Does Building More Rentals Mean The Condo Market Is In Trouble?

Do developers know something the rest of us don’t?

Or have the giant pension funds and real estate holding companies just decided to diversify, and perhaps take a long-term approach to investing, rather than a large short-term gain?

The recent media reports would have us believe that constructing purpose-built rental apartments spells doom for the condo market, but aren’t they forgetting that fewer condos being built makes for shorter supply?


I remember a presentation I did in Grade 12 “Economics,” back in 1997.

The task was simple: come up with a “question” that will lead to discussion and debate, and we would be judged on the response of the rest of the class, or lack thereof.

Students came up with most boring answers, and some of were illogical.  One of my buddies asked, “Do you think stocks are good for the economy?”  That didn’t make any sense, whatsoever.

My question was simple: If you had $10,000 to invest in an “all or nothing” venture, and there were four outcomes, which one would you take:

a) 90% chance of $11,111
b) 50% chance of $20,000
c) 25% chance of $40,000
d) 10% chance of $100,000

The class debated this for the rest of the period.  People were fighting to get a word in.

Of course, there really isn’t any right or wrong answer.

This is just a simple example of “expected value,” in that every single one of these options has an expected value of $10,000.

My teacher was smirking the whole time.  He even winked at me as I fielded questions; listening to people give their reasoning, when all the while, there really wasn’t a right answer.

In the real world, investment opportunities are not this simple.

But your expected value does play into your decision, along with future value, cost of debt, inflation, and a host of other variables.

Over the past, say, two decades, we’ve seen nothing but condominiums being built in the city of Toronto.  Very few true “rental buildings” have been constructed, as was the trend in the 60’s, 70’s, and even into the 80’s.

In the past few months, we’ve seen a lot of press about developers starting to build rental towers again, and it’s come with this bizarre notion, in my opinion, that this says something negative about the condo market.

Here’s an excerpt from an article called “Rental Renaissance” in last week’s Globe & Mail that shows the statistics involved:

There were nearly 24,000 rental units under construction across Canada in the second half of last year, up 52 per cent from a year earlier, according to commercial real estate brokerage CBRE Group Inc.

Across Canada’s six biggest cities, rental starts are double their five-year average. In Toronto, there are 21 rental apartment buildings under way, up from 12 two years ago.

Now bear in mind – I am not the CEO of a multi-billion-dollar pension fund, nor am I a math genius, or investment banker.  I’m not qualified to get in depth here.

But I can tell you that the newspaper articles about the condo market “being in trouble” because developers are electing to build rental towers instead of condominiums are incredibly misleading.

It goes back to that Grade 12 example, doesn’t it?

Call it “risk versus reward” if you want to.

Or simply suggest that different investors have different goals in mind.

If I’m more conservative with my money and want to put it in something “safe” that pays me 5%, as opposed to the gunslinger that wants all his money in gold and biotech stocks, trying to find one that will DOUBLE, then does that make me better, or worse?

Building a condominium versus building a rental tower doesn’t say anything about “the future of condominium prices.”

Instead, it speaks to the investor, and their goals.

Let’s say that an investor purchases land for $5,000,000, and it costs $10,000,000 to build a condo tower.

Let’s say that the condos are sold for $35,000,000, and the developer makes $20,000,000 in net profit.

Now let’s say that instead of selling those condos for $35,000,000, the developer was able to rent those units out, for a net profit of $1,000,000 per year.

So after twenty years of renting those units, the developer would have the $20,000,000 in profit that he would have had by selling the units as condos.  AND… he gets $1,000,000 per year, every year, forever.  (I know this assumes rents don’t go up, but just work with it…)

What’s the right call here?

Simple example, I know.

And there’s a LOT to be discussed.

That $1,000,000 net profit in Year #20 isn’t really $1,000,000 by today’s standards.  It could be more like $700,000 after inflation.

