Purpose-built rental construction is gaining momentum in Toronto and the new mixed-used downtown development The Well could be part of a new wave of badly needed housing options.

The Well is composed of six buildings spanning the block between Spadina Avenue and Draper Street on Wellington, and includes The Residences at The Well, comprising roughly 1,000 purpose-built rental units.

According to Rob Martin, senior vice president of Rhapsody, property manager for The Residences at The Well, purpose-built rental construction in Toronto has reached “a tipping point.” After spending years in Europe and the United States, Martin, who has had a long career in the rental sector, was longing to return to Canada, but prospects here looked dim.

By 2014, however, purpose-built rental construction in Toronto was beginning to burgeon and he considered it an ideal time to enter the city’s industry.

“There just wasn’t the industry back then for purpose-built housing in Canada (like) the one that existed in the U.S.,” Martin told RENX. “In 2014, there were one or maybe two project openings in the city a year.”

Purpose-built rentals vs. condos

Developers have long chosen to build condominiums instead due to the profit margins and because it was much easier for them to reinvest the proceeds in subsequent projects.

Real estate investment trusts have consequently stepped up and supported purpose-built rental construction in the city because long-term asset retention fits their business models.

However, there is still a need for much more rental development.

Dream Unlimited and the Dream Impact Fund have over 1,700 residential units across 14 buildings in Canada and it has more than 2,000 additional purpose-built units under construction it anticipates delivering in the next couple of years.

It began focusing on the rental sector in 2017, and according to Jamie Cooper, portfolio manager of the Dream Impact Fund, despite uncertainty proliferating throughout the real estate market, the firm is confident in the resiliency of the residential sector.

“Purpose-built rental development has real benefits to the investor compared to condo development — you get to own an income property at the end that provides recurring cash flow and the depreciation of the building lowers current tax costs,” Cooper said.

One major hurdle for developers is that purpose-built rental construction requires two to three times more up-front capital than condo developments.

So, until there are better frameworks to incentivize growing the sector, Cooper says scaling will be difficult.

The changing dynamics of home ownership

Still, there are promising signs.

Rental demand in Toronto has arguably never been as high as it is today.

Not only has Canada’s federal government increased its annual immigration quota to 500,000, it also welcomes up to 400,000 permit workers annually, most of whom naturally move to the city with the largest economy: Toronto.

Rhapsody, which turned eight years old this month, has become busier by the year.

The property manager has opened 19 rental developments across the country, most of which are situated in the Greater Toronto Area, owing to partnerships with large developers, ensuring a healthy pipeline.

On the horizon is a major rental development in Toronto’s Yonge and Sheppard neighbourhood that’s slated to open next year, followed by two more large-scale projects Martin anticipates will shine an even brighter light on the purpose-built sector, further demonstrating the business model in the city is sound.

These buildings look nothing like their predecessors from the 1960s through the ‘80s, as evidenced by the Residences at The Well and other major projects Rhapsody is managing, such as 2 Tecumseth (by TAS) on the western edge of downtown Toronto.

Incentives needed for apartment development

However, more incentives are needed to significantly scale-up purpose-built rentals construction in Toronto because of those up-front capital costs.

“Right now there is no framework that exists to incentivize the continued growth of rental development,” Cooper said.

“Whether that is HST, further reductions to development charges for building rental or otherwise, it would be helpful if government can introduce policy to further encourage more developers to participate in rental development."

Some programs exist through the Canada Mortgage and Housing Corporation, he added, but offerings remain paltry.

Martin, for his part, is optimistic purpose-built rental construction in Toronto is on the cusp of more growth, noting the cities of tomorrow won’t look like those of yesterday.

“Now that big companies like REITs are focused on this, they say there has to be a rental component to their retail strategy,” Martin said.

Some of Canada's largest retail REITS, including RioCan and Choice Properties, are intensively involved in multires development as a way to add new revenue streams and densify their existing assets.

“Being tied to retail in this way is such a huge plus, not just for tenants but for the general, overall health of the community," Martin said.

"Having residential being part of retail changes the services they offer and it enhances the whole community. If you’re dropping 300 units of housing, that’s close to 600 people, and that’s a lot of quick density in a small area and it’s exciting to see that.”