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Recent headlines about declining Greater Toronto and Hamilton Area (GTHA) rents have prompted Canadian real estate investors to look closer. While high interest rates have slowed overall rent growth compared to last year’s record highs, purpose-built rentals remain resilient.

Why are GTHA Rents Slowing?

The GTHA has seen a notable increase in new condominium rentals in recent quarters. In Q3’24 alone, Toronto saw a 52% increase in condos listed for rent. Driving the shift are highly leveraged investors and speculators, unable to sell at desired margins and facing rising mortgage payments. As a near-term solution, many are listing their condos as rentals, often at attractive, below-market rates.

Additionally, developers have delivered a record number of new condos, some of which are also being converted to rentals. These typically measure 400 to 500 square feet — sometimes as small as 350 square feet — and may be located in dense high rises, commanding lower rents. Notably, condo rentals under 500 square feet experienced the largest annual rent declines (7.1%-9.2%, Q3’24) in the GTHA, according to Urbanation’s UrbanRental Q3 2024 GTHA Rental Market Report.

What the Data Shows: Purpose-Built Rentals on a Positive Long-Term Trajectory

This influx of condos has temporarily slowed rent growth across all categories, but not equally. GTHA purpose-built rent growth, down in Q3’24, held onto approximately twice as much momentum as condos. Looking long term, however, GTHA purpose-built rents are up 17.5% over pre-pandemic levels recorded this quarter five years ago and continue to trend positively.

Rental Declines a Temporary Trend

Several macroeconomic drivers have supported the rental category’s long-term resilience and low volatility:

Population growth: After recent cuts to federal immigration targets, Canada still plans to welcome 1.14M immigrants over the next three years. The GTHA receives a significant share of Canada’s newcomers, who tend to rent.

Home affordability: The GTHA could overtake Vancouver as the most expensive housing market in Canada this year. Many Canadians choose renting over ownership due to the category’s relative affordability and flexibility.

Limited housing supply: Rental apartments are chronically underbuilt in the GTHA, even as purpose-built completions reached a 30-year high of 2,319 units YTD. With Canada needing more than 2.2 million such rentals by 2030 to meet excess demand, according to the National Housing Accord, the entrenched supply-demand gap will continue to support investments in purpose-built apartments.

Maintaining Growth in All Types of Markets

In periods of slower-but-positive growth, private REITs like the Equiton Residential Income Fund Trust (Apartment Fund) leverage strategies to maintain momentum:

Gap to Market: A healthy gap to market allows property owners to increase rents on natural turnover without outpricing tenants. The Apartment Fund, with a 35.1% gap to market as at Q3’24, achieved a 19.9% YTD rent increase on natural turnover, generating $40.0M in value. It was able to capture an average increase of $305 per new lease. The Apartment Fund’s recent strategic acquisition in Toronto aligns to its gap-to-market strategy with a 25% revenue gap to market.

Tactical Rent Pricing: In markets with higher vacancy exposure, strategic rent adjustments may be necessary to stay competitive. Even then, the Apartment Fund’s rental rate spread enables continued growth when compared to previous periods.

Quality Units: In tight markets, renters seek value-for-dollar. Units in the Apartment Fund’s GTHA portfolio average 710 square feet — typically larger than some newly launched condos — and receive on-site customer service, a notable driver of resident satisfaction. Desirable layouts support higher rents.

Rental Market Outlook:

• New condos’ effect on GTHA rent growth is expected to be temporary. As interest rates decline further in 2025, more condo investors will likely raise rents or transact units, stabilizing their impact on overall rent growth.
• The GTHA finds itself at the tail end of a period of oversupply. With Q1’24-Q3’24 condo starts down 54% compared to 2023, the resulting undersupply in the next three to six years will put upward pressure on prices and rents.
• Rentals with larger layouts and professional management will continue to drive a premium amid an influx of undersized condos. Strong fundamentals will continue to support rent growth in the purpose-built category, although at a slower pace versus recent highs. An anticipated reacceleration in 2025 offers investors the opportunity to benefit from a potential recovery as temporary rental declines resolve.

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While these numbers may seem concerning at first glance, it’s essential for investors to interpret them correctly when considering making an investment in condo development. A closer examination reveals valuable insights into the condo market and highlights potentially profitable opportunities, even as fewer cranes silhouette city skylines. 

Understanding the current condo market: Why some developers face distress 

In recent years, Canadian condo developers have had to adapt to the rising costs of borrowing, construction materials, and labour. Established and reputable firms have successfully navigated these dynamics due to their ability to absorb the costs.  

