Rent controls or not, Toronto developers see business case for more leased units

Open this photo in gallery:

When Ontario’s governing party, Doug Ford’s Progressive Conservatives, announced the removal of rent controls for new apartments in the province, it kicked off an age-old debate: Do rent controls – on their own – kill supply of new rental and does the removal of rent controls lead to more construction?

There are passionate advocates on both sides of the question, but when you ask those who are actually spending tens of millions of dollars to launch new purpose-built rental units into the market, you’ll find rent controls, or lack thereof, are not the sole deciding factor.

“With rent control or without, we think that rental makes a ton of sense, said Gary Berman, chief executive of Toronto-based Tricon Capital Group Inc. "This city needs a lot more housing … and we think rental housing is the solution.” Tricon is poised to begin leasing 502 “affordable luxury” apartments in the Selby, a brand-new, 50-storey apartment tower developed with MOD Developments Inc. at 592 Sherbourne St.. “The truth is, we started this program in a non-rent control environment; when the rent controls got announced as part of the Liberal government’s Fair Housing Plan [in 2017], we continued our program. And we’ve got 3,000 [more rental] units under active development.”

Indeed, there about 11,172 units of purpose built rental in various stages of construction in the Greater Toronto Area right now, according to market research firm Urbanation Inc., which reported that it was “the highest level in more than 30 years and 56 per cent higher than a year earlier (7,167 units).”

For Mr. Berman, the critical factors that supported new rental construction had to do with the incredibly low rental vacancy rate (which was close to 2 per cent when the Selby began planning and is, by some measures, under 1 per cent now). That market pressure began to raise rental prices, which he said had more to do with why developers chose to build condos rather than rental in the 20 years between 1997 and 2017, during which there were no rent controls on new construction.

“Rents weren’t high enough; they needed to hit the $2-per-square-foot range, otherwise, you couldn’t get the yields to get these projects started. That started to move three to five years ago,” Mr. Berman said. Urbanation reports purpose-built rental constructed since 2005 is averaging $3 a square foot. The company has four other rental projects in the works, in different hot sections of Toronto’s downtown core (King and Spadina, Yonge south of Bloor, the Distillery and Rosedale).

But Mr. Berman doesn’t object to the removal of rent controls.

“Obviously, anything the government can do to make the economics of rental housing more compelling is a positive for us,” he said. “I know that when rent control got passed, there were some developers talking about creating four-foot tubs, and taking away certain amenities to encourage more turnover; we never had that approach.”

If anything, the Selby is offering the kinds of extras and amenities that take it beyond the “condo quality” experience to something more akin to a luxury hotel. In addition to providing the usual condo amenities, including a state-of-the-art gym developed with fitness nutrition company BioSteel, Tricon is partnering with millennial-friendly service providers to provide bonuses unheard of in Canadian rental.

Online furniture providers Wayfair and Caspar mattresses will be offering discounts for tenants; Selby staff are planning to host cooking classes in partnership with the Oliver & Bonacini French-style bistro that will be opened in the building podium; and Canadian artists will be showcased and their works made available for purchase by Eye Buy Art Accessible Program in the restored Gooderham Mansion that serves as the gateway to the building.

The building will have a concierge – staffed by a professional butler. The building is also partnering with Toronto Life magazine; residents will not only get complimentary home delivery of the magazine, but also custom content, events and experiences exclusive to its membership program.

“They don’t need to do any of this, it would be very easy to lease up a building with vacancy rates this low,” Toronto Life publisher Ken Hunt said. “They want to do it, because they want to provide an excellent experience. This is an exclusive arrangement with the Selby. Toronto is a big confusing place and it is [our] mission to help people understand it and get the most out of it.”

All these extras help to sell units at lease rates that will be competitive not with other purpose-built rentals in the area – most of which dates from the 1960s and 70s – but with more recently constructed condo apartments. Mr. Berman expects one-bedroom units to rent for more than $2,000 and for the building’s two- and three-bedroom units to hit rates closer to $3,000. Leasing begins in early 2019.

Tricon has invested in condo construction since its founding 1988 and has more than $7.2-billion in assets under management in Canada and the United States. One other reason Mr. Berman is keen on rental in Toronto has to do with the rising costs that are squeezing condominium developers and have contributed to a rash of project cancellations.

“One of the reasons the [rental] apartment model hasn’t taken off here is because it does carry more risk. You are essentially building the building on spec. As the developer, we have to feel much more confident about what we’re doing, we have to deliver a high-quality building and the service has to be good,” Mr. Berman said. With the removal of rent controls, the Selby will never be forced to choose between lowering its service standards, as it will always be able to adjust rents to the prevailing market price – within reason.

“You don’t want to be greedy about the way you think about renewals; it’s a politically sensitive arena,” Mr. Berman said. “We want to strike the balance between generating good returns for investors and also making sure our residents have a good experience.”

Your house is your most valuable asset. We have a weekly Real Estate newsletter to help you stay on top of news on the housing market, mortgages, the latest closings and more. Sign up today.