Urban living: Room for rent

Headlines this year have described Toronto’s condo market as a ghost town, but recent data on purpose-built rental developments suggests the industry is on the cusp of a significant reset.

“There’s a wall of purpose-built rentals coming, particularly around transit nodes,” says Wes Myles, president and chief investment officer at Toronto’s Clifton Blake Group, a vertically integrated developer and REIT (Real Estate Investment Trust) that builds and manages upmarket purpose-built rental (PBR) communities.

Myles points out that Toronto’s housing stock is significantly undersupplied and this trend will only worsen with record immigration and expected population growth of about 150,000 annually. “You can’t build a housing policy hoping domestic and foreign investors will buy condos and rent them out,” says Myles.

His comments are supported by the analytics firm Urbanation Inc., which is reporting that construction began on 1,558 PBR units in the Great Toronto and Hamilton Area (GTHA) in the second quarter of this year, up 43 per cent over the same quarter a year ago. PBR starts were up 190 per cent in the first half of the year to 3,131 over the same period in 2022.

The total inventory of PBRs under construction in the GTHA has hit a multi-decade high of 23,376. An additional 159,176 were proposed for construction, with about half or 67,431 approved and in pre-construction.

This growth is primarily being driven by companies like Clifton Blake, Tricon Residential and Fitzrovia Real Estate. These dedicated PBR developers and managers, for the most part backed by private equity, institutional investors and pension funds, are attempting to rebalance the real-estate market in favour of new rental supply.

“Owning and operating PBRs offers a long-term, steady and defensive cash-flow stream that is desired by REITs and institutional investors,” says analyst Kyle Stanley with Desjardins Securities Inc. in Toronto. “Depending on jurisdiction, new-build product is also not subject to rent control, or is given a temporary rent control holiday, so it allows for robust returns, which makes development more attractive.”

Meanwhile, many regular condo builders have been forced to ice projects as a result of higher interest rates and dwindling demand. What’s behind this reversal of fortune? In part, the recognition by federal, provincial and municipal governments that incentives are needed to boost the supply of rental homes if Canada is to ever catch up to other G7 countries on a per capita basis.

“We’ve been lobbying all levels of government to recognize the difference between condos and PBRs for years,” says Myles of Clifton Blake, who specializes in multi-family rentals in Toronto’s core. “Now finally they’re having an epiphany and realizing we need to motivate builders to invest in new rental properties with professional ownership if we’re going to start solving the housing crisis.”

About a year ago the federal government and its housing authority the Canada Mortgage and Housing Corp. (CMHC) launched a number of new financing programs intended to bring thousands of new apartments to market as quickly as possible. At the same time Ontario removed its share of the HST and reduced development charges on new rental housing to spur delivery of a promised 1.5 million new homes in the next 10 years.

“The various measures put forward to stimulate rental construction will move the needle,” says Robert Hogue, economist at RBC Economics in Toronto. “But it will unlikely be enough to fully meet demand, especially in high-priced markets like Toronto where many potential buyers aren’t able to step on the housing ladder.”

He predicts that Canada’s rental housing gap could exceed 120,000 units by 2026, quadrupling the current deficit in the absence of a strong increase in construction starts.

Toronto’s Tricon Residential Inc. is chipping away at the deficit with the help of its private equity parent Blackstone Inc. of New York and institutional investors like the Canada Pension Plan Investment Board (CPP). It recently completed the first phase of Canary Landing at 131-181 Mill St. near the Distillery District. In total some 700 of 2,500 planned rental units across four developments will be affordable at Canary Landing thanks to a private-public partnership that includes Dream Unlimited Corp., Kilmer Group, Infrastructure Ontario and CMHC.

“All the units are finished the same and affordable housing is integrated throughout the community,” says Tara Tucker, vice president of public affairs at Tricon. “We’re aiming to achieve true economic diversity.”

Family-sized, three and four-bedroom apartments are part of the affordable mix. Tricon is building a further 725 affordable and market-rate rental apartments now under construction at 5207 Dundas St. W. near the Kipling subway station, co-developed with Kilmer Group and the City of Toronto.

“Removing the HST on new rental housing definitely made some projects that were on hold economically viable,” says analyst Stanley with Desjardins Securities. “But there is a lot more that needs to be done to really accelerate development.”

This includes reducing property taxes and development charges, which can inflate the cost of new rental apartments by as much as 25 percent. Clifton Blake Group, a company with nearly $1 billion in assets under management, has continued to see steady growth throughout the latest condo downturn. With three projects under construction and another three in pre-construction, Clifton Blake expects to bring about 550 new PBRs around transit hubs to market in the next 18 to 24 months and over 1,200 by 2028, a portion of which will be affordable and priced below market. These include Cricket Park, an eight-storey midrise at 1886-1928 Eglinton Ave. W., next to the future Fairbank subway station; and 1930-1938 Bloor St. West, a 17-storey tower with 120 apartments next to the High Park subway.

Similarly, Fitzrovia Real Estate, a developer and manager of upscale rental properties in the GTA, whose financial backers include Alberta Investment Management Corp. (AIMCo) and global asset manager Hazelview Investments, is building PBRs to help address the GTA’s rental shortage. These include The Grainger at 254 King St. E., a pair of mixed-use rental towers with 819 apartments; and 6 Dawes Rd. in Danforth Village, three high-rise apartment towers with a combined 923 apartments near the Main Street subway.

How big a shift toward the construction of PBRs should renters expect? “Many developers are kicking tires and crunching numbers, but these are big decisions,” says Hogue with RBC Economics. As Myles of Clifton Blake sees it, “The supply of professionally owned and managed PBRs versus investor-owned condos needs to be rebalanced. The current mismatch is likely to sort itself out by 2028.”