However, the rise in interest rates has also exposed inefficiencies that were previously masked by cheap capital and heated markets. Less prepared and unsophisticated developers faced a number of challenges: 

• New mortgage rules and higher interest rates, which slowed pre-sales and made it more difficult to capitalize new developments. 

• Increased monthly loan payments, which stressed finances for companies without sufficient cash reserves. Many developers rely heavily on leverage and expensive loans to finance land acquisitions. 

• Delays in approvals or execution, further straining financial resources. 

• Undisciplined financial management or inexperience in navigating the cyclical nature of real estate. 

For smaller, inexperienced, and less diversified condo developers, these issues have been particularly magnified. Some may file for bankruptcy protection, which can lead to insolvency. And when lenders lose confidence in a developer’s ability to repay loans, they can push projects into receivership. For developers — especially those with less experience — the loss of a key project can threaten the entire operation. This dynamic is increasingly evident in recent months. 

Taking a closer look at condo developer receiverships 

However, investors should recognize that insolvency or distress among a few firms does not indicate structural issues across the industry. It’s crucial to avoid generalizations and instead focus on the specific realities of the market. 

For instance, the number of projects in receivership doesn’t necessarily reflect the number of companies in distress. If a developer faces bankruptcy due to a few struggling projects, they may have other high-quality, financially viable developments that could also be impacted, which multiplies the apparent losses. 

It’s also important for investors to distinguish between different sectors and property types, as the dynamics vary significantly. For example, an office or land deal entering receivership says little about the viability of residential condo projects. Similarly, high-rise condo projects, which require higher up-front costs and much longer timelines, have experienced a greater increase in receiverships compared to mid- or low-rise developments. 

Ultimately, the risks facing a condo developer are highly individualized, even within the same sector or region. Though distress in the market should be considered, investors must evaluate expertise, experience, and financial practices at the firm level. 

High-quality developers are well-positioned for success 

A recent insight from Colin Doran, head of development advisory at Altus Group, describes well the current market reality: “There is less room for error. In the past, a developer could be good at sales and make their way to completion. Now they have to be good at all aspects, including planning and execution.” 

Of course, one could argue this has always been the case. Top-tier developers anticipate down markets and position themselves to thrive, even when challenges arise. These firms not only survive but often find themselves in a stronger position during economic downturns. 

To mitigate market cycles, experienced developers employ several best practices as a matter of course: 

• Purchasing assets for cash, when possible, and holding capital in reserve in anticipation of economic downturns or fluctuating interest rates. 

• Employing project-specific financing to ensure capital is dedicated solely to a project’s completion (rather than other business expenses/projects). 

• Avoiding selling units too far in advance of construction to reduce the risk of mismatched costs and revenues. 

• Taking a conservative approach to sales, costs, and development timelines, with contingencies built in for unexpected challenges. 

Tapping opportunities in the condo market

That said, even the current condo market offers opportunities. Despite a notable disconnect between buyers’ expectations of deals at low prices and sellers’ desires to minimize losses, there are attractive opportunities in the market that can allow firms to make accretive purchases. Discipline is key, however — investment firms should focus on purchases that align with their long-term goals, such as diversifying their portfolio or capitalizing on gaps in the market. 

Moreover, experienced developers have the expertise to take over projects at any stage, whether it’s a land-only site or a complex, in-progress development with existing plans and approvals. This flexibility allows them to maximize the potential of distressed assets over the long term. 

A market poised for recovery 

Although receiverships and insolvencies may continue to tick up through the end of the year as real estate companies contend with the lagging impacts of high interest rates, the worst of the high-interest-rate environment is likely behind us. 

With four interest rate cuts already in place and more expected this year, the real estate market is showing signs of recovery. In fact, builders have already broken ground on a larger-than-expected number of units, contributing to an overall strong first half of the year for construction. As well, construction costs have started adjusting downwards in some markets. 

As distressed firms exit the market, the spotlight returns to high-quality builders who have the expertise and resources to bring projects to completion. This shift is expected to lead to a stronger, more resilient market in the years to come. 

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To put the issue in context, the Canada Mortgage and Housing Corporation (CMHC) projects that Canada must build an additional 3.5 million new homes by 2030 to achieve housing affordability, or four million under a high-population-growth scenario. A CIBC economist places that figure closer to five million, factoring in non-permanent immigration. Whichever estimate one adheres to, the story is clear: Canada’s current pace of construction cannot keep up with surging demand. Nationally, housing starts fell to just over 220,000 units in 2023, far below the record highs set in 2021. 