And what’s the opportunity cost of having all that money tied up in the apartment?  You have $15,000,000 tied up (the $5M price of the land plus the $10M to build) for twenty years!  You could have used that money for other ventures, or even made basic interest.

Condos come with that “walk away” feature, whereas apartments come with that “constant management and maintenance” headache.

But ultimately, it’s up to the investor to decide which path to take, and there are thousands of variables to consider.

Earlier this month, Canada Pension Plan bought a portfolio of student housing in the United Kingdom for $2.1 Billion.  The portfolio had 40 residences, with room for 16,700 students.

This deal likely took several months, if not a year, to come together, and there were probably dozens of people at CPP that worked on it, not to mention consultants, investment banks, etc.

CPP clearly sees an opportunity here – university applications are up, student housing is in short supply, rents have potential to increase, etc.

But they chose to spend $2.1 Billion on rental units.

So does that mean the real estate market in the United Kingdom is going down?

No.  No it doesn’t.

But the articles in the Globe & Mail, National Post, Toronto Star, et al, all seem to suggest that because more and more rental towers are being built in Toronto, that there’s some sort of indication that prices are headed south.

I would agree that if every condominium developer started to construct purpose-built rental apartments rather than condominiums, then perhaps their 5-year outlook for the rise in values of condominiums has changed.

But not every condominium developer is building rentals; just a couple.  And that’s just one “perhaps,” and on the flip side, it could simply mean that there’s more money being pumped into real estate in general, just in a different way.

If a pension fund wants to put $2 Billion into “rentals,” because they like the long-term play associated with owning real estate, and collecting rent, then they probably aren’t going to purchase $2 Billion worth of condominiums, are they?

Instead, they’re going to buy purpose-built rental buildings, ie. the student residences in the UK.

So if a condominium developer thinks he can get more money from building an apartment, and selling it in one, two, or ten years to a pension fund, REIT, or another investment group, then I say again – this doesn’t signal a pending decline in the price of condominiums on the whole.

I guess the point I’m trying to make here is that people (especially the bearish media….) need to remember that condominiums and apartments are not as similar as they would have us believe.  They attract completely different investors, and the type of investment is drastically different.

Condos are individually owned, and together, they form a corporation.  They’re usually sold off one by one, by the developer, to individual investors.

Apartment buildings can be sold as a whole, to one investor, and they’re easier to manage, and the ownership structure is completely different.

So it could be argued, rather than “developers are building more apartments, so maybe the condo market is about to weaken,” that developers are building more apartments, so big financial institutions and fund managers are attracted to Toronto real estate even more so than before.

Maybe that’s my positive spin on things, but do you think that CPPIB would have spent $2.1 Billion on 16,700 individual condominium units scattered all over the UK?  Or did they buy the lot because it constituted ONE investment?

One final thought on this, while we’re at it…

The basic laws of supply and demand dictate that when supply goes down, and demand remains the same, then prices increase.  Correct?

So if developers start building more apartments, whether they hold these themselves (which most don’t) or sell them to larger investment funds, that means there will be LESS condominiums built.

If there are less condominiums built, then won’t prices increase?

If anything, they won’t go down.

So alas, I don’t understand the take-away from the media coverage that suggests “developers building rental apartments suggests the condo market is weakening.”

The laws of supply and demand wouldn’t agree.

And what the media coverage doesn’t mention is that most of these developers are looking to sell the apartments when they’re completed, not keep them and manage them.

Condominium developers develop condos; they don’t manage them, or rather most don’t.

Companies like Cityzen, who recently built The Berczy at 55 Front Street, aren’t just developers – they build condos, apartments, sub-divisions, retirement communities, and they own and manage many of the projects they build.

But that’s a rare case, and most Toronto condo developers are looking to get in, get out, and get paid.  That means holding a purpose-built apartment for 30-years isn’t the goal.

I sure don’t want to come off as a real estate cheerleader here, but the media are dying to see a real estate decline, and have been for a long time.  And it really bothers me when they draw an inference from something as basic as “hey look, there are more rental buildings being built,” to suggest a decline in the real estate market.

