Rental apartment construction slumps in Toronto as building costs rise

Rental apartment construction fell sharply in Toronto in the first half of the year, according to a new government report that suggests it has become “increasingly unsustainable” for developers to shoulder rising construction costs.

Apartment rental housing starts fell 24 percent to 1,436 units in the first half of this year compared to the same period last year, Canada Mortgage and Housing Corp. said in a new report released Tuesday. Four of the other five major cities surveyed by CMHC showed an increase in apartment rental starts, with Calgary more than doubling over the same period.

across the country, there has been a push a build more rental housingalso known as specially designed rental, to help house the growing number of residents who have long been excluded from the real estate market.

But in Toronto, developers have less incentive to build purpose-built rental buildings because demand is so high from investors looking to buy preconstruction condos.

Additionally, many prospective homebuyers cannot afford a home, given the typical sales price of more than $1 million in the Toronto region. Condos are relatively cheaper.

The sharp rise in construction costs has also been a factor for developers. CMHC said costs increased 22 percent, year over year. Those expenses, along with rising interest rates and higher land costs, “appear to make” purpose-built rental construction in Toronto “increasingly less sustainable,” according to the report.

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Due to the strong demand for pre-construction condominiums, it is easier for developers to quickly recoup their costs on them. Once construction of a condominium is complete, buyers close their units and the developer is paid.

“You sell and you’re done,” said Dana Senagama, CMHC senior specialist for the Toronto region.

However, with a purpose-built apartment building, developers face a longer period to recoup their costs. Leasing a building can take more than a year, and even then that doesn’t cover all the development costs. “You have to wait a long time to recoup that cost,” Ms. Senagama said. “So, it’s just not attractive.”

The CMHC report looked at the proportion of new high-rise units that are rental apartments versus condos, saying that Toronto was the only major urban center where condo construction outpaced rental apartment construction in the first half of the year in compared to the average of the previous year. five years. Purpose-built rental starts accounted for 10.7 percent of high-rise housing starts in Toronto in the first half. In the previous five years, the average was 17.4 percent for the first half of the year.

Montreal also showed a decline in purpose-built rental construction over the past year. But overall, rental starts accounted for 67.6 percent of high-rise housing starts in Montreal in the first half of this year. That’s higher than the previous five years, when the average was 61.2 percent. Similarly, in Vancouver, Ottawa, Calgary, and Edmonton, developers are moving toward purpose-built rentals.

For Toronto, this year’s rental starts marked the lowest level since 2017. The CMHC report said this decline suggests “some builders may be pausing to reassess the feasibility of development.”

The slowdown is happening as monthly rental rates skyrocket. The median rent for a condo hit $3.57 per square foot in the second quarter of this year, according to condo research group Urbanation Inc. The median monthly rent for a one-bedroom condo was $2,182 in the entire Toronto region.

The demand for rental units has increased due to a number of factors. Prospective buyers are continuing to rent or looking for a place to rent because they no longer qualify for a home loan now that the cost of borrowing has skyrocketed. Additionally, international students and Toronto workers have returned to the city as most government COVID-19 restrictions have been lifted.