Housing policy changes a welcome start 

Against this backdrop, the pace of change must be increased exponentially to deliver meaningful impact. This is particularly true in Toronto and Vancouver, cities notorious for development charges, red tape, and the longest approval delays in Canada. In the Toronto area, delays can add up to $50,000 to the price of a condo. Moreover, government charges and fees have come to represent more than 31% of the total cost of building a home in major cities, according to the Canadian Centre for Economic Analysis. 

Fortunately, there are signs that the industry may be headed in a positive direction. Governments at all levels have committed to reducing regulatory barriers that have historically stymied the creation of sorely needed supply. These new measures are a welcome start, but they will not have the impact needed to solve the housing crisis. Faced with a problem of this magnitude, stakeholders must set their sights even higher. 

Taking Aim at Exclusionary Zoning 

Record population growth and urban land scarcity underscore the importance of a high-density approach to efficiently house Canadians. However, exclusionary zoning practices have historically barred new apartments and condos in many residential neighbourhoods, favouring detached homes instead. Recent shifts in urban zoning reform could be early signs of a wider-scale moderation of this barrier in key markets. 

‘Gentle’ density approach is taking root

A significant catalyst for this shift is the $4-billion federal Housing Accelerator Fund. Launched in March 2023, the program provides funds to cities to expedite the creation of more than 750,000 new homes. Of more than 500 applications received, 179 resulted in signed agreements with the federal government. Applicants were asked to commit to ambitious reforms, with the voiced expectation that ending exclusionary zoning would be among them. In turn, numerous cities have signalled a willingness to permit multiplexes and other “missing middle” housing as–of-right (without conditions) in residential areas. 

Ultimately, provinces are constitutionally responsible for housing and have implemented policies to accelerate the creation of denser housing forms. For example, Ontario has permitted up to three residential units per lot since 2022. In April, Ontario passed its new housing plan, the Cutting Red Tape to Build More Homes Act. The act reduces development delays, removes mandatory parking minimums near transit, and eases the delivery of standardized housing. This expands on Ontario’s March announcement of $1.8 billion in funding toward municipal infrastructure projects that support homebuilding. In late 2023, British Columbia’s new housing legislation overrode municipal zoning to enable more small-scale multi-unit housing across the province. It also required local governments to take steps to reduce regulatory delays and review bylaws.  

What could the future of inclusionary zoning look like? 

While efforts thus far have focused on incorporating “gentle” density (multiplex, secondary suite, townhome) within existing residential neighbourhoods, it remains to be seen whether these policies will bring meaningful supply online. Granted, some permitted low-rise builds can effectively quadruple the housing available on a single lot. However, it is difficult to see detached-dominant neighbourhoods reconfiguring existing homes or creating new multiplexes in substantial numbers. 

As inclusionary zoning policy becomes normalized, however, we may see municipalities extending discussions to transitional, mid-rise-inclusive zones. These can be located at the periphery of low-density residential areas and along commercial corridors, such as those initially explored in Hamilton and Winnipeg. Transitional mid-rise projects can efficiently support density aims while better aligning to the scale private developers are seeking to complete.  

More extensive measures, such as promoting as-of-right density on transit corridors and other locations, might be a logical next step. Taken together, such approaches could serve to temper discussions around controversial urban boundary expansions, which may yet be required to help solve the housing crisis. Incorporating higher-density build forms, such as mid-rise condos, into the traditional suburban blueprint can offer a compromise solution at a time when action is critical.  

Encouraging Transit-Oriented Development 

Desirable high-density development has often pooled around transit hubs in major cities, providing value for investors and convenience to residents. However, even there, housing plans have historically clashed with restrictive zoning and, more often, arbitrary minimum parking standards for vehicles that may be neither desired nor necessary. In Toronto, a single parking spot can cost between $48,000 and $160,000 to build, inflating end-user costs and rendering some residential projects financially unviable. In response, we are seeing encouraging density policy changes and parking reform in transit-oriented priority areas.  

Reversing arbitrary parking minimums 

For example, British Columbia’s zoning reform (Bill 47) that took hold this year legalized up to 20 storeys along transit corridors. Further, it allows for 12 storeys within 400 metres of a route and eight storeys within 800 metres. Notably, the same provincial reform also bars municipalities from imposing off-street parking requirements beyond accessible parking in transit areas. Outside its transit-oriented districts, Vancouver eliminated parking minimums in the walkable West End and Broadway neighbourhoods. This improves the outlook in Vancouver, where development has favoured high-rises and detached residences with few options in between. Compelled by provincial law, Toronto established minimum density standards for development near transit stations.  

