December 2, 2021

Why Developers are Building Purpose-Built Rentals

Developers in Canada have an increasing interest in building new purpose-built rental projects to meet a growing demand for a lifestyle that continues to gain popularity.

There are a number of factors that have fueled that boom in recent years but a low interest rate environment has been the strong foundation for the burgeoning activity in this real estate sector.

Developers will tell you that interest rates are the main driver.

They are driving the costs of capital for the development projects to finance them at a more attractive level from a business point of view and they also are driving down the cap rates. It makes the pro forma click in the sense that developers can now get the yields they need for a development project.

With the financial environment appealing, developers are jumping at the opportunity to launch new purpose-built rental projects because the demand for that style of housing keeps growing across the country.

For example, at the recent Calgary Real Estate Forum, market research and advisory firm Zonda Urban (formerly Urban Analytics) released a report showing that Calgary has experienced a massive boom in purpose-built rental projects with 100 buildings launched over the last five years. Those buildings amount to 12,814 units across the city, including Cochrane and Airdrie. 

The demand in Calgary just illustrates the overall need across the country for rental housing. That demand is coming from several sources.

Millennials and other younger generations are not focused on home ownership and they see renting as a good financial choice. They saw the housing market crash of 2008-2009, particularly in the US, and are fearful of that taking place again in the future.

Also, in Canada, depending on the city they live in, the cost of home ownership can be out of reach for them for three reasons – the total cost to purchase a home is high, the cost of the down payment is therefore elevated, and there are the continuing costs of being a homeowner beyond mortgage payments. Another thing to consider is if they are buying a condo they have to worry about rising insurance premiums and the unpredictability of condo fees.

But renting a home has also become a lifestyle choice. For many, they don’t see homeownership as something to aspire to like generations before them. They don’t hold as much status in having a home as their parents did in the past.

For them, it also doesn’t make sense to tie up their net worth in housing because for them housing is like a consumer good.

Other factors contributing to that increasing demand for rental property include continued population growth across the country as well as rising immigration numbers.

The rental market has been dominated over the past few years by properties that have been around for decades. They are aging and lack a lot of the features a modern rental unit would have today.

Besides the fact that they are new, these recent projects, and much more to come, give residents amenities that simply are not available in the older rental buildings.

The older product served a purpose for its time but today residents want to experience more with their rental lifestyles.

Those lifestyles can also include ease of accessibility due to their locations in the inner-city or on transit-oriented developments.

Canada’s new purpose-built rental market is booming. Low interest rates, growing demand from certain demographics and lifestyle changes will continue to boost that segment of the real estate market for years to come.

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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Chris Chornohos is a leading real estate consultant, investor and developer with extensive experience within the commercial real estate industry. Contact me today.

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