Think: job creation, immigration, interprovincial migration, and projects to improve infrastructure and livability. Beyond being aware of the overarching trends, knowing these kinds of market conditions inside and out will help you to make sound investment decisions that will yield enduring value from the outset.