Sparking the Toronto Apartment Construction Industry

timthumbHow Condominiums Will Spark Toronto’s Apartment Construction Industry

The next five years will see a significant increase in the construction of new purpose-built rental apartments in the centres of Canadian cities. For years, the conditions have been favourable for building new apartments across Canada, but increasingly the signs are that the development industry is taking notice. Condominium developers, in particular, have great incentive to move into rental apartment construction.

To understand the changes ahead, it’s important to look back to see how purpose-built rental apartments have emerged as the sector that has led the real estate industry in growth. Apartments were not affected by the 2008 recession, and they continue to see rapid investment and improving returns due to a number of long-term demographic changes that have tipped the balance away from owning and towards renting.

The Perfect Storm
The purpose-built rental apartment industry is riding a perfect storm of suppressed supply and rising demand. Between 1975 and today very few apartments were built. This was largely the consequence of rent controls in Ontario and excessive regulation elsewhere. Rent controls and regulations have been easing over the past decade, but the result has still been a marketplace without enough apartments to meet rising demands. Most of the rental stock is now over thirty years old, meaning that any new apartments that are built are immediately placed at the top of the market.

On the demand side, people are increasingly looking for rental apartments because of long-term shifts in the country’s demographics. Baby boomers living in the suburbs find themselves rattling around in homes too large for their needs now that their children have left the nest. This group is looking to downsize, and move into neighbourhoods where the automobile isn’t as much of a necessity. Apartments which meet their accessibility needs, especially fewer stairs, are proving a compelling draw.

Young Professionals Lead the Way
But the long-term strength of apartment demand comes from today’s young. Urban professionals in their twenties and thirties are increasingly turning away from suburban living looking for smaller homes in vibrant downtown neighbourhoods. Between 2001 and 2011, over 50,000 people moved into the neighbourhoods in and around downtown Toronto. The overwhelming majority of these people were young urban professionals between the ages of 24 and 39.

Condominium developers have been largely responsible for serving the demands of this market. They have built so many condominium units, experts have started to fear that a housing bubble has appeared on the market. However, the reality is, while many condominium units have been sold to speculators, they seldom go empty. With demand increasing for purpose built apartments throughout Canada, the shadow rental market of condominium units has picked up much of the slack.

Long Term Gains Over Short Term Sales
This is where the transformation from a condominium boom to an apartment boom will take place. Whereas developers of condominiums have previously built to sell as quickly as possible, they can cut out the shadow landlord middleman and rent these units themselves, providing themselves with a long term income rather than a short term gain. There are already institutional partners looking for steady long term returns who can support these developers as partners in new apartment construction and management.

Condominium developers already know most of what they need to know to build new apartments. They know how to find land to develop, they already know how to navigate the municipal zoning process, they already know how to build attractive buildings, and they already know how to market a lifestyle for the people likely to live in them. The only thing they need to learn is how to determine the right rents, how to lease up the buildings, and how to manage the landlord-tenant relationship. If they need help, there are a number of management companies they can hire that can do this work for them.

The balance is tipping away from home ownership and more towards home renting. Between mortgage costs and condominium fees, the “ownership premium” can be as much as $200 per month compared to renting the same space. As a result of this, more people are looking at rental options. This trend is likely to continue for the foreseeable future.

It’s Time to Build New Apartments
There has never been a better time to build new apartments in Canada. The demographic and economic changes that support purpose-built rental apartments are now clearly in place. The only thing holding back new construction is a lack of knowledge in the opportunities available in this sector.

For more than 25 years, ROCK Advisors has been Canada’s expert in the multi-family rental apartment and student housing segments. Our extensive research and proprietary database have made us Canada’s apartment experts. The ROCK team offers a wealth of experience in brokerage, apartment development consultancy, market intelligence, and asset management. Based in Burlington, Ontario, ROCK serves developers, builders, owners, financiers and corporations of multi-unit apartment buildings.

To learn more about New Apartment Construction join us at the ROCK Conference Series, April 20 – 22, 2015. For more information and to pre-register visit our website rockadvisorsconference.ca

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