Developer bets on high-end rentals

With rents at record highs and vacancies at all-time lows, Canada is in the midst of a severe apartment crunch. Adrian Rocca is deploying rooftop pools, coffee-to-cocktail cafés and dog spas to get his country out of it.

The company Rocca founded and runs, Fitzrovia, has 8,500 rental units under development, more than any other builder in Canada, in what amounts to an unprecedented bet on high-end apartments in the country.

With higher rates of home ownership than many of its developed peers, renting in Canada has traditionally been seen as a transitory state for young people, or one reserved for those on lower incomes. But now that home prices and borrowing costs have spiralled out of reach even for many big earners, that may be changing. Rocca is looking to build an empire off that shift, and perhaps alleviate Canada’s broader housing shortage while he does.

“We feel passionately about changing that stigma,” he said on a visit to a finished building in midtown Toronto, after showing off a two-story gym with complimentary cold-pressed juices and a sky lounge tenants can book for entertaining. “We very much want to change the optics around renting. You can live in a beautiful building and be catered to.”

The demand Rocca is seeking to meet isn’t only from renters. With a background in investment banking and private equity, he also sees a growing desire among huge institutional investors, particularly Canada’s public pension funds, to own apartments.

Such investors have been ramping up purchases of finished apartment towers for years, but because Canada hasn’t been building enough

new ones since the 1970s, finding one to buy is about as hard as it is for a tenant to find a place to rent. Rocca wants to help solve both problems by offering Fitzrovia as a partner to institutional investors who want to finance new buildings, but don’t have the capacity to build them themselves.

So far, he’s focused around Toronto, and on the luxury market because its higher margins allowed him to get the business off the ground. But Rocca said he’s also courting those same big investors to build student housing and to buy and upgrade Canada’s older apartment stock.

Rocca said it was around 2017, when he left a job at landlord Tricon Residential Inc., that he noticed Canada’s immigration-driven population growth had pushed apartment rents past a tipping point that made building new units attractive to pension funds and other large institutions.

“Rents got to a level where it justified the development risk,” said Rocca, who started his career in mergers and acquisitions at Credit Suisse First Boston.

So far, Fitzrovia has partnered with two of Canada’s major pension funds and a publicly traded real estate company, whose names Rocca declined to share. He said the partners provide the majority of the project financing, though Fitzrovia owns five per cent to 15 per cent of each building and works as the developer and property manager.

While accelerating immigration and government moves to encourage multi-family construction have spurred ever more apartment development across Canada, it’s still not enough to keep up with the growth in demand. And the historic rise in interest rates over the past two years could make even the current pace of building difficult to sustain.

“The demand for rental is clear, but the cost side, it’s not clear that the accounting works out,” said Aled ab Iorwerth, deputy chief economist at Canada Mortgage and Housing Corp., the country’s national housing agency. “The risk that I’m concerned about is that the rental construction that’s going ahead at the moment secured financing maybe a year or two ago, prior to the interest-rate increases. With interest rates high at the moment, I’m concerned about how builders get access to construction financing.”

Rocca said he’s already seeing project launches slow down, and that more help from the federal government is needed, particularly to build new, affordable supply. He’s been advocating that the sales-tax break the government gave last year to new developments be extended to units currently under construction, as long as the builder starts another apartment project within two years. And governments, he said, should also grant new developments a 20-year property tax abatement to ensure their potential returns to investors justify the higher costs of interest.

Rocca has 12 luxury developments underway. A two-bedroom unit at one of those properties in Toronto rents for $3,900 — about double the area’s average for purpose-built apartments of the same size, which is $1,940, the latest available CMHC data show.

At that price point, his projects won’t solve the housing crunch for the low-income people feeling it most acutely. A minimum-wage worker, for example, would have to devote about half their monthly income just to afford the average rent on a studio in the city, according to the housing agency.

But housing experts, including Iorwerth, say new supply helps, even at the top end of the market. Those options may tempt high-income earners who’ve found themselves locked out of home ownership to upgrade, leaving their older, cheaper rentals for someone else to move into, and opening vacancies all down the line.

Rocca eventually plans to raise money for a fund to finance construction of units geared to lowincome tenants. The properties he buys and builds will still be linked with the same premium Fitzrovia brand, he said.

“We want to plug the gap around affordability by saying, ‘Hey it’s OK to rent, it’s OK to live in a building that has all these great services,’ ” he said. “You have all these events, you can meet and be part of this broader community, make some friends and have a real strong sense of belonging.”