Vacancy rates in apartment buildings across the country are at near-record lows, but expensive land and high construction costs are keeping developers from building new inventory.
New buildings would likely fill quickly, but developers have opted to put up condos instead because they provide a better short-term return. Further deterring development are interest rates so low that it is cheaper to buy an existing building with CMHC insurance than to arrange financing to build a new one.
"Building an apartment building is a very niche thing," said Ugo Bizzarri, vice-president of acquisitions at Timbercreek Asset Management Inc. "There's certainly a need. But until it's cheaper to build them than to buy them, construction just doesn't make a lot of sense."
Canada Mortgage and Housing Corp. said yesterday in its rental market survey that the national vacancy rate decreased to 2.6 per cent in October from 2.8 per cent a year ago. CMHC cited immigration and improving economic conditions for the lower vacancy rate, saying household formation improves when the economy gets better.
In Winnipeg, the rate was a mere 0.8 per cent as immigrants searched for housing. Statistics Canada's most recent population estimate said Manitoba underwent its highest rate of immigration since 1971.
"The economic recovery that has taken place over the past year has boosted demand for both rental and ownership housing," said Bob Dugan, chief economist at CMHC. "High levels of immigration have supported demand for rental housing, thus pushing the vacancy rate lower. Improving economic conditions have likely boosted household formation. These two factors combined, have put downward pressure on the vacancy rate."
The average rent for a two-bedroom apartment increased to $860 from $836, a gain of 2.9 per cent.
While there isn't much building activity, there are a few companies breaking ground and adding inventory. Concert Properties Ltd., a Vancouver-based developer, has built 1,150 new rental units in Toronto in the past five years and just broke ground on another 29-storey building in the city's downtown.
Concert is backed by pension funds, which allows it to look beyond short-term returns when considering projects, president Brian McCauley said. It has built dozens of buildings in the past 20 years, and has never sold one.
"We'd rather build something brand new than buy a 40-year-old problem," he said, adding that while it would like to build more in British Columbia, land prices have made that impossible since about 2001. "But we're pension-plan-owned and look at investing on a long-term basis, which is the only way you can make sense out of building new rentals."
About 85 per cent of the country's 109,000 apartment buildings are owned by small investors, such as families or small businesses. And while these properties may not return as much to their investors as shopping centres or office buildings, they offer a lower-risk way to own income-generating properties.
They attracted attention throughout the recession for holding their value, particularly because there were no distress sales as owners could refinance their debt inexpensively through CMHC, ensuring access to credit at a time when other property owners found debt markets completely closed.
Those willing to buy far surpass the number of sellers willing to part with their income-generating property. RealNet Canada figures show the number and value of transactions are well below historic highs.
It's created an odd situation, where would-be buyers are paying finders' fees to agents who find them something to purchase, said Derek Lobo, chief executive officer of brokerage Rock Advisors Inc.
"We've done over $200-million in transactions in the last six months," he said. "In more than half the cases, the buyer has paid us. That tells me there is far more demand than there is supply."
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A FALLING VACANCY RATE
Winnipeg was the country's tightest residential rental market in October, but the national vacancy rate fell across the country as more people sought housing of all kinds.
Canada Mortgage and Housing Corp. said Thursday in its Rental Market Survey that the national vacancy rate decreased to 2.6 per cent, from 2.8 per cent a year ago. The rate in Winnipeg was 0.8 per cent.
The other cities with the lowest vacancy rates were Regina, Kingston and Quebec (1 per cent each). The rate was highest in Windsor, Ont., and Abbotsford, B.C. (6.5 per cent), Saint John (5.1 per cent) and London (5 per cent).