Like its catalyst effect on inclusionary zoning, the Housing Accelerator Fund has similarly encouraged some jurisdictions to densify along transit. Ontario cities such as Hamilton, London, and Vaughan have discussed plans to better accommodate building near transit. Brampton announced as-of-right zoning for fourplexes and four-storey developments within 800 metres of transit, which encompasses most of the city. 

Purpose-built rentals an ideal fit for transit corridors  

Investors may recall the introduction of last year’s federal and provincial tax incentives for the construction of purpose-built rentals. It is likely that apartments will figure predominantly into a new wave of transit-oriented housing. In many cases this is by design, with renter preferences increasingly skewing toward well-serviced, amenity-rich urban areas. For residents, these benefits can often offset the typically higher rent prices commanded by units along transit routes.  

For truly transformative results, municipalities must consider extending as-of-right densification to major roadways in addition to transit corridors. Furthermore, “stepped” density plans like Vancouver’s are less prescriptive, acknowledging that towering high-rises aren’t the only solution. Instead, such plans allow density to take the size and shape most beneficial to the community. 

Exploring More Innovative Approaches to Housing 

Beyond funding and adding density, expediting the creation of housing has been a focus of several new initiatives and proposals:  

Pre-approved home designs:

The federal government plans to update its catalogue of standardized home blueprints originally designed to accelerate housing production between the 1940s through the 1970s. Developed by the CMHC, the updated catalogue is expected to first focus on low-rise builds and potentially explore higher-density construction, such as mid-rise projects. The approach could reduce approval times for financing and municipal permitting by up to a year, according to experts cited by the government.  

Like the CMHC effort, British Columbia is exploring its own library of accessible home designs. Under the Standardized Housing Design Project, builders can expect to gain access to 10 modular designs for laneway homes, duplexes, and triplexes. Both catalogues should launch in 2024. 

While it is encouraging to see governments take aim at systemic barriers to housing creation, they must carefully consider how these approaches can be executed from a development standpoint. For developers, practical constraints include the scarcity of buildable lots, and building requirements can differ from region to region. Furthermore, extending the strategy to mid- and high-rise applications is complicated by their numerous site-specific engineering and design considerations. To genuinely create housing relief, the goal of ongoing consultations must be an actionable government policy that reflects industry realities. 

Unlocking government lands:

In most major metros, land available for infill development remains scarce and expensive. Some cities, including Hamilton and Burlington in Ontario, have stated they will explore partnerships for the development of public lands. Calgary’s new Housing Land Fund, introduced in March, serves to reduce barriers for the usage of surplus municipal lands for development opportunities. 

Office-to-residential conversions:

Converting office space to residential homes sidesteps net-new construction and repurposes underutilized buildings. Canada’s government announced its aim to redevelop surplus federal offices into more than 2,800 affordable homes in Calgary, Edmonton, St. John’s, and Ottawa. Some building owners and investors faced with high vacancy rates are also increasingly looking to this approach. Not without its challenges, repurposing can include costly layout, plumbing, and HVAC changes.

While stakeholders can and should pull all levers available, the scalability of niche approaches must be fully considered. A patchwork of initiatives may collectively see some results, but necessarily highlights the need for larger-scale development. 

Private Investment Will Play a Major Role in Relieving the Housing Crisis 

On the heels of these many initiatives, the federal government unveiled in April a total $21-billion investment designed to further accelerate housing density. It includes a $15-billion top-up of the Apartment Construction Loan Program, as well as $6 billion to help provinces build the infrastructure needed to support new housing.  

Cities and provinces hoping to tap into this funding must commit to many of the approaches outlined above. That includes cutting development approval times to 12 to 18 months, eliminating parking minimums near high-frequency transit lines, and as-of-right construction for pre-approved designs. This push is the most encouraging yet, but public policy is only one part of the equation. 

Tellingly, Prime Minister Justin Trudeau’s announcements echoed the CMHC, which has long recognized the private sector’s important role in addressing the country’s housing shortfall. It has maintained that well-run, accountable firms have access to the capital and expertise necessary to achieve homebuilding at scale. To get there, more must be done to dismantle onerous regulatory frameworks that inhibit development and construction. Unlocking private productivity can help build housing faster, improve project viability, and reduce unnecessary costs that otherwise get passed to Canadians. With public and private stakeholders working together, only then might we be closer to relieving the housing crisis. 

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The purpose-built rental market in Canada broke new ground in 2023. Rental vacancy rates fell to a 35-year low, according to the Canadian Mortgage and Housing Corporation’s (CMHC) latest report. Meanwhile, average rent growth and asking rents ended the year having achieved record highs. The result was a historically tight rental market, shaped by demographic shifts, interest rates, and low housing supply. 

