A RISE IN RENTAL PROJECTS
In addition to building condos for sale, some large developers are also entering the rental market
While new condo developments have seen healthy sales in Montreal for more than a decade, the renters’ market basically simmered on low heat, with few new buildings dedicated to tenants.
But over the last year or so, something has been cooking among downtown construction projects: a handful of new developments are being built that cater specifically to renters.
How does this work exactly? For decades, developers have been working with roughly the same model when it comes to getting their projects built. Most of them are backed by banks, and the financing activates once they’ve achieved a certain percentage, usually 50 or higher, of sales and deposits. At that point, the project is green lit, and construction starts.
For these rental projects, however, the structure of the financing is somewhat different.
“Large developers that have built strong relationships with banks are investing in massive apartment buildings and instead of selling condos to buyers, who then rent them out and generate rental income, they have eliminated the middle man,” said Saguy Elbaz, real-estate broker with Sotheby’s International Realty Québec. “Once the building is occupied, the builders can refinance based on the returns they’re generating, take the proceeds, and then move on to build the next project.”
This business is very hard to get into because without a solid track record, banks are unlikely to provide the financing necessary to build.
“No money comes in until full completion,” Elbaz said. “So only big players like Devimco and Canvar have the capital and reputation to build such buildings.”
So why are developers turning their attention to the rental market?
“It started when condo supplies became abundant, and everyone was talking about la crise des condos neufs à Montreal,” Elbaz said. “Developers realized that the competition was fierce and that the rental market had needs that weren’t being filled.
“So the ones who had a strong relationship with their financiers were able to transition into building revenue-generating properties. It’s lucrative because they build at cost, but rent at a premium.”
Ness Revah, sales manager at the TOM project, said his superiors are now considering going that route as well.
“They have done three successful condo projects and are now looking at building apartment buildings for rent,” Revah said. “With solidified relationships with their financiers and a good track record for the past six years, they’ll be able to build these new rental towers in the coming years.”
The impact on the rental market in Montreal has yet to be truly felt, but the potential effects could be beneficial for would-be tenants.
“When these buildings launch with three, four, or five hundred apartments available all in one shot, it’s going to flood the market in that area,” Elbaz said. “So other investors and landlords are feeling the pressure, especially when they need to find a new tenant; and on the flip side, investors will be less likely to buy condos as investments if this trend continues at the same pace.”
These buildings are catering to a wide range of renters, from students and young families to local professionals and companies renting for their travelling personnel.
“They’re a great choice for many because usually the rent includes heating, electricity, Internet and amenities,” Elbaz said. “Having only one monthly bill for your apartment is an accountant’s dream.”
“I really enjoyed the fact that I only had one bill to cover all my apartment costs,” said Phil Schrier, current tenant at the Le V project by Canvar. “When I sold my condo and started shopping for a new one, I realized that a good deal was becoming harder and harder to find, so I decided to rent.”
Elbaz expects many tenants will find themselves in that situation.
“Most first-time buyers usually have less than 20 per cent for a down payment and so they stay in the rental market until they can build the necessary capital,” he said.
“Tougher mortgage laws and rising prices will keep renters renting for longer, but it can also sometimes be more interesting to rent; your dollar goes further and there are no strings attached.”