Purpose-built residential rental market picking up steam in Canada, new report suggests

As pension funds and other big investors seek new, reliable income streams, purpose-build rental is at levels not seen in two decades.

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But everything new property entering the market has come at a price: Vacancy rates have risen to levels not seen in nearly 17 years as builders increase the supply of new units.

A report out Tuesday from Toronto-based Altus Group says the rental push is creating a situation that, until recently, was uncommon – soft rental markets where some landlords feel pressed to fill their buildings.

Nationally, the vacancy rate as of October 2015 was up to 3.3 percent, from 2.8 percent last year. That rate reflects vacancy in buildings with three or more units, but doesn’t include condominium apartments which are rented out.

“It’s basically Calgary which is throwing most of the market off,” said Peter Norman, chief economist with Toronto-based Altus Group, which considers anything above a 2.5 per cent vacancy rate a gentle market.

Altus looked at 34 markets across Canada and says only four can be considered tight markets, which have a vacancy rate of below 1.5 per cent – a proportion Norman says is hardly “catastrophic” poor the overall rental market.

Developers will also be finding methods to make construction of rental buildings profitable. Purpose-built apartments were 35 percent of apartment construction within the period studied, a percentage which includes condominium units rented. The percentage hasn’t been that top since the early 1990s.

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Altus noted that 2015 was record year for apartment transactions in the Greater Toronto Area, as $1.7 billion worth of existing units traded hands. Which was up from $1.1 billion a year earlier.

With buying costs continuing to rise for existing rental apartments, some investors are looking to developers to create them new buildings.

“There’s a market which has reasonably strong demand to it and rents are still rising. The economics of this mean that people who wish to purchase new purpose-built (rental properties) to own and retain them, see a chance,” Norman said.

Paul Finkbeiner, of GWL Realty Advisors which manages 286 properties across the country, said customers are visiting them asking for rental stock.

They’ve sucked away tenants from the crappy inventory that smells like cabbage.

“They don’t just want to get in and out, he explained. “Lots of pension funds don’t just want to get condominiums because you help make your money and you have to reinvest it. We want reliable ongoing income stream and apartments are simply that.”

The realty company discovered that, across the nation, landlords increased the rent they charge by typically 2.9 percent over the last 12 months, most of which could be a lagging effect of rents not responding to increased supply at this time.

“A large part from it, and it’s several blended across the nation, however, you have different rent control regimes,” said Norman, noting in certain markets, like Toronto, when a renter leaves the owner can set the rental rate at a new and higher rate.

Brad Lamb, a Toronto developer, said rental apartments make sense for any decade however, many developers are searching for quicker profit to allow them to reinvest the money.

“You’ll need far more equity (to rent construction). You have to put bigger guarantees and you can’t get the money out as quickly,” said Lamb, adding the apartment business is well suited for affluent people and pension funds pleased with a solid six per cent return on their own money.

Lamb said that, while vacancy minute rates are slowly rising, he thinks the impact is mainly on older structures because tenants will appear to condominium units or new purpose-built instead of old-stock apartments built-in the 1960s and 1970s.

“They’ve sucked away tenants from the crappy inventory that smells like cabbage,” Lamb said.

Derek Lobo, chief executive of SVN Rock Advisors Inc., said the vacancy uptick in Alberta is pretty much expected because of the sluggish economy within the province brought on by lower oil prices, but demand for apartments continues to be strong elsewhere he said.

“Construction is meeting a lot of the suppressed demand in the marketplace,” said Lobo, adding that low interests rates have made it affordable to construct and finance new apartment rental buildings.

gmarr@nationalpost.com

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