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The twin 1970s brown-brick apartment buildings that rise above a supermarket and strip plazas in northwest Toronto aren’t elegant or even striking.

But the Country Club Towers, both 27 storeys tall and backing onto a golf course, are crown jewels of a sort. The buildings are two of the largest in a portfolio of 44 dated suburban rental buildings and, in early November, the collection sold for an astonishing $1.7-billion. It was among the steepest valuations in Canadian commercial real estate history, relative to the properties’ rental income.

The Continuum REIT-owned Country Club Towers on Weston Rd., Toronto, was recently sold to Starlight Investments for $1.7-billion.

Fred Lum/the Globe and Mail

The sale process was an unusual one. The current owner, Toronto-based Continuum Residential REIT, had launched a $300-million initial public offering for 40 per cent of its shares in October, but after a few weeks of marketing the deal was massively oversubscribed – with orders totalling $1-billion. The night before the deal was supposed to price, privately owned Toronto real estate firm Starlight Investments swooped in and proposed buying the whole portfolio. The offer was so good that Continuum withdrew its IPO.

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The single transaction solidified a trend that had been brewing for months: Canadian apartment buildings have become one of the hottest asset classes in the world, and institutional buyers desperate to find the next great investment are scrambling to scoop them up.

Starlight insists the purchase was a steal even though the buildings are, on average, 49 years old. “Portfolios of this nature and composition are few and far between in the Canadian multiresidential sector,” the company said in a statement to The Globe and Mail at the time of the sale. In other words, this many apartments rarely hit the market all at once.

Better yet, rental supply is extremely tight. Canada has built hardly any apartment buildings since the 1970s, pushing vacancy rates to near historic lows, particularly in and around Toronto and Vancouver. Across the 44 Continuum buildings, the average vacancy rate is just 0.3 per cent.

Meanwhile, demand for all types of housing is soaring. The federal government is welcoming more immigrants to help fuel economic growth and cities such as Toronto, Montreal and Vancouver have become hot spots for global tech talent. This week, The Globe reported that Amazon.com Inc. is embarking on a major expansion in Vancouver that will triple its planned downtown footprint and take up an entire city block.

Amid this demand, there simply aren’t enough houses being built, and the torrid pace of condo construction isn’t keeping up, either. Because people still need to live somewhere, institutional money is betting that apartment buildings will succumb to the market reality. "The crux of this,” said Brian Kriter, an executive managing director at Cushman & Wakefield, the global real estate services giant, “is rising rents.”

These buyers can’t exactly run wild. Many provinces and cities have rent controls that protect existing tenants. Yet in some markets, particularly Ontario, landlords can readjust rents to market prices when there is tenant turnover. In some recent cases, rents have jumped 25 per cent to 30 per cent.

This prospect is enticing because interest rates remain stubbornly low around the world. In Canada, yields on long-term government bonds are less than 2 per cent. Institutional investors are searching for alternative assets such as real estate, which provide higher and perhaps rising income. Global private equity giants Blackstone Group Inc. and Brookfield Asset Management have both stated they want in on the rush for Canadian rentals, and they have huge war chests, having just raised new real estate funds worth US$20-billion and US$15-billion, respectively.

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While private and institutional money is nothing new in Canadian real estate – the vast majority of apartment buildings in Canada are already privately owned – what’s changed is the intensity of investor demand.

As money pours in, the key question is where it will flow. “It all comes down to whether foreign capital boosts supply,” said RioCan REIT president Jonathan Gitlin, who has run the company’s rental apartment division. If investors construct new buildings, it could ease pressure on rents.

But if the money creates bidding wars to acquire decades-old buildings, existing tenants, many of whom are lower-income or newcomers to Canada, will get squeezed. New owners will want them gone in order to increase rents, but there’s hardly anywhere else for them to go.


The brewing crisis has been decades in the making. Private developers put up a lot of apartment buildings in the 1960s and 70s, fuelled by tax breaks for investors and strong demand for rental units – but all that construction came to a halt.

