What’s The Future Of Purpose-Built Rentals In Toronto?

I suppose this could be turned into a mathematical equation on an exam for a first-year university business class.

If you owned a plot of land, should you: a) construct a condominium, sell the units, and be “out” inside of 4-5 years, b) construct a purpose-built rental tower, hold it in perpetuity, and after X number of years, surpass the amount of money made from option (a).

The number of new purpose-built rental buildings in Toronto had dropped massively during the real estate boom, and was all set to make a big comeback if not for the Ontario government’s actions last April.

Let’s look at a couple of purpose-built rentals that are moving forward, and consider why a developer would build for the long-term, rather than short…

RentalRedCircle2

What would you do, if you were in the situation described above?

Say you own a parking lot in downtown Toronto, and you’re building a 40-storey, 240-unit residential tower.

You could build the structure and rent out all 240 units, collecting cheques each and every month.

Assuming you financed, say, 70% of the project, you’d have to work to pay the loan back via the monthly rent – for how long, exactly?  Ten years?  Twenty years?  And then afterwards, you just sit back and collect the cheques?  Let the good times roll?

You could build the structure and sell the individual units, forming a condominium corporation, and once the building is registered as such, hand the 240 deeds over the owners and say, “Good luck,” then take the money and run.

I know what you’re thinking – in the first scenario, the builders/owners/investors would sell to a REIT or a pension fund, for an amount that’s based on the income stream, rather than keep the building “forever.”

But that complicates our very simple question: apartment or condo?

Before the late 1970’s, every high-rise unit was within an apartment building, owned as a whole, by an individual or corporation.

It wasn’t until the early 1980’s that the “condominium” became common, which gave way to a major shift in the percentage of units which were condo versus those which were apartment style, through the 90’s, and into the 2000’s.  Today, there are very few purpose-built rentals being constructed, and you have to ask yourselves, why?

If money isn’t the answer, then I don’t know what is!

In 2017, it seems that “rental units” don’t refer to the same thing that they did in the 1970’s.

In the 70’s, you’d expect to “rent” within an apartment, with the superintendent living down the hall like your University residence “Don” did, paying the rent each month to whoever owned the building.

Today, an overwhelming percentage of “rental units” are owned by individuals, whether it’s a basement apartment, a unit within a four-plex, or as is so often the case, a condominium.

So do you, the renter, care if you’re renting Unit #2707 from XYZ Corporation who owns all 240 units in the building, versus renting from John Smith who owns that one unit, within the condominium?

I don’t think most renters care, to be honest.

There are pros and cons to each type of landlord.

If you’re renting a condominium, you might find that your landlord is overbearing and annoying, compared to an apartment building superintendent, or you might find that the owner lives overseas, doesn’t respond to emails, and won’t pay to fix anything in the unit.

But the topic today isn’t whether you’d rather rent an apartment or a condo, but rather whether you’d rather build an apartment or a condo as a developer.

And if money isn’t the biggest reason to build and sell condominiums, rather than hold apartment-rentals long term, then perhaps the new regulations from the “Ontario Fair Housing Plan” are.

I remember reading an article, circa early 2015, that was touting the explosive growth forecast for the purpose-built rental market.  Let me see if I can dig that up…

….ah HERE.

This is from a website called www.biznow.com, and includes data from Urbanation, which is slowly becoming Toronto’s most accurate source of condo and rental statistics:

Dormant for two decades, purpose-built rental apartments are resurgent in the GTA, with eight buildings (2,458 units) under construction and 37 (9,207 units) proposed, according to a new report from Urbanation. SVP Shaun Hildebrand unpacks the renewed enthusiasm for purpose-built rental.

Only 34 rental projects were built in the GTA since 2005, a mere 6,723 units. “Construction has been flat over the last 10 years,” Shaun tells us. (Indeed, compare that to the plethora of condo buildings that cropped up in the same period.) But with affordability issues pushing rental demand to a 20-year high, the residential pipeline’s been filling fast with rental developments. “If you add up all the projects under construction, and those expected to start in coming years,” says Shaun, “it’s actually 75% higher than what’s been developed in the past decade.”