Reflecting on these trends’ lasting impacts, investors can achieve some clarity on what to expect in the year to come. With rentals charting a growth trajectory due to chronic undersupply and immigration, certain markets show exceptional promise. Factors like increased government support are likely to provide additional tailwinds over the long term. Ultimately, investors can expect the purpose-built market’s overheated conditions to gear down but remain tight.  

Rental growth to continue at a moderate pace 

In 2023, rental affordability declined nationwide as average Canadian rent growth (8%) exceeded average wage growth (4.1%) by a large margin. Notably, rent growth among purpose-built rentals (12.8%) outpaced other rental types, according to Rentals.ca. CMHC found that the share of units with rents below 30% of income was statistically zero in Toronto, Ottawa, and Vancouver, with declines in Edmonton, Calgary, and Montreal. 

However, this disparity is expected to moderate somewhat in 2024. The average Canadians’ salary is forecasted to increase by 3.6%. Meanwhile, record rent growth is expected to skew lower toward its five-year average of approximately 5%. A greater balance between the two reinforces healthy turnover rates. 

Comparatively more affordable markets like Edmonton may continue to see rent increases above the national average. However, rent increases in less affordable cities like Toronto and Vancouver are likely to remain below the baseline. High average rents may have a limited, if not short lived, moderating effect on turnover and subsequent opportunities to price rents to market. Though institutional investors have the advantage of a long investment horizon, a thoughtful approach to increasing revenue potential (such as leveraging renovations) can help make the most of each natural turnover. 

Signs of excess rental demand 

Purpose-built rentals completed in 2024 and beyond are well positioned to absorb chronically unmet demand at market rates. Of course, the question is whether construction can be made economically viable to capture this excess demand. In that regard, a broad trend of policy changes encouraging the construction of purpose-built rentals provides cause for optimism. Indeed, early signs suggest incentives may already have taken effect, with rental starts ending Q4 at a 10-quarter high. Nonetheless, it is important for governments to explore further incentives – tax breaks, zoning, streamlined permitting – to increase project viability. 

Insert map: Rental apartment supply grew in most large markets last year 

Though many factors contributed to excess rental demand across Canada, low supply was a key determinant of tight markets. That is not to say that there was no meaningful growth among purpose-built rentals. While purpose-built growth in the GTA paused in 2023 (-0.5%), rental stock expanded by 5.8% over the last decade. Ottawa added more than 3,500 rental units, a record high. Edmonton added 3.7% to its already broad supply, while Vancouver added 2.7%. Calgary made the greatest proportional leap with 6.2%. Nationally, demand still outpaced growth and vacancies fell to new lows.  

The parallel change in 2023 vacancy rates among rental condos offers yet another reliable indicator of undersupply. Despite adding new supply, condo vacancies fell from 1.6% to 0.9% nationally. Condo rents are at a premium compared to purpose-built units. In a high cost-of-living environment, the pace with which new condo supply was absorbed underscores the importance of expanding purpose-built rental stock.  

Immigration to continue driving rental demand 

Major urban centres represent promising markets with room for rental growth not only in 2024 but in years to come. There, high immigration coupled with low supply is expected to continue to generate low vacancies and higher rents. Population growth is on track for new highs, with Canada welcoming up to 485,000 permanent residents in 2024 and another million in the following two years. 

Immigration comprised the lion’s share of Canada’s population growth in 2023. The number of international students increased by 29%, or more than 300,000, over 2022. With a high tendency to rent, immigrants were observed as the main driver of tight market conditions in many markets. 

Toronto typically receives more newcomers than any other Canadian region, and Ontario added record numbers in Q3 2023. The story was much the same in British Columbia, where international migration grew by 56% compared to 2022. Quebec welcomed a record number of non-permanent residents in 2023, including students, of which Montreal attracts the largest share. Likewise, Edmonton and Calgary saw significant interprovincial migration encouraged by employment gains and an affordable cost of living. Even mid-size markets, such as Hamilton and London in Ontario, received record or heightened levels of international migration last year.  

Low homeownership affordability to drive rental market tightness 

With home prices anticipated to rise further in 2024, more Canadians can be expected to consider renting’s enhanced value proposition. In 2023, the national aggregate home price grew by 4.3% YoY.  Prices softened mid-year but increases in mortgage-servicing costs and condo maintenance fees far outpaced potential savings. In the Toronto area, for example, owners of a median-priced condo allocated a record share of income (more than 40%) to associated expenses.  