Developers blame several forces for this, including the removal of tax incentives for building new rental towers, rent controls that were introduced in the mid-1970s and a recession in the early 1980s.

Hardly any new rental buildings have been built since. About 80 per cent of Canada’s entire supply of apartment buildings was constructed at least 35 years ago, according to Starlight. Developers, however, have been busy, making money hand over fist through the condominium boom.

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While condos and rentals are, broadly speaking, the same types of buildings, developers almost always choose to build condos for several reasons. For one, it is far easier for developers to obtain and repay construction financing on condos. Governments and lenders typically require a developer to presell at least 70 per cent of the units in a condo building before construction begins. The developer gets cash deposits up front, and once the tower is fully occupied, the developer receives the money for all units sold – typically more than enough to pay off all the construction loans.

At the peaks of the many condo booms across Canada since the early 1980s, newly announced developments sometimes sold out in a flash. “It was good times, baby,” said David Goodman, a commercial realtor in Vancouver who has been vocal about the city’s current rental crisis. “The profits were immense.”

Rental apartments, by contrast, have a multidecade payback period. A developer might spend millions of dollars to construct a building, then try to recoup that investment over the long term by collecting rents month after month.

For many years, the saving grace from condo construction booms was that some of the new units became a de facto supply of rental apartments. Buyers of condos are typically individuals, and some would rent the units out, treating the condos as investment properties.

The trouble in Toronto and Vancouver now is that even condos are too expensive for many buyers and renters. Demographics, geography and government policies have pushed land prices into the stratosphere, which pushes up the price of anything built on that land. Much of Vancouver is surrounded by water and mountains, and the province introduced an Agricultural Land Reserve in 1973 that prevents the city from sprawling inland.

In Toronto, the provincial government set aside a Greenbelt around the city in stages in the early 2000s, and introduced a restrictive Growth Plan for the Greater Golden Horseshoe in 2006. While environmentally friendly, those measures limited the amount of land available for development and introduced complex new rules for its use.

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The supply crunch is aggravated by soaring demand – particularly from newcomers pouring into Canada’s largest cities. In Toronto last year the population jumped by 125,298 people, but new completions of all housing types rose by 37,750 units. Amid the shortage, the city’s vacancy rate for rental apartments is now 1.1 per cent. The Country Club Towers are 100 per cent occupied.

The demand-supply mismatch makes for a stellar investment opportunity in rental apartments. In a recent white paper, Starlight uses one of its recent investments in downtown Toronto as a case study. The company bought a 174-unit rental building and increased average rents by $411 a month over its four-year holding period.

To help generate this profit, Starlight, like a growing number of rental building owners, invested money to upgrade suites by refurbishing kitchens and renovating the building’s lobby. Many rental towers haven’t had investments in them in decades, and by sprucing things up, new owners can attract wealthier tenants who can afford market rents. By Continuum’s calculations, the average monthly rent across its portfolio is $1,224, but the average monthly market rent it could fetch, according to a valuation for its IPO, is $1,592 – 30 per cent higher. Starlight did not reply to a request for comment for this story.

But what makes a great investment can hurt tenants who move around, or who arrive from abroad. Although annual wage growth in Canada is finally picking up, now hovering around 4 per cent, the rise is still a fraction of rent increases in many areas. Canadian Apartment Properties REIT, the country’s largest publicly traded rental apartment owner, reported an average rent increase of 13.9 per cent on apartment turnovers during the first nine months of 2019.

If the trend continues, where will low-wage workers, especially those working in downtown cores, find affordable apartments?


No matter where it comes from, fresh capital – and a lot of it – is needed to maintain and upgrade Canada’s existing rental apartments and to build new ones. One of the major reasons the country had such minuscule rental development for three decades was that no one wanted to fund it.