That doesn’t include pre-construction condo projects that might convert into rental, which is happening more lately as the purpose-built market gathers steam. Earlier this year Urbancorp canceled its Kingsclub condo complex on King West (above), announcing plans for rental apartment towers instead. And last December, the group behind The Selby, a proposed 49-storey condo project at Sherbourne and Bloor, turned it into a rental development. “Large developers and institutional investors are getting behind rental,” says Shaun.

The Honest Ed’s redevelopment by Westbank Corp (above) won’t include any condos, just rental apartments. What explains the surging interest? Rental demand is at a record high as a booming young population migrates into the city centre, where it’s more expensive to buy real estate. Vacancy rates are hovering around 1%; and rent levels rose nearly 15% in the past five years, notes Shaun. “That was what [investors and developers] were waiting for: the big jump in rents.” Apartment rents downtown can be higher than condo rental rates in some cases. “So it’s starting to make more sense to build rental.”

RioCan REIT and Allied Properties REIT are JVing on 602-620 King West (above), a mixed-use project with an office tower and 14-storey rental building. For years condos have been the de facto supply of new rental units, but Shaun notes renters place a premium on living in professionally managed rental apartment buildings. “It’s a secure form of housing. The unit owner isn’t going to sell it and force you to vacate.” And amid eroding affordability, more people are choosing to stay put in rental properties. “The development industry realizes the demand for rental has longevity—this is not a fad.”

 


Now that was written in April of 2015, and a lot has changed since then.

January to April of 2017 was the hottest real estate market, specifically condo market, that Toronto has ever seen.

And here we sit, nearly 30 months later, and I still have to wonder what the future holds for purpose-built rental properties in Toronto, let alone the downtown core.

There are a few examples popping up.

The southeast corner of Bay & Gerrard Streets is going to be home to a 43-storey, 595 unit rental building, and I think every last one of us would have bet our shirt that this location would have produced yet another condominium.

And the building’s name?

The Livmore

Their slogan?

“Lease is Less.”

Here’s the press release from back in July:

GWL Realty Advisors (GWLRA) today launched their flagship purpose-built rental building and the largest of its kind in terms of number of units currently under construction in Canada. Located at the southeast corner of Bay and Gerrard Streets in the heart of downtown Toronto, the Page + Steele designed amenity-rich building will introduce 595 rental suites into one of the tightest rental markets in recent history.

Unveiled today as The Livmore, the 43-storey apartment tower offers extensive amenities and features: media room, party room with kitchen facilities, every unit with en-suite washer/dryer and custom features and finishes, full service fitness and yoga rooms, a pet spa and outdoor dog run area, and a Sky Lounge on the 26th floor providing panoramic views of the city.

With vacancy levels of both purpose built and condo rental at historic lows, The Livmore will contribute significantly to meeting the rental needs in Toronto’s downtown core. And the message – Lease is More — is a simple one. That is, without the financial constraints of a mortgage, interest rates, property taxes and maintenance fees, life offers more of everything — play, entertain, read, breathe, laugh, cycle, think and Livmore. The project is walking distance to streetcar and subway stations, universities, medical/hospital services on University Avenue, Yorkville shopping and restaurants, and the financial and theatre districts.

The wisdom of renting resonates with prospective residents but also with politicians and financial experts. Speaking at today’s launch about the need for more downtown rental housing was Councillor Kristyn Wong-Tam. “Purpose-built rental is in high-need, particularly in the downtown core,” said Wong-Tam. “Toronto is now the 4th largest city in North Americaand growing.  As our city expands, there needs to be a selection of housing options and I am pleased that GWL Realty Advisors is at the table to serve this demand.”

Toronto’s chief planner Jennifer Keesmaat added, ” The Livmore is an essential contribution to our city – 570 new units of purpose built rental will be added to our housing stock right in the heart of the city, adding housing choice. It also fulfills a key objective of our city building through the provision of a complete community, that includes excellent amenity space and public space and new affordable housing.”


You can always tell when something is written by Public Relations, and not a journalist.

“The wisdom of renting resonates with prospective residents but also with politicians and financial experts.”

Politicians?

Since when do I care if Adam Vaughan rents or owns?

