With home ownership out of reach for many in Canada’s major urban markets, expect more and more Canadians this year to ask themselves: Why not rent?
In the Greater Toronto and Vancouver areas and in cities such as Calgary, Edmonton, Montreal and Ottawa, the multi-residential rental market is looking like a better option for people who want or need to live in cities.
With demand for residential units on the rise, the opportunities for residential investment are more favourable, and developers are actively evaluating the business case for bringing new residential rental buildings to market.
The trend toward renting is happening for a combination of reasons, not just rising home prices, says Jennifer Keesmaat, distinguished visiting scholar at the University of Toronto and former Chief Planner for the City of Toronto.
“When we look at the workforce and how mobile it has become, home ownership just doesn’t make sense in the same way it did,” she says. “In another generation you may have had a company job in a company town and that’s where you would live for your life. Work has become much more mobile and people are living in multiple places.”
Ms. Keesmaat also sees a change in attitudes toward rental housing, with more people now seeing rentals less as a temporary or last resort in a tight market and more as a stable option for longer-term living.
“It becomes a great housing choice for as long as you want to be there, but also has flexibility in case you want to move to another city,” she says.
“Rental accommodation is integral to attracting the young and the bright workforce,” says James McKellar, Director, Brookfield Centre for Real Estate and Infrastructure at York University’s Schulich School of Business.
The challenge for major Canadian cities, particularly Toronto and Vancouver, is to have an adequate supply of residential rental units for professionals and knowledge workers, he says, adding that despite public perception, “affordable housing” should be understood to mean more than just affordable home ownership.
Prof. McKellar adds that, with the exception of Montreal, housing policymakers and analysts have tended to overlook the importance of having a robust rental supply in a costly ownership market.
While year-over-year growth in residential house prices has slowed in the fourth quarter of 2017, the average home price went up 10.8 per cent to $626,042, according to research in 53 Canadian markets by Royal LePage.
This creates positive conditions for building more multi-residential rental housing development, says real-estate investment advising firm Bentall Kennedy in its Perspective 2018 report, the company’s annual outlook on Canada’s real-estate market and the economy.
“Data from the 2016 census indicates that for the first time in decades, home ownership rates are on the decline across most major markets – and at the lowest level nationally since 2001. The decline is most pronounced across those under 35 years of age – the prime renter cohorts,” says the report.
To a large extent, the gap in residential rental supply in Toronto and Vancouver has been filled by condominium units, which are often rented to tenants by their owners.
“In the 60s, 70s and early 1980s there was a wave of apartment buildings built across Canada, then the next wave was and continues to be in the form of condos,” says Paul Zemla, President of Investment Management and Chief Investment Officer for Bentall Kennedy in Canada.
But as Ms. Keesmaat points out: “In Toronto, on the one hand, this was a good thing because it added housing stock to the market that was needed desperately. On the other hand, it has created tension because within five years, 80 per cent of the condo units become occupied by their owners or investors. What this means is that it’s not a stable form of housing for the person who is renting, compared with a rental building that was specifically designed for renting.”
Mr. Zemla says, “It’s the desire for a live-work-play environment that is driving people to seek out these types of projects in major Canadian cities. Choosing to rent rather than buy to secure proximity to the epicentres of culture and commerce has been common practice in cities like New York, Chicago and Seattle for decades; this trend is finally gaining strength in Canada’s major metropolitan neighbourhoods.”
Opportunities on the rise
Multi-residential rental investment opportunities in Canada are particularly appealing because of the low vacancy rates — averaging 4.2 per cent nationally and less than 2 per cent in Toronto, and resulting in a relatively stable income profile.
Not surprisingly, the multi-residential sector has seen the highest total returns for any property sector in the IPD Canada Property Index for the second year in a row, at 8.1 per cent for the four quarters up to Q3 of 2017, the Bentall Kennedy report says, adding: “Vancouver (13.9 per cent) and Toronto (11.2 per cent) led the way with double digit returns and … even Calgary has experienced positive returns in each quarter of 2017 after a tough stretch in 2014/2015.”
Changing perceptions and evolving demographics are also opening up new opportunities.
“The quality-of-life perception in purpose-built rental properties is dramatically shifting, as hotel-style amenities, luxury finishes, mobile-integrated technology offerings, and concierge service are becoming the new standard in the sector,” Mr. Zemla notes. “Whether it’s an advancing millennial starting a family, or an empty nester downsizing, demand for larger units to accommodate evolving lifestyles is also on the rise,”
“Two-bedroom rents in Toronto are now commanding a premium in some neighbourhoods,” the Perspective report notes. Yet, “looking at suite mixes of projects under construction in Toronto suggests that developers are still scratching the surface of the two-bedroom market opportunity … Growing demand and a shortage of suitable accommodation provide an opportunity for purpose-built, multi-residential rental developers.”
As Ms. Keesmaat notes, a city needs a variety of housing types to have a “healthy housing ecosystem” that makes it comfortable for the people who live and work there. “Ensuring that we have market rental housing is about ensuring the stability of the overall housing system, including ownership housing in the city. They’re all conjoined,” she says.
A healthy supply of purpose-built residential rental buildings creates more livable communities across Canada, producing economic and social benefits for cities with aspirations for future growth and competitiveness.
This content was produced by The Globe and Mail's Globe Edge Content Studio in consultation with an advertiser. The Globe's editorial department was not involved in its creation.