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Despite this reality, mammoth foreign investors are sometimes demonized as speculators. The situation isn’t unique to Canada. Blackstone has been active in Copenhagen recently, and last month the New York-based private equity giant was singled out by Denmark’s newly elected socialist government. “You can’t use the same methods here as you do in New York," Housing Minister Kaare Dybvad said.

Worried that the country’s middle-class won’t be able to live in Denmark’s largest cities, the government proposed a new law that would limit rent increases – even if new landlords upgrade units. For its part, Blackstone has said it owns just 0.5 per cent of the rental apartments in Copenhagen, and that it will keep investing in the country.

“I understand the stigma of foreign capital," said Michael Waters, the chief executive officer of Ottawa-based Minto Group, a large rental apartment owner and developer. But he argues that, “in any aspect of the Canadian economy, foreign direct investment is generally a good thing ... housing is no different.”

Any fear-mongering would also be hypocritical. Toronto-based Brookfield is a global property giant and many large Canadian pension funds also have large real estate holdings around the world. “Capital doesn’t have any borders any more,” said Mr. Kriter of Cushman & Wakefield.

MULTIFAMILY REAL ESTATE

PURCHASER BREAKDOWN, 2018

Private Canadian investor

31%

Institutional

2.5%

REIT/real estate operating company

10.9%

Foreign investor

12.9%

Pension fund/adviser

26.2%

Private equity

16.5%

SOURCE: CBRE

MULTIFAMILY REAL ESTATE

PURCHASER BREAKDOWN, 2018

Private Canadian investor

31%

Institutional

2.5%

REIT/real estate operating company

10.9%

Foreign investor

12.9%

Pension fund/adviser

26.2%

Private equity

16.5%

SOURCE: CBRE

MULTIFAMILY REAL ESTATE PURCHASER BREAKDOWN, 2018

Private Canadian investor

31%

Institutional

2.5%

REIT/real estate operating company

10.9%

Foreign investor

12.9%

Pension fund/adviser

26.2%

Private equity

16.5%

SOURCE: CBRE

The more critical issue is where the fresh capital flows – to construction of new apartments or to scooping up existing buildings and maybe flipping them after a few years.

At the moment, both types of capital are at work. Blackstone, for instance, teamed up with Starlight in 2018 to start investing in Canadian rentals, and in the 18 months since it has announced two acquisitions of existing portfolios.

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At the other end of the spectrum, Morguard Corp., one of Canada’s largest commercial and residential landlords, built and opened two towers in midtown Toronto five years ago, one of the city’s first new rental projects in decades.

Other developers are also testing the waters, including Daniels Corp., a Toronto developer that has announced several partnerships with the city to construct buildings with a mix of market and subsidized units.

RioCan REIT, one of the country’s largest shopping centre owners, also has ambitious plans to build rental apartments. Many of its malls in and around large cities are surrounded by large parking lots, offering valuable land it already owns to increase density, and RioCan has found through its research that younger people in urban markets will pay premium rents for new builds with amenities such as cold storage for their food deliveries.

The REIT’s long-time CEO, Ed Sonshine, has also been one of the few willing to call it like it is. He’s argued that while it’s possible to put lipstick on a pig – meaning a 50-year-old apartment building – it’s still a pig. “When you’ve got 50 years of cooking in a building, the walls smell," he said in an interview with The Globe earlier this year. “And you can’t replace anything, because then you have to kick people out."

Yet even if every new investment dollar flowed into rental construction, it would still take years to fix the demand-supply imbalance. Simply getting the necessary approvals to start building can be maddening for developers.

Mr. Waters, the Minto CEO, says it took his company six years to get the necessary sign-offs for one new Toronto development. A full year went by getting permission to cut down six non-native trees that Minto had promised to replant. “This is in a city that has [a] housing affordability crisis," he said.

Such delays are common in Vancouver, too. “It’s almost as if we need a housing czar," said Mr. Goodman, the commercial realtor. If a project is sitting in limbo for more than a year, perhaps a heavy hand should intervene to escort it through the bureaucracy.

