The Return of Rental: Toronto's Cooling Condo Market Leads to Renewed Interest in Purpose-Built Rental
Overview
By: Zale Skolnik
For the last 40 years, development in Toronto has been dominated by condominium construction; however, with new discussions about purpose-built rental buildings, the development landscape in Toronto is exhibiting change.
Developers have long favoured condo developments over purpose-built rental buildings because of the higher returns and lower risks. In condo developments, developers can pre-sell units that have not been built, whereas with apartment buildings, developers must wait until completion of the building before renting their units. Additionally, many developers seek to avoid the hassle of becoming landlords. Becoming a landlord not only requires added and continuous responsibility, but in Ontario, landlords must also abide by provincial rent control rules. Developers of condo projects are unconcerned with rent control rules as the abidance to any such rules does not fall to them, but rather, to the individual unit owners who may decide to use their units as rental properties.
Contrary to the well-established patterns that have given way to 'Condomania', purpose-built rental developments are popping up all over Toronto. Rockport Group is planning The Montgomery, a new 27 storey apartment tower at Yonge and Eglinton; Morguard has completed The Heathview, two 30 storey apartment towers at Bathurst and St. Clair; and most recently, Westbank has announced plans for their Honest Ed's redevelopment project which will include 1000 rental apartments.
Climbing rents, low interest and vacancy rates and tax benefits are a few of the factors that make purpose-built rental projects attractive to developers. With guaranteed tenure and housing prices continuing to increase, rental is dually attractive for tenants who do not want the responsibility of ownership or cannot afford it (the average sale price of a detached home in Toronto was $935,122.00 in November, 2014).
Given the current condo climate in Toronto, purpose-built rental affords opportunity for healthy long term investments. It should come as no surprise then that the steady profit producers have attracted the eyes of institutional investors like pension funds. There have been several recent transactions where institutional investors were rumoured to have purchased entire condo developments from developers and then converted the projects into rentals for long term reliable cash flow (The Selby Condos at Bloor and Sherbourne and Kingsclub on King Street West are two examples of this).
As of late, apartment real estate investment trusts are the top performing REITs on the TSE and among investors, demand for rental is huge. The interest of these institutional investors has set off a storm of discussion and a renewed interest in purpose-built rental, as available opportunities for such large scale investment are in short supply. With Toronto's developers racing to catch up, it's a safe bet that we'll be hearing a lot more about rental in the weeks, months and years ahead.