Ryan O’Connor knows several developers in Calgary who once only built large-scale condominiums but, are today shifting into developing purpose-built rental towers.
“Presales [for condominiums] are extremely challenging and the duration to sell is challenging,” Mr. O’Connor says. “It’s really economics-driven. I can think of four towers within a block of me that are slated to be rental towers.”
Mr. O’Connor, who’s the president of Western Securities, a Calgary-based real estate company with developments across North America, knows a thing or two about shifting to rental. Back in 2009, as the downturn that struck Calgary a year previous was making itself fully felt in the condo market, a 27-storey condominium development in Calgary’s Beltline neighbourhood called Union Square was finally completed and opened its doors to buyers.
The original project, first developed by Apex Homes, called for a second tower on a vacant lot right beside Union Square. But thanks to the downturn, the tower was never put up. Indeed, it’s only in 2018, nine years later, that Western Securities is breaking ground there, following a re-design of the tower to be a purpose-built rental called the Underwood – including four extra floors, smaller unit sizes and 18 extra units overall.
“We set out to build rental from the beginning,” Mr. O’Connor says, “but we were told in the beginning that condos made more sense.”
Today, they no longer do, he says.
For an increasing number of developers in Calgary, most especially in the downtown core, condos now appear to be less attractive as a development investment. Interest is shifting toward purpose-built rental, says Alex Ferguson, president of GableCraft Homes and Excel Homes Multi-Family in Calgary.
“There’s a lot of multi-family activity in the city,” Mr. Ferguson says. “If you look in the central core area, a majority of the new activity is rental buildings.”
But Mr. Ferguson says rental isn’t entirely taking over. He notes that Canadian Mortgage and Housing Corporation statistics show the shift toward rental in Calgary trails other cities like Vancouver. While six per cent of new housing starts in Calgary are now rental, according to CMHC statistics, more than 20 per cent are in Vancouver, he says. Indeed, fully 43 per cent of Calgary’s new housing starts are still condominiums.
Until recently, the supply of housing built as rental had been in decline – down 27 per cent between 1990 and 2016, according to CMHC data.
Experts say today the slow but steady shift in the other direction, away from condominiums and toward rental, has been 10 years in the making, following the 2008 crash in Calgary that saw condo prices plummet. They also say several other factors are also at play, including rising interest rates and the the federal government’s implementation mortgage stress tests. Both reduce the spending power of potential condo buyers.
Some say buyers are now responding to these changes by abandoning the idea of ownership entirely, and this is behind the rise of purpose-built rental in Calgary.
“There’s a shift almost socially where people enjoy having the capital in their pockets – they’ll travel or entertain,” says Sarah Itani, business development manager with Cidex Developments, which has a handful of purpose-built rental projects either under construction or in the process of gaining approvals in Calgary.
“There’s a shift in the mentality,” she says. “While traditionally our parents invested in real estate, for very real reasons, there’s been a depreciation of those assets and people see it doesn’t make sense. There’s not that same belief that the market will recover. This generation doesn’t want to put money into a large, solitary investment.”
Cidex is banking on this change by building several new developments, including the West Village Towers, at the western entrance to downtown Calgary, which will see close to 600 rental units sitting atop 90,000 square feet of retail space at street level.
The company is also building two developments called the Hat. One will be a 28-storey rental tower in the East Village on the edge of the city’s downtown core. The other will be a low-rise, 66-unit, 12-storey project that - because of its close proximity to the city’s LRT system – will be built with no vehicle parking for residents.
Ms. Itani says the company builds rental that can serve a broad market; one-, two- and three-bedroom units that can accommodate young renters as well as people with families or empty-nesters. And she says her buildings are currently 100 per cent occupied. “The assumption even two years ago was, who rents?” she says. “But we’ve seen it to be a very diverse market.”
Still, Mr. O’Connor says the flourish of new purpose-built rental has him somewhat concerned about the market itself.
“It makes me nervous that so many are building apartments now, because of all the supply that’s coming online,” he says. “The market is already saturated. But when I say the market’s saturated, I’m talking Calgary wide. There’s nodes. Where we’re building our tower, we don’t feel that node is saturated.”
When it comes to condos, he adds, many in Calgary are already rentals. “We estimated that 40 per cent of the buildings were being bought as investors and renting them out, so there’s a lot of rental supply.”