But then there are local residents, who also put up roadblocks. In Vancouver, residents routinely complain about potential shadows from new towers, or partial blockages of their view of the water or mountains, sending developers back to the drawing board. “The NIMBYism is at a level that is so astonishing," Mr. Goodman said.


Given the rental market’s current trajectory – soaring demand and stifled supply – the short-term outlook is turbulent.

Already, rising rents are forcing tenants to reconsider what they have, so turnover is starting to slow. If the affordability crisis escalates, “you’re going to have tenants who don’t want to leave their units,” RioCan’s Mr. Gitlin said.

Some frustrated renters have already taken to the streets. Last year, a group of tenants in Hamilton were so angry about above-guideline rent increases they trekked to Ottawa to try to protest at the home of InterRent REIT’s CEO.

Governments are also proceeding cautiously. In 2017, former Ontario Liberal premier Kathleen Wynne extended rent controls to new builds – before that, only properties built before 1991 were subject to them. Last year, though, newly elected Progressive Conservative Premier Doug Ford removed them from new builds, but kept them on existing units.

As this plays out, demand continues to swell. Immigration has been a staple of federal Liberal and Conservative government policies for decades and Prime Minister Justin Trudeau is keen on welcoming even more skilled newcomers to boost the economy. “Unlike other global leaders, Canada remains supportive of immigration as an economic imperative," real estate consultancy CBRE noted in a recent report, adding that immigration accounted for 80 per cent of Canada’s population growth last year.

CANADIAN POPULATION

GROWTH BREAKDOWN

In thousands

Net international migration

Natural increase in population

450

400

350

300

250

200

150

100

50

0

1978

1986

1994

2002

2010

2018

SOURCE: CBRE

CANADIAN POPULATION GROWTH BREAKDOWN

In thousands

Net international migration

Natural increase in population

450

400

350

300

250

200

150

100

50

0

1978

1986

1994

2002

2010

2018

SOURCE: CBRE

CANADIAN POPULATION GROWTH BREAKDOWN

In thousands

Net international migration

Natural increase in population

450

400

350

300

250

200

150

100

50

0

1982

1974

1978

1986

1990

1994

1998

2002

2006

2010

2014

2018

SOURCE: CBRE

G7 POPULATION GROWTH

Compound average annual population growth

2009-18

2018-23

1.2%

1.0

0.8

0.94%

0.6

0.63

0.4

0.46

0.46

0.2

0.0

-0.2

-0.04

-0.03

-0.38

-0.4

Canada

U.S.

Britain

France

Italy

Germany

Japan

SOURCE: CBRE

G7 POPULATION GROWTH

Compound average annual population growth

2009-18

2018-23

1.2%

1.0

0.8

0.94%

0.6

0.63

0.4

0.46

0.46

0.2

0.0

-0.2

-0.04

-0.03

-0.38

-0.4

Canada

U.S.

Britain

France

Italy

Germany

Japan

SOURCE: CBRE

G7 POPULATION GROWTH

Compound average annual population growth

2009-18

2018-23

1.2%

1.0

0.8

0.94%

0.6

0.63

0.4

0.46

0.46

0.2

0.0

-0.2

-0.04

-0.03

-0.38

-0.4

Canada

U.S.

Britain

France

Italy

Germany

Japan

SOURCE: CBRE

All these forces mean that pressure will keep building, pushing Canada into new territory. Sheila Botting is Deloitte’s national real estate leader, and she’s spent close to three decades in commercial real estate. She said she’s never seen a crisis boil over so quickly.

What makes this situation so intractable is that there’s no easy fix. New money is both good and bad. Upgrades to old buildings are necessary, but there’s nowhere for existing tenants to go. Immigration adds pressure, but it’s necessary for economic growth.

“As much as everyone likes to think there is a simple answer,” Ms. Botting warns, "there isn’t.”

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