January 19, 2023

Purpose-Built Rental Development Trying to Keep Up with Demand

Several economic market fundamentals are lining up to make this a very positive year for the multi-residential real estate sector in Canada.

And one of those real estate assets that’s set to thrive in 2023 is purpose-built rentals, according to the comprehensive report, by consulting firm PwC, 2023 Emerging Trends in Real Estate.

“Purpose-built rental housing is a key focus for interviewees this year, given underlying demand drivers—such as immigration, international students, and people who no longer qualify under the mortgage stress test—that support rent increases,” said the report. “Rental demand has recovered from 2020 lows, and vacancy rates have tightened. But challenges facing the sector mean that it can still be hard to make the numbers work. Rising construction costs and other financial issues . . .  are causing some developers to think carefully about pursuing purpose-built rental projects.

“Overall, we can expect higher rents to drive down affordability. Affordability challenges will continue to affect a growing number of communities across Canada—not just the most expensive cities like Toronto and Vancouver—as rents in some cases reach or surge past pre-pandemic levels. Demand will be especially strong given trends in the ownership market, where rising interest rates are making it increasingly difficult for people to buy a home and make the transition from renting.

“While CMHC (Canada Mortgage and Housing Corporation) and other government programs are critical to building affordable housing, concerns remain about the amount of funding available and whether these initiatives truly target the right groups in the most effective ways. One solution that sometimes comes up is the possibility of converting excess office space and retail properties to affordable housing. Effective government support will be critical to making the numbers work in these cases.”

According to the report, multi-family residential housing was a frequently mentioned best bet this year, although the outlook was mixed. On the one hand, factors like rising immigration activity are driving demand both now and looking further out. But the PwC report wondered how this squares with discussions about delays in condo and purpose-built rental apartment projects amid current market pressures. One explanation is that the current environment favors investment in multi-family housing as opposed to developing it. And investing in rental housing has become attractive at a time of rising rents spurred by demand from people refraining from purchasing or unable to buy a home during a period of increased interest rates, explained PwC.

“With a growing share of households priced out of the for-sale market, demand for rental units is far outstripping new supply. Though population growth slowed sharply during the pandemic, demand is also rising from the many young adults eager to start their own households after moving back in with their parents during COVID. Further boosting demand is the increasing number of younger adults choosing to live alone, according to a report from economists at the Fed, perhaps a reaction to lockdown claustrophobia.”

Despite the challenges including construction costs and rising interest rates, developers are responding to the supportive demographics and current environment. More multi-residential units are being built. More purpose-built rentals are on the horizon as supply tries to keep up with the burgeoning demand for this type of housing today and into the future.

Chris Chornohos has a passion for real estate and helping his clients reach their business goals by providing Real Estate Investors and Owners with the first class valuation and advisory services to close more deals. Chris is also an investor, builder and developer. Reach out to Chris today to help with your Real Estate needs. 

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