Demand for housing in Toronto has been on a steady increase for the past 20 years. In the early 2000’s new housing supply primarily consisted of low-rise housing classified by urban sprawl across the GTA. In 2006 the provincial government instituted the Greenbelt Protection Act to curb the urban sprawl and protect green space, effectively creating a ring around the GTA with minimal space for new low-rise housing. This paved the way for the condominium boom of the 2010’s. With demand for housing accelerating, the slowdown of new low-rise construction caused prices to rise sharply. Condominiums became the prime option for developers as demand for intensification grew. Scarcity on the low-rise side continued to see price growth and condo’s became the most affordable housing option. On the rental side, there was almost no new purpose-built rental buildings added to the Toronto housing supply since the 90’s. Vacancy rates dropped below 2%. Condominiums became the only option for new rental supply into a market desperate for more housing options and facing affordability issues. Pre-construction condo buyers became the new landlords as a way for investors to capitalize on the continued demand for housing. Communities across the GTA have felt the effects of the changing housing market, as prices continue to rise. The future of real estate is changing, driving many investors and developers to chase purpose-built rental projects now more than ever.

Affordability is a paramount challenge for the GTA real estate market. Toronto is the largest city in the country, and sees steady population growth each year, with inadequate new housing supply, ultimately driving up housing prices. The Federal Government’s immigration acceleration plan, announced in October 2020, will complement the anticipated growth in the coming years, aiming to reach a total population of over 8 million by 2031. With the average detached home currently selling for over $1 million, these prices are expected to jump, making home ownership less realistic for many people. Renting as opposed to owning will be a more viable option for some going forward. Toronto vacancy rates are amongst the lowest of many major cities in North America, averaging below 2% for the past 5 years, making it an ideal centre to build new rental housing.

Over the last 5 years valuations of 30 year old apartment rental buildings have skyrocketed with the aggressive purchasing of many institutional investors. Expecting a continued increase in demand across the GTA for years to come, today institutional investors have begun to focus on investing in new construction of purpose-built rental buildings. Part of this new construction is driven heavily by several changes to the development environment. These changes have caused some developers to turn from condominium to purpose-built rental projects over the last couple of years. When a developer builds a condominium, they pre-sell a certain percentage of the building and then the use the deposits as part of their construction financing. Meaning they need less equity invested than a purpose-built rental and can generate higher returns for their investors. Recently the Canadian Mortgage and Housing Corporation (CMHC) and other government and conventional financing programs have implemented higher loan-to-cost lending for purpose-built rentals, trying to level the equity requirements with condominium development. A major factor in any development budget are the city’s development charges. Recently the provincial government announced that for purpose-built rental buildings developers could defer paying development charges until the building is completed and generating revenue from rental income. This is a major reduction in the capital required upfront to build a purpose-built rental, further improving prospective returns for the development investors. The removal of rent control in 2018 allow developers to set the rental rates based on market demand going forward. In addition, by setting prices after completion of construction, purpose-built rental projects benefit from any real estate appreciation that may take place during development, and mitigate risks from inflation during the construction period. With the continued acceleration of construction costs these attractive features continue to push institutional investors towards purpose-built rental development.

Back in the 1970’s, 80’s and 90’s smart investors were pouring money into construction of apartment buildings and have seen them only continue to increase in value as demand for rental housing remains strong. “Many ultra-high net worth families in Toronto built their wealth by owning apartment buildings as long-term investments” says Devon Cranson, Founder and President of Cranson Capital Securities, an Exempt Market Dealer that provides accredited investors with private equity real estate investment offerings. “Today it’s harder for investors to own their own apartment building, however the increased demand for rental housing poses an opportunity for a new generation of investors to build their wealth through private equity investing in Purpose-Built rental projects alongside institutional investors.” The Canada Pension Plan Investments (CPP) cites a long-term opportunity to build and invest in building Purpose-Built rentals in the GTA as the reason behind their recently announced investment of $350M with a Toronto-based apartment developer. It is clear that the time is now for purpose-built rental investments in the Greater Toronto Area.