Negativity sells.

Just look at this guy and his prediction that Canadian real estate will drop 40-50%.  And what does he do for a living?  Oh right, he’s a financial adviser.  So I guess we should sell real estate, and put it into his fund?

“When The Bubble Bursts” will sell.

But a book called, “Everything Is Fine Here, Folks” probably won’t get a look…


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  1. Huuk says:

    There is a gap in Highend, purpose build rental buildings in Toronto.
    Other cities with high rents and a wealthy/luxury-focused population (NYC, London…) have amazing purpose built rentals with amenities equal or better to condos, but the benefit professional management.
    The sell is: ‘Don’t have some investor who lives abroad managing your rental, let our onsite team provide you on demand service’ or something to that extent.
    This is a smart move as condos that were purchased as investments to rent start aging fast due to wear and tear of renters start to deteriorate.
    This has zero to do with with a condo bubble and everything to do with a safe bet (10,000 = 11,111 at 90%).

  2. condodweller says:

    “If there are less condominiums built, then won’t prices increase?
    If anything, they won’t go down.”

    This is not as straight forward given, as someone pointed out above, that new rental buildings will compete with rental condos. IMHO the deciding factor will be whether or not the new rental buildings will offer something a rental condo does not. Looking at the supply side of rental units only, if rental buildings add ~300 units per building to the supply chain without a response from rental condos then based on my math, and I’m no math expert either, the overall supply would increase, would it not? Therefore, according to the laws of supply and demand, would prices not go down? Both for condos and rentals?

  3. Amelia says:

    If the rental units coming on the scene are nicer/bigger/better amenities/better locations than the available condos, I could see the speculative side of condo ownership affected negatively. Fewer people opting to rent condos (higher vacancy rates) might lead to a reduction in the number of individuals investing in condos to rent. Renters much prefer renting in buildings that are professionally managed anyway. And apartment buildings are generally less expensive to rent.

  4. Appraiser says:

    Interesting article from the U.S. Same probably holds true in Canada.

    “Data from the Federal Reserve’s 2013 Survey of Consumer Finance indicates that the wealth of the typical homeowner is $195,400, compared to $5,400 for the typical renter. Now some of that difference reflects differences in age, but much of this contrast is due to the savings associated with obtaining home equity. Delaying this process can have large impacts later in life.”

    1. Joe Q. says:

      IMO, age, income, location, employment history would have to be controlled for in order to make such a comparison meaningful.

    2. Kyle says:

      As of Aug last year, household net worth was $694K in Toronto, $710K in Vancouver, $680K in Calgary vs $442K for Canada as a whole. When you consider how closely tied the average household net worth is to real estate prices, it becomes pretty obvious one of the biggest drivers of household net worth, is whether someone owns real estate or not.

      1. Kyle says:

        Link below for a much more detailed breakdown of household net wealth. In Toronto household net wealth is 694K. Made of 535K Real Estate, and 327K in Liquid Assets and -168K in Debt. This clearly shows that Real Estate is a bigger contributor to net worth than other investments and that household debt is far from being out of control. Debunking Garth Turner’s oft bleated myths that a diversified portfolio will grow your net worth faster than real estate and that home owners are leveraged to the ying yang.

        Lots of other interesting information in here, such as – for those that own it, real estate makes up about 50% of their net worth (slightly higher in the major centers). Again debunking yet another one of Garth Turners’ go-to myths, that those who own real estate have everything in a single asset.

        1. jimbo says:

          What is your opinion on 12% of the households owing 40% of the debt?

          1. Kyle says:

            If there is one thing that has served me well in life. It is having a really good BS detector. When i see a headline based on some stand alone stat without other key pieces of data supporting it, my BS detector goes crazy. My opinion of that stat is that it is completely meaningless without further data on how well qualified those 12% are to handle the debt (i.e. what is the average credit score of the 12%? How much do they make relative to the debt they’ve taken on?). Also given the mortgages in arrears rate is essentially 0% (latest figures show 0.17% in Ontario and 0.28% for Canada), my opinion is that the article above is meant to be click bait for those desperately hoping to find cracks in the market.

