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Construction workers work on the top floor of the Time and Space condominium project in Toronto’s Front St. East and Sherbourne St. neighbourhood on Oct 11.Fred Lum/The Globe and Mail

Rental apartment construction dropped sharply in Toronto in the first half of the year, according to a new government report that suggests it has become “less and less tenable” for developers to shoulder rising building costs.

Housing starts for apartment rentals fell 24 per cent to 1,436 units in the first half of this year compared with the same period last year, Canada Mortgage and Housing Corp. said in a new report released Tuesday. Four of the other five major cities CMHC surveyed showed an increase in apartment rental starts, with Calgary more than doubling over the same period.

Across the country, there has been a push to build more rental housing, also known as purpose-built rental, to help house the growing number of residents who have long been priced out of the real estate market.

But in Toronto, developers have less incentive to put up purpose-built rental buildings because demand is so high from investors seeking to buy preconstruction condos.

As well, many would-be home buyers cannot afford a house, given that the typical selling price is more than $1-million in the Toronto region. Condos are relatively cheaper.

The sharp rise in construction costs has also been a factor for developers. CMHC said costs are up 22 per cent, year over year. Those expenses, along with the jump in interest rates and higher land costs, “appear to make” purpose-built rental construction in Toronto “less and less tenable,” the report said.

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Because of strong demand for preconstruction condos, it is easier for developers to quickly recoup their costs on them. Once a condo building has been completed, buyers close on their units and the developer gets paid.

“You sell and you’re done,” said Dana Senagama, CMHC’s senior specialist for the Toronto region.

With a purpose-built apartment building, however, developers face a longer period to recoup their costs. Leasing a building can take over one year, and still that does not cover all the development expenses. “You kind of have to wait a long time to recover that cost,” said Ms. Senagama. “So, it is just not attractive.”

The CMHC report looked at the proportion of new high-rise units that are rental apartments versus condos, and said Toronto was the only major urban centre where condo building outstripped rental apartment construction in the first half of the year compared with the average of the prior five years. Purpose-built rental starts accounted for 10.7 per cent of the high-rise housing starts in Toronto in the first half. In the previous five years, the average was 17.4 per cent for the first half of the year.

Montreal also showed a decline in purpose-built rental construction over the past year. But overall, rental starts accounted for 67.6 per cent of the high-rise housing starts in Montreal in the first half of this year. That is higher compared with the previous five years, when the average was 61.2 per cent. Similarly, in Vancouver, Ottawa, Calgary and Edmonton, developers are shifting toward purpose-built rentals.

For Toronto, this year’s rental starts marked the lowest level since 2017. The CMHC report said this decline suggests “some builders may be pausing to reassess the feasibility of development.”

The slowdown is occurring as monthly rental rates are soaring. The average condo rental hit $3.57 per square foot in the second quarter of this year, according to condo research group Urbanation Inc. The average monthly rent for a one-bedroom condo was $2,182 across the Toronto region.

Demand for rental units has increased owing to a number of factors. Would-be buyers are either continuing to rent or looking for a place to rent because they no longer qualify for a home loan now the cost of borrowing has spiked. As well, international students and Toronto workers have been returning to the city as most government COVID-19 restrictions have been lifted.