Why Are There So Many Rental Apartments Under Construction?

It was not too long ago that Toronto could not build their condos fast enough. For several years in a row, Toronto had the rare distinction of building more condo units than any other city in North America, even cities four to five times larger like New York and Mexico City.  Torontonians didn't know whether to be proud or afraid. For some, this explosive growth of condos revealed a worrying trend toward an oversupply of condo units. This oversupply, it was believed, would lead to a larger number of units than buyers, and subsequently a market correction.

The thing is, we are no longer number one. Though the Toronto condo market still has many new units coming up, plans for new buildings have subsided some, and many developers who had once built condos have now put their focus on something quite different. Rental properties.

In fact, one Toronto developer in particular, switched mid-construction from condo building to rental building, even after some of the units had been pre-sold. Earlier this year, Urbancorp cancelled its Kingsclub condo complex for plans to build three rental towers instead. Some buyers who bought pre-construction were a little miffed that they were not going to have the condo unit they bought come to fruition. And who could blame them? After months or even years of waiting for their dream condo, all those who had invested in Kingsclub condo received were their deposits back. Not exactly worth the wait...

This swich from condo to rental apartments is a small portion of the rental construction boom under way. There are rentals also under construction all over the city. The number of new rental apartments under construction across the the GTA is at a 25 year high. We have not seen any rental construction since the early 1990s. So, why all this focus on rentals? Is there a fear from developers that building condos are not a good investment at the moment? Are they worried about a coming condo crash?

In some ways, developers are concerned over condo oversupply. Because of the explosion of condo construction in the past, it is not surprising that we would need to slow down. And at the moment, the condo supply seems to be healthy because the developers have pulled back a little plus the demand for them stays strong. Still, I think the real reason developers are going into rentals has more to do with their bottom line: Money. Simply put, rentals, these days, are profitable. They are catching on to what a lot of condo investors have been doing for many years now. They are cashing in on Toronto's impressive rental market.

It seems there has been a lot of water cooler conversations about the rise in condo prices, but rents have also been on the rise along with condo prices. As a renter, you are paying much more for rent in Toronto that you would have five years ago. Currently, the average 743 square foot unit rents for $1870/ month.

So, why would developers not get in the game? I'm sure they can see an opportunity when they see one. Instead of receiving a one time payout from a condo purchaser who buys a unit once, the developer just rents out the unit and had continuous cash flow paid out each month. It's the same thing condo investors have been doing for decades.

The rental market is very appealing. The vacancy rate is still relatively low in this city. Despite all the new condo owners who rent out their units, the vacancy rate in the downtown core still come in just below 2%. For the developers who focus on apartment buildings that are just for renting, the vacancy rate for these comes in at around 0.6%. Those are pretty good numbers for a developer.

But  why are these rentals being gobbled up? It appears there are more renters these days because more people spend a longer time in the rental phase. They need to build up more equity to buy, or maybe they find purchasing too much of a drain on their finances. The desire to live downtown burns strong for many and house prices rise keep home ownership out of reach for some.

 But renters are not just priced out or preparing homebuyers. There is a motherland of renters coming in the years ahead. The baby boomers will want to rent and live off the equity of their sold homes they lived in for decades.

The rental market may have had little appeal for a long time, but it's back in a big way. Developers are finally understanding what many small time condo investors have known for a while: Rents are strong and consistent in Toronto and renting has a big future ahead of it for Toronto.