In any event, the sales pitch is a bit much (ie. “without the financial constraints of a mortgage, interest rates, property taxes and maintenance fees, life offers more of everything — play, entertain, read, breathe, laugh, cycle, think and Livmore”), but I’m sure you could easily accuse me of pushing home ownership too, so fair is fair.

It’s important to note, however, that adding rental housing to a downtown core that is in dire need of it, does not mean this will be affordable to all, or cheaper than what the free market will bear, and I think that’s an important distinction to make as there’s a common misconception out there that “condo owners” are greedy, when in reality, whichever pension fund or REIT owns The Livmore will seek the highest rents possible.

So if politicians are on board, as it looks like some are in the case of The Livmore, then are there advantages to developers for building an apartment rather than a condo?

In some cases, yes.

Look no further than 66 Isabella Street for a great example.

This was a 1970-built, 26-storey apartment building that was well past its time.

The owners of the property wanted to expand, and while I’m tempted to put words in their mouths and say “They wanted to build a condo,” I would guess that what they did build was probably a combination of what they wanted to build, what they were allowed to build, what incentives they were given by the City of Toronto, and how they worked with the city toward a common goal.

What they did, in the end, was pretty clever.

Here’s the artist’s rendering of the “new” 66 Isabella Street:

66Isabella

See the beige part of the building on the left-hand side, behind the glass-tower, that looks like a 1970’s apartment building?

That is the 1970’s apartment building.  They just annexed this massive glass tower to it.

Over 200 units were added, all rental.

Critics might suggest there’s no fusion between the two buildings, but we’re not building art here; we’re building rental units.

So if 66 Isabella Street is any indication, perhaps the City of Toronto will encourage developers to consider constructing purpose-built rentals, by relaxing height restrictions, fast-tracking applications, providing subsidies or discounted development levies, or anything else that will help change the outlook of many developers from short-term to long-term.

I will add that the “Ontario Fair Housing Plan” did not help matters.

Developers were apparently not happy with the “Rental Fairness Act,” and over 20,000 planned rental units were in jeopardy what a survey was commissioned back in May.

This should come as no surprise to anybody.

And only time will tell whether that was just rhetoric and posturing, or if Toronto really could lose out on as many as 20,000 planned rental units, which would end up becoming condos.

I may sell real estate for a living, and not rent it, but I think a healthy combination of both new condominiums and purpose-built rentals would do the city well.

There will always be private investors who want to own individual condos and lease them out.

Perhaps that is a topic for next week.

How have the new rental measures affected investors?  And how, as a result, have would-be renters been affected as well?

12 Comments

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  1. Frances says:

    Rent control is self-defeating but it can be hard to argue against them in a tight market with high rents that sometimes amount to gouging. I confess I don’t know the right way to go.
    As for amenities, the only one I would want is laundry equipment in my own suite. The others that are offered in condos don’t interest me at all and I wouldn’t want to pay for them and I wouldn’t want to pay for them in a rental building either.

  2. Alex says:

    For a renter the difference between condo and purpose built apartment can be pretty big. I lived in an old apartment so maybe it’s just age but I noticed huge differences between the two:
    1) amenities. A condo generally has its own gym, pool, party room, etc, and they tend to be nicer than what an apartment might have.
    2) In suite amenities. Do not underestimate the huge difference between having laundry in suite (condo) vs lugging all your stuff to the basement, trying to find a free machine, and forking over $3 or more per individual load.
    3) Elevators! I lived in an apartment for 3 years and don’t remember any of our elevators breaking down once. They probably did once or twice but it was so rare I don’t remember it. In my condo (and anecdotally from friends) at least one elevator usually goes out of service for a day or so once every few weeks! I feel like if one group is basically buying the whole building as a long term investment they enforce a quality build.

    Actually I guess my points end up evening out, but depending on what’s important to you they make a big difference when looking for a place to rent. You know, if we weren’t in a crazy market and people had a choice.

    1. Jack says:

      @Alex: Yes, it is just age. Amenities in newly built rental buildings are about the same (depending on the price/luxury levels of course) as in newly built condo buildings. As we read recently, some builders are switching from condos to rentals, or the other way round. They are not changing building plans.
      So the difference is between old and new, not between condos and rentals.