Although rents also increased across markets, the cost difference between renting and owning made renting even more attractive. In the clearest example, the average two-bedroom condo in Vancouver cost $2,212.74 more per month to own than to rent last year, owing in part to mortgage increases. Of course, in Edmonton, Canada’s most affordable major condo market in Q2 2023, the gap narrows dramatically. There, condo ownership costs amounted to 13.8% of household income, providing a relatively accessible alternative to renting. Nonetheless, rental vacancy rates nearly halved in 2023, underscoring potential buyers’ main hurdle: amassing a down payment in a rising price environment. It is safe to say that lower home affordability contributed to this second consecutive year of turnover declines in 2023. 

Look out for a growing group of new and young renters 

CMHC’s report identified the accelerated growth of potential renters aged 24 and under in 2023. Where this generation of future tenants goes, new rental demand is likely to follow. Creation of new supply in areas where this group chooses to put down roots can prove advantageous in the years to come. Likewise, property owners and developers will have to consider catering to this demographic’s lifestyle expectations. 

This demographic saw higher growth than other age groups in most provinces. In many regions, this population shift was attributed to employment gains which encouraged the formation of new households. For example, Alberta’s young renter growth was more than twice the national average as Edmonton and Calgary observed stable youth employment. Where employment gains were significant, including Toronto (+5.6%), Montreal (+2.7%), and London (+8%), young renters played a role supporting demand.  

2024 provides solid opportunities for purpose-built rentals 

Immigration, home unaffordability, and unmet rental demand are expected to continue to drive the performance of purpose-built rentals into 2024. As the markets respond to widely expected interest-rate cuts, the year ahead may well represent continued growth for investors as well as value for residents. 

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Office, commercial, and retail property values and profits are strongly correlated with the Canadian economy, which entered the new year exhibiting virtually flat growth. Interest-rate sensitive single-family resale home prices, which can be equally driven by mass psychology and speculation, saw a moderate but clear correction with the national Home Price Index softening for a third consecutive month in November 2023.  

Understandably, a focus on these stalling real estate assets can lead to cooling investor sentiment around Canadian real estate at large. However, it is important that investors rightly observant of these economic trends fully understand their impacts, as they do not affect every facet of the real estate market equally. Indeed, it is in this economic environment that multi-family apartment assets are viewed by some as a strong opportunity for investors seeking alternative exposure in 2024. 

Interest Rates 

After raising interest rates 10 times since March 2022, the Bank of Canada’s (BoC) aggressive campaign against inflation finally moderated into a dovish hold at its current 5% benchmark rate. Rates are widely expected not to climb any further in 2024, but the question of potential cuts – when and how much – has divided rate watchers.  

As the effects of the Bank’s hiking cycle continue to work their way through real estate markets, raising investment capital for acquisition and development can prove more challenging for firms. Retail investors dealing with the personal impacts of a slowing economy have less liquidity to invest. Along with fewer investor funds, a higher cost of capital can slow firms’ ability to obtain leverage for construction. Meanwhile, REITs holding mortgages maturing within a high-interest period face the possibility of significant interest-cost increases. As a result, investors will see slower, more conservative markets and downward pressure on the value of some property types.  

A study of multi-residential apartment assets’ relative strengths will find them well-positioned to mitigate the effects of high interest rates. Investors will note that cap rates, a measure of potential profitability partially driven by interest rates, have been unfavourably rising across most major Canadian property types. From Q4 2021 to Q3 2023, and through the BoC’s rate-hiking cycle, softer-than-expected real estate activity saw national average cap rates increase for major property types; however, multi-family cap rates remained at the low end of all major property types, buoyed by expectations of rent growth and investor demand. Canadian institutional investors, which have been net sellers of real estate since the pandemic, have continued to make multi-billion-dollar investments in multi-family properties.  

Investors interested in the multi-residential space should continue to look to private REITs displaying strong fiscal governance through interest-risk mitigation strategies, such as staggered mortgages. With less-prepared buyers sidelined or struggling in the current economic environment, financially healthy firms can take advantage of the weakness in the market to purchase assets at discounted or distressed pricing levels and grow their portfolios efficiently. 

Entrenched Inflation Costs 

According to the BoC’s 2023 Monetary Policy Report, core inflation has dropped from 2022 highs to just below 4%. Excluding shelter costs — the sole component of the BoC’s inflation measure that has not experienced a decrease — inflation currently rests just shy of 2%. Although inflation growth remains muted in the wake of the BoC’s rate-hiking cycle, like shelter costs, many of the attendant increases remain entrenched. For example, residential building construction costs across 11 major Canadian metros rose 6% year over year in Q3 2023, driven by increases in material costs and construction wages. Property owners are faced with higher operating, utility, tax, and maintenance costs.  

