It’s a common misconception that newer is always better when it comes to housing and real estate in general. While the amenities associated with new builds certainly have clear appeal, the tradeoff can be cost, space, and sometimes even quality.
In Canada, rental construction was aided by federal incentives in the 1950s, ’60s, and ’70s. And then in the ’80s, those incentives stalled and so did rental construction. Today, that decades-old supply accounts for a significant portion of the country’s rental stock, and there’s little debate of its unique and enduring value, particularly from an investment standpoint.
This post investigates the reasons why older buildings tend to yield a higher ROI than their newly built counterparts and explores some retrofitting projects around the Golden Horseshoe area geared at preserving and extending the life of aging supply.
Better cost value compared to new builds
In Ontario, construction costs are on the rise, due to soaring lumber and wood panel prices, increasing tariffs on crucial components such as steel, aluminium, rebar, and concrete, and a severe shortage of skilled labourers. These factors are leading to higher charges by contractors and construction companies, adding thousands of dollars to new home building costs. In Toronto alone, the price of construction for new residential buildings has increased by 8.3 percent year-over-year, according to Statistic Canada.
On the other hand, the average selling price for older purpose-built apartments is between $250 and $350 per square foot—that’s compared to $400 to $750 per square foot for newly-built rentals and newer condominium developments. Once acquired, these older properties can be upgraded to spec at a nominal cost, leading to higher yields for a more approachable initial investment. That all said, the values of aging rentals are quickly appreciating, as is the cost of acquiring them, owing to a rental supply deficit decades in the making.
Strong performers on the rental market
Throughout Canada, there is consistently strong demand for economically-priced rental units, driven by the economically challenging times, the housing supply shortfall, and population growth. In Ontario, strong fundamentals, such as job growth and high rates of immigration, combined with high homeownership prices and lagging rental construction activity, are expected to create a shortage of 200,000 units in Ontario’s rental market over the next ten years.
Speaking specifically to older rental stock, decades-old developments tend to boast prime location in high-potential areas, larger suite sizes, better parking accommodations, and simpler design characteristics (which tend to result in reduced maintenance costs), compared to newer builds. For landlords and property owners, these factors bode especially well, as they ensure stable occupancy, low vacancy, and continual demand.
Retrofitting to add value
One of the upshots of cost-effective acquisition is having the fiscal latitude to invest in capital upgrades to the asset sooner rather than later. Strategic capital upgrades can improve upon the value and livability of existing supply, leading to better marketability, the generation of rental growth, and (in some cases) reduced operating expenses. For instance, investments into energy efficiency are not only marketable in the socioeconomic context of today’s world, but can reduce utility costs in the long term, positively impacting the bottom line. In today’s market, improvements to air ventilation systems are another capital upgrade that will increase the marketability and livability of the asset, leading to happier tenants and higher demand for the asset.
The benefits and sensibility of retrofitting existing supply are not lost on federal and provincial policymakers and property owners. Last year, the Canadian government allocated $5.75 million in grants and loans to reduce energy consumption by 40 percent within four multi-residential buildings in Toronto and Hamilton. The Ken Soble Tower Transformation—a rehabilitation project that is expected to reduce greenhouse gas emissions by a staggering 94 percent—is also underway in Hamilton. In Niagara, the Ontario government has announced funding to repair and retrofit social housing apartment buildings in the region, in an effort to make the units more comfortable, healthy, and energy-efficient. And in Greater Sudbury, projects to improve housing stock built more than 40 years ago are underway, including the revitalization of units at 159 Louis Street.
Location is key for faster return on investment
Where investments into retrofitting are going (particularly at the hands of the government), is a pretty clear indication as to where older assets hold the most potential for value. Hamilton has been in the crux of gentrification for some time, and as the cost of living in Toronto continues to rise, more affordable regions surrounding the city, such as Niagara and Sudbury, are quickly up-and-coming. As such, demand for rental units in these areas will increase on par with gentrification.
In today’s market, vintage builds are more valuable than ever, especially given the context of the country-wide housing supply shortage. Retrofitting these older buildings is a tried-and-true way to extend their useful life, add value for residents and communities, improve the asset’s position in the marketplace, and ultimately preserve their unique value. Moreover, older rental buildings that are managed and maintained in a strategic manner represent a method of both protecting capital and gaining yield, while securing a faster and more significant ROI for investors.