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Colliers International believes Toronto will see more purpose-built rental construction in the years ahead, echoing murmurs throughout the industry forecasting a boost in new apartments. The commercial real estate company is forecasting a few more city condo developments crossing over into rental territory during their construction, something Toronto has witnessed with high-profile projects such as The Selby and Kingsclub switching to rental.
“With the exceptionally low vacancy rate and the shift of preference from single-family homes in the suburbs to apartment-style units, the developers have begun to transition from condominiums to purpose-built projects,” Colliers stated in its Spring Land Report for the GTA, released Monday.
“Investors heavily involved in office and industrial real estate are now shifting into investing into multi-residential properties as well.”
It’s something other major real estate organizations have predicted. In its spring outlook report for Ontario, the Canada Mortgage and Housing Corporation (CMHC) said “demand for less expensive multiunit ownership and rental housing will grow faster, particularly in Ontario’s most expensive ownership markets.”
Currently, rental construction remains a drop in the bucket compared to condo construction in Toronto. In March, CBRE, a commercial real estate services company, released data on the slight uptick in rental housing construction in Canada, a trend it said was still in its infancy. For 2014, CBRE found that purpose built rentals made up just 12.3 per cent of apartment construction starts in 2014, compared to 87.7 per cent devoted to new condos.
However, 2014 still saw a modest increase in purpose built rental apartment construction compared to previous years. The average number of rental starts was 1,799 in 2014. Between 2009 and 2013, the number of rental starts averaged 1,546.
Developers committed to rental still manage to raise eyebrows. When Westbank announced that it would introduce roughly 1,000 purpose-built rentals — and not a single condo — in its redevelopment of the Honest Ed’s site at Bloor and Bathurst, it caught a number of real estate watchers off guard.
Ian Duke, a spokesperson for Westbank, said the company wasn’t surprised by the reaction the announcement generated. “Seen through the lens of the last twenty years it is an unusual decision,” he said.
“We’re seeing right now a historic opportunity to take advantage of incredibly low interest rates, which really is what is driving most of the resurgence in purpose built rental. We’re building Bloor and Bathurst to own and operate ourselves. From an investment perspective, we just think this is great place to build a significant long-term asset.”
Low interest rates are certainly a major factor tempting condo developers into the rental market, but the CMHC points out the high home prices and slow wage growth have also kept demand up for rentals.
Not every builder is expecting an uptick in rental, however. Concert Properties, a Vancouver-based company, has built 2,200 purpose built rental housing units in Toronto since 2002. Brian McCauley, President and COO of Concert Properties, is critical of forecasts calling for more rental building.
“I think there’s an awful lot of talk about it and an awful lot of press around the projects that have been stalled in sales and are being repositioned as rental buildings,” he said.
“I’m not so sure that everything we hear about is actually going to make it to rental housing. Once developers realize the cost of actually building it, owning it, maintaining it, I’m not sure it will make economic sense for the developers.”
Concert hasn’t bought land for a rental project in the city since 2009. The reason? The land is just too expensive.
“If you’re a company that has an existing portfolio of rental-residential and you can effectively put a new site into rental production with very low land prices, then that might make sense. But if you’re out there, trying to rationalize buying property today, an urban, high-rise property for rental purposes, it’s very difficult to make it work,” he said.
He also notes that it’s easy to misfire and oversaturate a neighbourhood with rentals. It’s a delicate balance. McCauley explained that that its four-phase project out in Etobicoke, Village Gate West, introduced 950 rental units to the area. Once the last phase was complete, “we had probably oversupplied the marketplace. It took us longer to lease up that building than we had originally intended.” A number of their master-planned projects are now a mix of condos and purpose-built rentals.
As far as the future is concerned, Westbank’s Duke ties rental building activity in the city back to interest rates.
“I think we are definitely seeing an upswing in purpose built rental in the market and this is a positive development in terms of housing diversity and affordability. However, we expect this shift will only continue for so long as the interest rate environment remains favourable.”