Stable rental income from multi-residential apartments provides a welcome buffer against possible property-value fluctuations, offering firms another way to reward patient investors. Rental income is considered an effective hedge against inflation in the current environment with asking rents hitting new highs across Canada. However, like owners of other property types, multi-residential apartment owners face increased expenses in categories ranging from insurance to payroll.  

For this reason, REITs best positioned to weather inflationary cost increases include those with an active approach to property management. Firms who manage properties directly versus outsourcing their management to third parties are better able to tap into economies of scale through vendor partnerships, create operational efficiencies, and act on opportunities to create cost savings. Likewise, portfolios with a substantial gap-to-market benefit from a greater ability to absorb or mitigate costs. 

Construction Labour Shortage 

A severe construction worker shortage continues to fuel Canada’s chronic inability to meet skilled employment demand on job sites across all major property types. This serious imbalance results in longer construction timelines and stalled projects and poses greater risk for investors.  

By mid-2023, the industry had erased a surge in post-pandemic hiring from September 2022 to January 2023. A partial rebound in October and November 2023 did little to advance the situation for housing and infrastructure labour demand, resulting in a net loss of 15,000 jobs since year-start.  

Worker loss due to retirement is the primary contributor. According to forecasts, Canada will see more than 245,000 construction workers retire by 2032, roughly 20% of the 2022 labour force. Meanwhile, demand growth is expected to reach almost 300,000 workers. The widening gap has already sent labour costs soaring with construction wages increasing nearly double the pace of other industries in 2022. Economic conditions have slowed the pace of construction as firms trim headcount, resulting in 67% of home builders and developers reporting plans to build fewer units.  

Though November 2023 posted a decline in rental housing starts, they remain at multi-decade highs in both absolute and per-capita terms, underscoring expectations that starts in the category will remain elevated through 2024. This strength can be attributed partly to past and newly implemented government programs which reduce the impacts of construction-related challenges. The complete removal of harmonized sales tax on purpose-built rental projects in many provinces provides an immediate reprieve from mounting construction costs, while initiatives like the federal government’s recently announced express entry status for immigrants skilled in the trades suggests sustained political will on the issue. Organizations, such as the Canadian Chamber of Commerce’s Housing and Development Strategy Council*, help to ensure federal housing and development policies around labour reflect industry realities.  

*Equiton is a member of the Housing and Development Strategy Council 

Housing-Market Sentiment and Policy Risk 

Despite the country’s diverse real estate offerings, a wide-ranging media focus on Canada’s housing supply crisis has in many ways soured investor sentiment and spurred some governments to enact policy in this area. While not expected to have a significant impact on housing supply or pricing, foreign purchase bans, vacant-home taxes, and the application of taxes to newly constructed and substantially renovated residential housing instead create new sources of apprehension for investors hoping to enter the single-family home market. Less directly, interest-rate increases have taken hold in the form of softening residential resale prices and stymied growth.  

In this complex environment of fluctuating home values and heightened policy risk, investors are reminded that single-family homes, although a major component of Canadian real estate, do not represent the sector at large and that the demographic shifts informing Canada’s housing policy response may represent opportunities for other property types.  

The federal government expects to welcome 500,000 new immigrants annually by 2025, creating further demand for housing which is widely expected to be unmet. Low housing supply and affordability has pushed more Canadians into the rental market and limited existing renters’ ability to transition to homeownership. That said, more Canadians within the younger and senior tranches of the population are actively choosing to rent, seeking a more affordable, urban-oriented lifestyle free of property upkeep. Rentership growth is more than double the rate of homeownership and highest among the financially stable baby boomer generation, which numbered more than 9 million in 2021.  

REITs that focus their development and acquisition strategy on high-growth regions in Southern and Western Ontario, as well as growing metros in Alberta, British Columbia, and Quebec, will have an advantage as immigrants settle into populous but underserved markets. Additionally, property owners catering to Canadians’ advancing preference for rental living through condo-like amenities and community-building will be rewarded with high-quality residents and the ability to right-price rents to the market’s currently higher levels. 

Mitigating Risk with Multi-Residential Apartments 

Sophisticated investors who understand these challenges and how different categories of real estate are impacted can more clearly see and take advantage of investment opportunities in Canadian real estate while other investors shy away. With the moderation of cost increases attributed to inflation and the resolution of rapid shifts in monetary policy, Canadian housing and multi-residential apartments should continue to yield rewards for investors over the coming years. 