        2. Jimbo says:

          Not sure why but I can’t reply to your last thread. I also meant to add, how do you think that would affect the numbers you provided above. IE would it skew them lower considerably or the avg debt higher for the majority that have less debt than $168k. Not sure how that erased on my phone before I posted.
          I agree with what you’re saying, unless specific information is released it is hard to dissect what can or can’t happen with that 12%. I did look a little further to see where the stat came from. you can find the information in the bank of Canada financial review, December 2014. The only piece of information they divulge is the debt to income ratio (250%-350% holds 23%of all debt, 350%-450% holds 7.4% of all debt and 450%+ owes 9.5% of all debt) credit score is not given. So if I understand what DiR is, that means that someone/family earning $120,000 (after taxes) a year would owe between $300,000 and $420,000 (in the 250-300 bracket). So I’m thinking $1,200-$2,000 a month in payments not including land tax etc. That really doesn’t seem that alarming. I’m willing to guess that the majority of the people in this 12% are under 35 and would be the most vulnerable to job loss. It is to bad they don’t release what percentage of this 12% live in Alberta, BC or Ontario.

          1. Kyle says:

            Agreed it is very difficult to tell without more granular data. Generally speaking i can see how a small percentage of debtors would hold a large percentage of the debt. Those that bought a long time ago would have relatively little debt (i.e. they paid less when they bought and have had more time to pay down their debt), conversely those that just recently bought would have relatively more debt. I suspect the 12% simply represents those that bought most recently.

            Another stat i found is that over 43% of Canadian home owners don’t even have a mortgage anymore. So i could definitely see how over time people move from the 12% camp over to the 88% camp, and then finally to the 43% of mortgage free homeowners camp:


        3. Jimbo says:

          That stat is from 2008 when homeownership was around 65%. Now that it is at 70%(as of 2011 in BOC release) or higher. I would say that less than 43% are mortgage free. The BOC release does state that 33% of Canadians are debt free. You can be mortgage free but not debt free so I’m guessing the number is somewhere between 25-36% mortgage free. I think being mortgage free will have less significance and will be nonexistent in the milenial and generation X life span.

          The median age that statcan quoted as debt free is 62. I think the number will drop to below 25% in the next 15 years for the following two reasons. Baby boomers and generations after spend a lot more of their income on luxuries than the previous generation and the second deals with pensions. Majority of the population before the baby boomers have a defined pension meaning they always have income coming in outside of CPP and OAS. Not having this access to a pension will mean more people using the equity in there house to pay for day to day expenses. Utilizimg the equity will only become a problem for people that didn’t save enough for a long retirement.

  5. jimbo says:

    We know that condo developers in Toronto can turn a condo into a rental if they like even after some presales have been completed (urbancorp). My question is can a pension fund or large investor buy the majority of the condos in an established building and dissolve the corporation? Once dissolved or once controlling the majority of the votes could they increase the maintenance fee driving down the cost of each unit thereby allowing them to purchase the rest at a discount?
    I ask because something similar has happened in Florida a couple of times. I know it is the result of a law that was changed in 2007 or 2008, but with such old condo laws in Ontario are condo owners protected?

  6. Jonathan says:

    For the record, 11 St. Joseph was the subject of another post by David over 5 years ago:

    Even though it was operated as a purpose-built rental building, it was in fact a failed (in a sense) condo project. I lived there for a time as a renter, and heard from another resident that some residents actually owned their units as if they were regular condos. Nothing was ever substantiated, but presumably it would be theoretically possible for someone to buy a pre-construction condo unit and end up living in a building where the vast majority of other units were owned by a single investor. I don’t know of any legal protections that would save a pre-construction buyer from ending up in such a situation…

    Furthermore, I would imagine that today’s crop of condo to rental projects will also be registered as condominiums to ensure maximum flexibility if future economic circumstances change.

