Cranes Rising in Toronto

Apartment rents are on the rise as condo development takes off.

In 2013, $1.48 billion of multifamily properties traded in the Greater Toronto Area (GTA), setting a new benchmark for transaction volume, with a 9 percent increase from 2012 (the prior record holder) and 60 percent greater than the 10-year average.

Michael Betsalel, vice president of Colliers International, notes that when numbers come in for 2014, the numbers may be even higher—but a lot of that has to do with the condo segment.

“For rental properties, there is very little supply but a very strong market,” Betsalel says. “Vacancy is very low, at 2 percent, and we are seeing some pretty strong appreciation in the rents, but only on turnover. There has been an impact to the market because in the last 10 years, there have been approximately 300,000 condo units built, of which half are being rented, so that’s added some higher-end supply to the market.”

The latter point means there has been very little purpose-built rental being constructed, and as a result, rents have been increasing substantially.

According to Betsalel, there are more cranes up in Toronto than in Chicago, L.A. and New York combined, with condos being built left, right and center, but the reality is that to buy condo land costs $300 a foot and you’re not going to get rents to justify a yield.

“There have been newly developed buildings, being built by major institutions or on existing density—maybe someone has an old apartment building on an existing site, and they have free land in which to build,” he says. “The other option is to build a condo and sell it for a lot more a square foot, so the opportunity to make money is really limiting the production of purpose-built rentals.”

Jason Mercer, director, market analysis and service channels for the Toronto Real Estate Board (TREB), says there’s been more interest in the Toronto multifamily market of late.

“This segment of the rental market has been of growing importance because we have not seen a lot of purpose-built rental construction over the last decade,” he says. “This means that households looking to rent a new unit with modern finishes and amenities in popular neighborhoods are often turning to investor-held condos.”

The majority of apartment rentals reported through TREB’s TorontoMLS system are located in the city of Toronto proper. In its most recent report, data showed that approximately three-quarters of transactions were in the city of Toronto, with a majority of these located in the central core. Mercer says this follows the trend for apartment development over the last decade.

“In Q2 2014, the number of rental units listed was up by 22 percent. These listings prompted similar year-over-year growth in rental transactions, at almost 26 percent,” Mercer says. “These statistics suggest that renters are attracted to these new, investor-held units because they offer modern finishes and amenities in popular locations in the city and surrounding regions.”

David Lieberman, partner, capital markets group for Avison Young in Toronto, says apartment buildings that are not condo-tilted were historically built up until the ’70s, but the condo boom has saturated the market over the past two decades.

“What we see with new build is currently a lot of space is concentrated by the transit hubs, and the supply is good and pricing is significantly higher than those older properties,” he says. “The older existing product is managed differently. [These properties] have fewer amenities and are priced lower.”

Lieberman notes that rents of $3 per square foot for new product seem to be the norm, with a 20-30 percent difference for the older properties.

Condos taking the lead

In Toronto, condominium apartment development has been the driver of overall new home construction in the GTA since the recession, and that has left little land for multifamily apartment buildings.

“The great majority of units currently under construction were purchased by end-users or investors at the pre-construction stage of development. Many of these developments were 80-plus percent pre-sold before the start of construction,” Mercer says. “When units complete, some investors choose to sell, whereas others who have a longer term view choose to rent their units out.”

While the majority of apartment development continues to be in Central Toronto, there has also been a lot of suburban development over the last decade, particularly in Mississauga City Centre and southern York Region, including Markham.

“Toronto is on the transit hubs, so it makes sense that it is doing particularly well in both the condos and the old stock,” Lieberman says. “Certainly, anything in downtown Toronto, or anything along Young Street, and anything in the core is seeing the most action.”

The appeal of Toronto

The GTA has a very diverse economy covering all sectors of the economy, from financial and professional services to manufacturing to government. This has meant that, from an urban region perspective, the GTA is Canada’s single greatest beneficiary of immigration into Canada.

“Immigration is the driver of population growth in the GTA,” Mercer says. “With many different job opportunities, people from many different backgrounds are attracted to the Toronto area. This has also led to great diversity from an ethnic and cultural perspective, which also serves to attract newcomers to Toronto. Many newcomers tend to rent before moving into the home ownership market.”

A convergence of things drives people to the area, with labor being a chief factor, in Lieberman’s opinion—especially in the areas of financial services, pharmaceuticals and high-tech.

“Toronto is where the jobs are, and we are seeing a lot of 25- to 35-year-olds integrate into the downtown core. Those people are single and want to be where the action is, where the restaurants and bars are, near transit so they don’t need the expense of owning a car,” he says. “Immigration into the city will bring another 1.7 million people in the next 10 years, both out of country and outer provinces.”

Investment opportunities

Forbes rates Toronto as one of the Top 10 most financially influential cities in the world, and investors are flocking to get involved.

Lieberman says he gets calls on a regular basis (a few times a week) from investors looking to invest in multifamily buildings in the Toronto area.

“There’s a tremendous amount of capital still coming into this city from all over the world, and a lot of that wants multi-res,” he says. “If we have 100,000 people coming into the city, and there’s only 28,000 units for condos, the demand for the eco boomers is growing and will continue to drive this city, so there is need.”

Betsalel notes Canada is the most stable economic country in the world right now, based on many reports, and Toronto is the center of the country.

“It’s the biggest city, has a tremendous amount of employment, a stable banking system, so from a stability standpoint, people looking to put their money somewhere strong and long and stable are looking at Canada, then Toronto and then multifamily—the most stable, recession-proof asset class.”