IMPORTANT INFORMATION: This communication is for information purposes only and is not, and under no circumstances is to be construed as, an invitation to make an investment in Equiton Residential Income Fund Trust (the “Fund”) or with Equiton Capital Inc. Recipients of this document who are considering investing in the Fund are reminded that any such purchase must not be made on the basis of the information contained in this document but are referred to the Confidential Offering Memorandum which may be obtained upon request.

The post Understanding Key Challenges Impacting Real Estate in 2024 appeared first on Equiton.

Demand Drivers Creating Opportunity for Multi-Residential Apartments

1. Surging population growth 

Population growth across Canada will surge in the coming years, stoking further demand for multi-residential housing. The federal government has reiterated its plan to welcome 500,000 immigrants annually by 2025. Meanwhile, Canada’s share of international students and temporary foreign workers is also booming. Growth is not expected to affect all regions equally, as newcomers tend to settle in heavily populated major metros. 

Sources: Ontario.ca, Alberta.ca, StatCan (Edmonton), StatCan (Calgary)

2. Housing supply and affordability issues 

Canada is facing a housing shortage tied directly to its longstanding inability to create new housing supply in line with population growth. The entrenched supply-demand disparity among single-family homes has worsened with decades-high interest rates exacerbating upward pressure on home prices, limiting renters’ ability to transition to homeownership. A parallel surge in demand for rental accommodation is expected to outstrip supply by 120,000 units by 2026, quadrupling the demand for rental accommodation seen in 2023. Tight market conditions across Canada have pushed the average asking rent to a record $2,149 in September 2023. Through it all, rental apartments remain a comparably affordable and desirable alternative to ownership for residents seeking a lifestyle in areas where single-family homes may be out of reach. 

3. Popularity of rental living  

Homeownership in Canada is on the decline since hitting its peak in 2011. For many renters, economic headwinds have rendered the idea of homeownership impractical, but the fact is more Canadians report renting by choice. A recent national survey of approximately 20,000 renters found that 46% had a preference for rental living. When making the increasingly popular choice to rent, those who adhere to the popular rental lifestyle cite affordability, building services, a sense of community and eco-friendliness as important considerations. Rental property holders who recognize this and provide excellent amenities and value-for-dollar could see positive impacts on resident well-being, as well as their portfolio balance sheets.  

4. A new generation of financially stable renters 

In Canada, growth in rentership is highest among the baby boomer generation comprised of people aged 56 to 75. Baby boomers numbered more than 9 million in 2021 and made up the largest portion of the country’s homeowners. As this generation ages, many seek to tap into home equity to help fund retirement or shed upkeep-intensive single-family homes for a simpler lifestyle. Baby boomer renters are typically financially stable and prioritize amenities like communal areas, landscaping and security; conveniences like tenant apps and walkability; and a strong rent-versus-own proposition driven by today’s high-interest, high-inflation environment. 

5. Favourable government policy 

With attention focused on housing supply Canada-wide, political will at all levels of government is being directed at the creation of new housing units and the development of multi-residential apartments in particular. For example, the federal government recently removed the Goods and Services Tax on the construction of purpose-built rental housing. Soon after, the Ontario provincial government removed its portion of the Harmonized Sales Tax (HST) on purpose-built rental housing construction started between Sept. 14, 2023 and Dec. 31, 2030, and completed by the end of 2035. As such initiatives gather momentum, stock of modern, high-quality rentals can provide an attractive alternative to condo apartments for prospective and downsizing homeowners alike. 

Tapping into investment opportunities in multi-residential apartments 

 Amid these tailwinds, Canadian multi-residential apartments can provide investors with not only stable income but also the potential for strong capital appreciation as the demand for rental units continues to significantly outpace supply. The Equiton Residential Income Fund Trust (Apartment Fund) offers investors the opportunity to benefit from these substantial demand drivers by investing in a growing, highly selective portfolio of Canadian multi-residential properties and developments. With an eye to the future, Equiton’s experienced leadership team continues to seek out opportunities as new trends emerge. 

IMPORTANT INFORMATION: This communication is for information purposes only and is not, and under no circumstances is to be construed as, an invitation to make an investment in Equiton Residential Income Fund Trust (the “Fund”) or with Equiton Capital Inc. Recipients of this document who are considering investing in the Fund are reminded that any such purchase must not be made on the basis of the information contained in this document but are referred to the Confidential Offering Memorandum which may be obtained upon request.

The post Five Trends Driving Multi-Residential Apartment Demand appeared first on Equiton.