  7. Natrx says:

    One BIG and major difference between Canada and the US.

    The Americans had Health Care issues! They had to either pay their mortgage or health insurance after being laid off. Canadians do not get that draconian choice.

  8. joel says:

    One of the big reasons that developers are switching to purpose built rentals is because it is easier for them to get funding from banks. They are able to borrow money without having pre-sold 80% of the units. This allows for them to build quicker and to incur less costs. No need to pay 7-8% to realtors for the pre construction condos and no need for the market money or building of a sales center.
    Developers that are used to selling out in pre-sales in the first week aren’t able to convince (dupe) buyers as quickly and the money is coming out of their bottom line. Purpose built rentals eliminate this step and there are many REIT’s and Funds interested in the Toronto RE long game.

  9. daniel says:

    Rising rents and falling cap rates are the explanatory variables. $3.50 psf rent, at 30% operating cost ratio and 4% cap rate gives you $735 finished value psf. Even normalizing revenue for vacancy and cap ex you’re still in the high $600’s psf. Rental is now competitive with condo on a revenue side, and it doesn’t require you to pay $25 psf in agent commission, build a $1M sales centre and spend hundreds of thousands (or millions) on a marketing campaign.

    With vacancy rates below 2% in Toronto it’s not rocket science either. Lots of lower income people only have the downpayment or income for a 500-600 sf condo, but can rent a 750 sf condo and would prefer not to be tied down to ownership.

    Need deep pockets though, LTV’s are pretty low. Also, these rental buildings will compete with the rental inventory held by investors in condo buildings, so there certainly is some strong interaction between activity in the rental market and in the condo market.

  10. Mike says:

    CPP’s investment in Student Housing is not a real estate play, they’re buying cash flow off of a government entity (high credit rating). UK universities are owned by the State (Crown), rates are dictated by the Universities, payment is guaranteed by the University.

    Securitising student residences is just another way for a government (in this case the Universities) to borrow money by selling off a guaranteed cash flow. It has absolutely nothing to do with number of units, number of students or rental rates now or in the future.

  11. Chroscklh says:

    David, I see different side of arguments. One hand – less condo supply good for owner. Other hand – if builder make deal with real estate owner to buy whole building, maybe is cuzz they anticipate slow to sell all condo unit, slow to get finance. Third hand – liability-driven investor (insurance co, pension fund) need to invest in asset with duration that match obligation – life insur policy, people pension etc- need to own long-term asset like bond. Apartment building is great ‘bond’, goes up in value, rents go up, in Toronto rarely have high vacancy. Purpose-built rental is, however, hard justify when 30-yr old building cheaper – but is not the case anymore, little bifurcation of these market, so much demand for even old crappy stock, so now make the sense build new. Plus demand is there on tenant side. New building have no rent control, and more efficient too.

    1. daniel says:

      No references to bears or the mother land. You’re slipping Chroscklh

    2. Mike says:

      You bring up a good point. If you have the land to build a condo, you’re going to be looking at a few years to see an exit. If you think the real estate market is heading lower it makes for a compelling argument to build a rental building and see an exit. Currently raw land is not moving in Toronto (Brad Lamb says so himself). By building a rental building you’re risk that you will have trouble selling units is eliminated, so that clears up your financing issues and let’s you focus on construction and completion which lets you exit the original land investment with the profit from building on the land.

