In the past two or three years, executives for Minto, the Ottawa-based apartment developer, have spotted an opening in a market that had seemed all but moribund for years, even decades.
Those opportunities, as it turns out, were hiding in plain view, in the form of the sprawling open spaces at the bases of some of Toronto’s 1960s-vintage apartment towers.
Martin Tovey, a Minto vice-president, points to an infill project in Don Mills that’s on the verge of securing council approval –200 stacked townhouses, to be situated on the largely unused grounds of a three-building apartment tower complex at York Mills and Leslie. Minto purchased the properties a few years ago.
The spacious, newly-built units – each over 1,100 sq.-ft – will come in two- and three-bedroom versions. They’re close to schools, parks, transit and shopping.
And this twist: they’re rentals that will lease for about $2,000 a month.
“We see this [area] as a bit of a downsizing node,” says Mr. Tovey. But, he adds, the project will also appeal to families that have been priced out of the single-home market, yet can’t find a suitably sized condo. “We think there’s a niche.”
In Canada’s largest urban regions, but particular the two with the most stressed real estate markets and lowest vacancy rates, the multi-unit rental apartment market has sprung to life in the past few years, but especially over the past twelve months or so.
According to Peter Norman, a real estate economist with the Altus Group, about 30,000 new rental units came on the market last year across Canada, a figure that’s about two to three times higher than traditional levels of new purpose-built apartment construction. The uptick, says Minto senior-vice-president George Van Noten, reflects not just consumer demand but also a growing interest in multi-unit rental apartments by institutional investment funds looking to acquire assets that offer low risk and long-term cash flow. “They like new product,” he says.
Some of these ventures, like the one at York Mills and Leslie, are in-fill projects with mid-range rents that take advantage of that fact that the land is free.Daniel Arigiros, president and CEO of Conundrum, a real estate investment trust that specializes in multi-family residential, says his firm is also eyeing mid-range infill rental buildings on existing apartment sites with lots of open space in the east and west ends. “We’re looking at options.”
Others are higher-end mid-rise projects on main streets. Oben Flats, a relatively new private company with German roots, has four high-end rental buildings open or under development in Toronto, and one other, at Sherbourne and Gerrard Streets, under proposal.
Edenshaw Development Ltd., which develops condos and rental buildings for institutional investors, recently opened its first rental building, Alto, on Dundas Street in Little Portugal. The building includes 96 two- and three-bedroom suites, as well as the usual assortment of condo-like amenities.
Most of the newest rental apartments tend to be priced at the higher end of the market, which means north of $2.75 a square foot. Alto’s rents run to $2.95.
Edenshaw president and CEO David McComb says his firm’s Dundas Street building has attracted a more diverse range of tenants than more typical downtown condos, including families with young children and older couples who either owned homes in the area or have children living nearby.
In other cases, the choice to rent is tied to a desire to be free of the financial and maintenance obligations that come with ownership. “I like the options we have in terms of flexibility,” says a 57-year-old business executive who, with his wife, swapped a five-bedroom house two years ago for a luxury rental on the subway line (he asked not to be named). “I didn’t feel that condo prices made sense.”
Mr. McComb and many others note that there’s been no shortage of new rental apartments in Greater Toronto over the past 15 years, but they have tended to be condos that are bought by small investors and leased out. Edenshaw’s condo projects, he says, are 50 to 75 per cent tenant occupied.
Compared with units in purpose-built rental buildings, those who rent individual condo apartments are more vulnerable to dislocation if the owner decides to occupy or sell. But Mr. McComb adds that a growing number of people are looking to purpose-built rental buildings because they’ve been turned off the condo market due to the drip-feed of stories of shoddy construction as well as high monthly fees for amenities that may not be especially useful.Mr. Argiros also points out that large rental developers are aiming to take advantage of the fact that so many condos have sprung up in areas without schools or other community amenities sought by families, including those that can't afford to own their own home.
On the developer end, the two types of buildings may look similar from the outside, but they represent very different types of businesses. For companies like Minto, which has been building and operating rental apartments for decades, the calculations are familiar.
For builders like Edenshaw, which has traditionally developed condos, entering the purpose-built rental space has been a learning curve because the units aren’t presold, Mr. McComb says, adding that the company brings in property managers early on in the approvals process.
The need to secure project financing up front also means that investors looking for strong cash flow will insist on better construction standards, more durable finishes and interior amenities, and better performing mechanical systems. “The idea that rental is of lower quality than condos is a bit of a market fallacy.”
McComb says his firm, having completed its first rental project, is now interested in other such ventures, although he adds that the decision about whether a new building will be a condo or purpose-built rental is still largely determined by the economics of each site. But given that Alto reached 100 per cent occupancy in half the time Edenshaw anticipated, the demand, he says, is “most definitely there.”