As rents surge, why aren’t we building more apartments?
Toronto builders overwhelmingly prefer to build condos, so they can get a faster return
Anyone who has tried to find a rental apartment in Toronto knows the heartbreak. The outrageous rents, the waiting lists, the hopes of finding a decent place at a decent price, only to discover it’s an uninhabitable dump.
There’s no question that it’s a landlord’s market. There’s big money to made if you have a unit to rent out — and yet Toronto seems strangely reluctant to meet the skyrocketing demand by building more rental apartment buildings.
In fact, only a tiny percentage of residential high-rises being built in Toronto are designed as rental buildings. The rest? Condominiums.
In a report released last week, commercial real estate broker CBRE found that a full 89.1 per cent of residential towers being built in Toronto are condos. Just 10.9 per cent are designed to be rental buildings. In 2018, according to the city of Toronto, 2,472 new rental units were built in this city. In the same year, a whopping 11,816 condo units were completed.
The reason? Toronto has one of the hottest condo markets in the country, and when developers have the choice between making their investment back almost instantly through condo presales
— versus a slow trickle of rental income over decades — they will almost always choose to build a condo tower.
When developers opt to build condominiums, “they can presell units before ever putting a shovel in the ground, complete the project and sell the balance of the units and collect a handsome profit. In and out fairly quickly,” said Paul Morasutti, vice-chair of CBRE. In contrast, Morasutti said, buildings designed as rentals take longer to bring developers any income; in most cases, it can be years until the building is ready for rentpaying tenants.
Keith Reading, director of research at Morguard Corp., a Toronto-based real estate company which owns and manages commercial and residential buildings across North America, agrees that fast money is the reason Toronto builders prefer condos to rentals.
“If you’re looking at this as an investor, you can get a return now rather than waiting two years. A lot of investors like condos, because they can get in, make their money, and get out quickly, rather than waiting,” Reading said. “It’s lucrative, and I don’t see it changing any time soon.”
Making things worse for renters, the handful of rental buildings which are going up aren’t exactly budget-friendly either, Reading said.
“The rental buildings which are going up, aren’t what we would typically think of in terms of rentals. They’ve got ultra-premium amenities, they’ve got higher rents. What we need is things lower down the price ladder,” Reading said.
Part of the problem is that the condo market is hotter in Toronto than most other places. In other cities, where condo sales are slowing, developers are more likely to consider building rentals.
Reading says the high demand for condos in Toronto is driven by downsizing baby boomers, people buying a place for their kids to stay while in university and younger people pushed out of the pricy market for singlefamily houses. A report by Royal Lepage last month found that the median price of condos in the GTA had risen more than 9 per cent in the last year, up to $743 per square foot.
There’s another factor pushing demand for condos, argues Geordie Dent, executive director of the Federation of Metro Tenants’ Associations: They’re seen as a good investment by people who never have any intention of living in them at all.
“A lot of people are using them as a speculative investment. They’ll buy them and then flip them a couple of years later. Sometimes they don’t even rent them out to tenants. It’s easier to just keep them empty,” Dent said. So what’s the solution? With the vacancy rates for rental units in this city hovering in the low single digits, the lack of new housing — especially of the affordable variety — is becoming a crisis, Dent said. It’s also something that was all too predictable, he argued.
“This is exactly what a lot of people predicted would happen when governments stopped investing in rental housing and giving incentives to builders,” Dent said. “When I moved here from Vancouver 10 years ago, I was really happy to be in a city where you could easily find a place to rent. After five years, that stopped being the case.”
In Toronto, the vacancy rate in the city’s 313,000 rental units is just 1.1 per cent. There are roughly 21 area residents for every purpose-built rental unit in the Greater Toronto Area, according to CBRE.
The average price paid for renting a condo unit is also substantially higher than the price paid for a purpose-built rental apartment, CBRE found — in Toronto, the average rent paid for a two-bedroom condo is $2,393 per month, while a twobedroom apartment is $1,467, partly because of rent controls on older buildings.
Because there are so few rental buildings, they’re a much sought-after prize when they come up for sale. The price of rental buildings sold in Canada last year hit $8.3 billion, an alltime high, according to the CBRE. They’re still a lucrative asset to own, one that provides a steady long-term stream of income, Morguard’s Reading said.
“If you’re looking for a quick return, build condos. If you’re looking for a longer-term investment that’s an income stream, then apartments are the way to go,” Reading said.
Builders, Dent added, have another incentive to avoid creating new rental buildings — the companies who tend to buy them are likely to give a far more rigorous inspection to the finished construction than someone just buying a condo unit or two.
“They look at the unit they’re buying. They don’t look at the roofing, the electrical in the basement. They don’t have the expertise, and many don’t care,” Dent suggested.
The property taxes paid by rental buildings are another factor hindering their construction, Dent added.
A study by the Federation of Rental-Housing Providers of Ontario (FRPO) found that rental buildings in Ontario are charged an average of roughly two and a half times as much as similarly-sized condo buildings.
On top of that, said FRPO CEO Tony Irwin, rent controls make it less likely for new rental buildings to be built. Rent controls were extended to new buildings by the previous provincial administration of Kathleen Wynne. Though that expansion was undone by Wynne’s successor Doug Ford, Irwin said the effect was immediate and unequivocal.
“There were rental projects in the pipeline that stopped dead in their tracks or were turned into condos. In and of itself, getting rid of rent controls is not a panacea. But it definitely had a real effect when controls were extended,” Irwin said.
If rent controls — and cutting them down — is one thing governments can do, Irwin says, so is cutting the amount of time it takes to get buildings approved, and areas to be rezoned.
“There’s land in areas which haven’t been rezoned for decades. Make the approvals process shorter. Make it easier. Help from the government doesn’t have to mean subsidies. Companies want to build more rental stock,” Irwin said.
Dent, meanwhile, suggests that governments at all levels could do a lot more in terms of providing financial incentives to builders, whether it’s in terms of tax breaks or even some direct subsidies.
“People always say, ‘It’s a very complicated issue.’ It’s not, really. We know what works. Governments have to get more involved,” Dent said. “When veterans came back from WWII, governments made sure there was rental housing built. We’re talking on a massive scale. It wasn’t that governments built and ran them, it was that they made it possible for builders to do it.”