NO ONE IS BUILDING RENTAL APARTMENTS — BUT THERE ARE WAYS TO CHANGE THAT
Experts believe slump will continue unless investors embrace innovation, Murtaza Haider and Stephen Moranis say.
Vacancy rates in Canada’s biggest cities may be at record lows, but so far that high demand has yet to trigger an increase in purposebuilt rental construction.
In fact, rental units have constituted only a small fraction of new construction since the early seventies, when rent control laws were first introduced in Ontario and British Columbia.
Real estate experts believe that the decades-long slump in rental construction will continue unless investors embrace innovative solutions, such as ones that facilitate joint ventures between entrepreneurial developers, who are looking for short-term returns, and institutional investors, who are in it for the long haul.
An NDP government in B.C. introduced rent control regulations in 1972. A Progressive Conservative government followed suit in Ontario in 1975. Over the next 42 years in Ontario, successive governments have subsequently extended the reach of the rent control regulations.
In 2017, the Ontario Liberals extended regulations to all rental units, including those that have come into use since November 1991 and which had previously been exempted.
As it stands today, Ontario landlords can increase rents on existing tenants at a government prescribed rate, which is set at 1.8 per cent for 2018.
Landlords may apply to the Landlord and Tenant Board for a higher increase in rent to offset necessary capital expenditures or other costs.
However, such requests are often met with renters’ anger and refusal to oblige.
Whereas renters have successfully lobbied governments to implement and tighten rent control regulations, it has not necessarily worked in their favour. Rent control regulations have turned the investors and builders away from purpose-built rentals to constructing condominiums while the demand for rental units has increased over time.
The Wellesley Institute, for instance, estimated that between 2011 and 2016, the number of renter households increased by 85,000 in the Toronto Census Metropolitan Area.
In comparison, Toronto registered only 10,000 rental starts during the same interval. With the shift from rental to condominium construction, renter households are thus being increasingly absorbed in condominiums owned by individual investors.
The fix, though, comes with uncertainty for renters, since the owner could take the unit out of the rental stock, requiring the tenant to relocate. And with record low vacancy rates in purpose-built rental buildings, the odds of finding a long-term rental unit remain equally low. Furthermore, starting a new lease is likely to be more expensive since vacancy rentals are not subject to rent controls.
That regulations hurt renters has been known for decades. Still, governments enforce such regulations to appease the renters, even though they are the ones who end up being worse off.
Walter Block, writing in the Mid-Atlantic Journal of Business in 1989, noted that rental vacancy rates in Vancouver increased after B.C. abolished rent control in 1984, thus giving renters some breathing space. In comparison, the vacancy rate remained stubbornly low in Toronto where rent control regulations were even further tightened.
If the status quo prevails, vacancy rates will remain low, offering renters few long-term rental opportunities in wellmaintained buildings. This could change if new purpose-built rental construction were to resume.
Derek Lobo, a real estate expert and the CEO of SVN Canada Inc., has structured innovative joint ventures between merchant apartment builders and institutional investors. He insists that rental construction is profitable because of the sustained demand from millennials, who are mostly priced out of the ownership market, and seniors who would like to maintain a quality of life without the hassles of ownership.
However, the new demand can’t be served by the existing rental units that have become functionally obsolescent. Mr. Lobo believes that the two-bed, one-washroom, eight-foot-ceiling unit with no air conditioning does not attract the new renters who can afford to rent, if not own, quality abodes.
A new class of high-end rentals could match the quality of condominiums while offering the security of tenure.
To achieve this goal, the builders’ preference for short-term gains has to be matched in joint ventures with the long-term investment needs and financing capacity of institutional investors, such as pension funds, whose preferences are for wealth generation and long-term cash flows.
New rental buildings could be placed near existing ones that have both surplus land and underground parking to be shared with the new buildings. In return, investors could assist with structural improvements to the neighbouring older buildings resulting in an increase in the supply of rental units and an improvement in the quality of existing ones.
Without innovative approaches such as these, purpose-built rental construction will continue to languish.