      1. Andrew K says:

        Take into consideration some facts in numbers. Canada is after Greece most in dept per capita.(Not very optimistic according to economy eeee?) I am a baby boomer and looking my older friends ,I can tell, that there is a BIG change in a way they taking into consideration their future(and I will to in few years). They sell houses and rent apartments. It is a way to get out of any depts. and get FREE .If you sell your house or condo for $400,000,and you pay rent $1500/month, than you have 22 years worry free accommodation, but if you are smart and move outside of Toronto(no strings of work attached) and pay let say in Goderich $700/month ,you are close to your family(3-4 hrs. drive) and you have money to pay 44 years rent, OK- inflation 30 years and you are 65 so you are ok until you are 95.More and more old people will rent, so if you bought condominium and rent it via kijiji or craigslist ,how can youn be more attractive to rent your condo than BIG man who owns 200 units with own property management people and that people can deal with any problems in apartment in matter of minutes – OK hours(no days like you). How can you be more attractive for potential tenant with 1 unit than them ?, when in case of dept, you are up to your head and easy(in case of tenant problem) you can go under.

  12. Kyle says:

    Logic be damned – media will pretty much spin anything into a sign of imminent housing correction and bears will eagerly buy it.

    As for purpose-built apartments, it’s important to note where these apartments are being built. Only in major centers and only in established neighbourhoods with transportation and amenities already in place. These investors are betting on the reliable long term, growing cash flows (something prized by pension funds, since it helps offsets the cash flows of their pension liabilities), and price appreciation as the urbanization of large centers continues.

  13. Ed says:

    Whether it be condos or apartments one thing that is true is people need a place to live and with immigration to the GTA at 100,000 per year more units are needed. I see investment into apartment buildings as a long term bullish sign that the market is very healthy here.

    1. Mike says:

      Where do you get this statistic from? Here are the population rates since 1981 from the Canadian Census
      1981 2,137,395
      1986 2,192,721
      1991 2,275,771
      1996 2,385,421
      2001 2,481,494
      2006 2,503,281
      2011 2,615,060
      (all info StatsCan)
      You will notice that they growth rate remains constant until 2011, the last year data is available. The annual growth rate is less than 1%. You will notice that in the years between 1986 and 2001 the population only grew by 288,773 a period that encompassed a bubble and its subsequent pop. Housing prices took 11-years to return to 1989 prices despite the population of Toronto continuing to grow at its traditional levels. From 2001 to 2011 the population grew by 133,566 people. Since 2011 there have been a number of changes in the Immigration Act which makes it more difficult to move to the country.

      That said, I hear this statistic a lot when it comes to real estate but can’t figure out how it’s calculated.

      1. Appraiser says:

        @ Mike:

        Here are the latest population projections from StatsCan for the GTA.

        “The Greater Toronto Area (GTA) is projected to be the fastest growing region of the province, with its population increasing by almost 3.0 million, or 45.8 per cent, to reach over 9.4 million by 2041. The GTA’s share of provincial population is projected to rise from 47.6 per cent in 2013 to 52.9 per cent in 2041.”

        1. Mike says:



  14. DavidP says:

    Whether they’re building a normal rental building or a condo rental building might also give insight as to why a building’s investors are going rental. 11 St Joseph started out as a rental building, but it was a condo that they sold units of slowly.

  15. Paully says:

    I think that there is a fair demographic argument for building more rentals right now. The peak of the Baby Boom was in the early Sixties, so the peak birth years for the Echo Boom would have been around the late eighties or early nineties. Kids born in the early nineties are approaching their mid-twenties, which would typically be the age for them to move out and get their own place, which would traditionally mean renting something. I realize that those are relatively vague dates and ages, but I am just trying to acknowledge an underlining trend that may be at work here.

    The other thing at work has to be the more recent proliferation of big residential REITs looking for investment properties. There are now more entities out there with the capital to buy a big apartment building, so it would seem to make more sense to build more to sell to these giant funds.

  16. Appraiser says:

    Oh look it’s 2015, time to make another housing crash prediction. Apparently if your prediction proves false, you can simply revive it.

    Reminds me of an episode of the Simpsons, “Now go change the expiration dates on the dairy products.” – (Apu to Homer, 1991).

    2014 –

    2013 –

    2012 –

    2011 –

    2010 –