  3. gregoryyyz says:

    The purpose built rental at 620 King W mentioned above is switching to condo:
    http://urbantoronto.ca/news/2017/09/king-portland-centre-residential-switches-rental-condo

    Small evidence I guess developers are not happy with the Rental Fairness Act.

  4. Jeremy says:

    I lived at 66 Isabella in 2011 when this addition was announced. The tenants were trying to organize a protest and my neighbors wanted me to join in. I told them it was a losing battle and moved shortly after. Imagine having to put up with years of construction in a rental building.

  5. Joe Q. says:

    David writes: “So do you, the renter, care if you’re renting Unit #2707 from XYZ Corporation who owns all 240 units in the building, versus renting from John Smith who owns that one unit, within the condominium?”

    If I were the renter, I’d certainly care. John Smith may very well decide to “cash out” and sell the unit, or to move into the condo himself, requiring me to pack up and find a new place to live. With XYZ Corporation, both of those scenarios are a lot less likely!

    1. jeff316 says:

      Agreed. I never rented from individuals for that very reason.

  6. Sarah says:

    Sorry, I might have missed it somewhere in the post – but why can rental apartments charge more to rent than a condo unit? Is it the absence of condo fees? – Thus people willing to pay a little bit more in net rent?

  7. Rachelle says:

    Well David,

    You omitted a few important problems for developers which is financing and property taxes. Let’s start with the path to building the building in the first place, the developer is going to have to pay for construction, city development fees of 60K per unit, HST, city approval, likely OMB hearings etc. So in a condo, you get your money back and you pay everyone off. The units are 80% presold and the bank gives you financing based on those presales.

    For construction of a rental building, you would have a hard time getting financing, because you don’t get presales. Most of the creators of the rental apartments are actually pension funds who need places to park money for relatively low yield. Most of those “rental” buildings are actually condominiums but all owned by one owner, there is no reason why they couldn’t start selling the units off individually later on.

    Pension funds are buying these projects once all the uncertainty of development is gone. They are approved projects with no more planning or city approval to do. They can then present a case we have this many units and we can achieve this income. The math is relatively simple. They are not taking a parking lot and turning into a building.

    66 Isabella site is again not a very risky deal, they have a proven record of business, and a mostly paid off building that they are expanding.

    The timing of the new rental regulations is extremely unfortunate. Buildings generally take a long lead time to build – from 5-10 years depending on the neighborhood opposition, zoning, financing etc.

    The city of Toronto charges 3 times the property taxes for multi residential rental vs condo. A few years ago they changed the rules for new construction of rental buildings only. The old decrepit buildings still spend much of their rent budget on City of Toronto taxes. According to the city of Toronto website, it looks like a new category of “new multi residential rental” was added in 2002. I seem to remember this change much later than that but maybe not.

    Since 1994 Landlords were also allowed to increase the rent above the guideline on new units. This was done to encourage building new rental buildings. But then you would pay 3 times the property tax as a condo.

    So even if it is 2002, you have a window of 14 years to conceived, plan, finance the building of a new rental building, for much of that time rents were flat so that made it very difficult to make a solid business case for rentals.

    For a rental landlord when you rent an entire building, you end up with a lowering effect, this effect is immediately observable when they release condos for rent. The initial rental price where you are competing with other landlords is $100 to $200 lower than just a year later.

    The worst of all these problems is that the government’s changing tactics have reinstilled a profound distrust of the Government among property developers. They will just screw you over for votes because perception is reality to them. But property developers are not altruistic saps. If they can’t make money building it, they won’t. Needless to say, reducing your time exposure to legislative change risk, is a solid business strategy.

    1. Steve says:

      Well written and absolutely bang on

    2. Jeff says:

      Apartments have had same mill rates as condo’s for almost 20 years now.

  8. Kyle says:

    Time will tell whether the anticipated rebirth of purpose built will fizzle. With rent controls on new units, only a few large institutions have an investor profile with that long a time horizon, so i suspect there will be far less being built.

    In my view i think what we will likely see going forward instead of more purpose built, is money diverted into revitalization/renovation of older existing towers, so that landlords can extract more rent from their existing stock while still taking advantage of various government incentives. The result- less affordable units, and more high end units, but not much increase total number of units.

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