The past few years have been very good for the purpose-built rental apartment industry. Developers are discovering that years of restrained supply and burgeoning demand have created a perfect storm that makes apartment buildings an excellent investment.
The centres of Canadian cities, once the exclusive purview of condominiums, are now seeing an influx of high-quality rental housing.
While apartments have done well in the recent past, savvy investors need to look to the future to see what the market will bring.
For the past five years, condominium developers, and now apartment developers, have focused on downtown markets as that’s where the demand has grown. Developers have primarily marketed to young urban professionals, largely in their 20s, usually single and often childless. As a result, most new multi-family buildings in the downtown cores of Canadian cities are bachelor or one-bedroom.
Although many downtown cores are seeing the effects of gentrification, with rents rising to match, the sense of the downtown as a place for single people has been around for decades. In downtown Toronto, fewer than 30 per cent of rental apartment units have two or more bedrooms. In Mississauga, more than 60% do. Since the Second World War, the message to young people growing up in the cores of cities appears to be: if you want a family, move to the suburbs.
The trend is changing
There are indications that this trend is changing. A study released in 2011 by the City of Toronto shows that the majority of people in the downtown core love where they are living, but a substantial number did see themselves moving out of their apartments in the next five years. Why? Because their accommodations were too small, and were unlikely to be a good fit for them in the coming years. But where did most of these people who anticipated a move want to go? Right back downtown.
Downtown Toronto and the downtowns of other hot Canadian markets like Vancouver or Montreal have seen an influx of new residents. The population in the core of Toronto has increased by more than 50,000 in the past five years. These new people have largely been young urban professionals drawn to the amenities of the core.
But these young people aren’t going to stay young forever. It is very likely that in the next five to 10 years many will marry and will want to raise a family. And as the Toronto study shows, these people want to find a life for their new family downtown. The question is, will there be an apartment stock that caters to their needs?
Condominium developers are focused on the here and now, and what will sell over the short term. Apartment developers are in for a longer haul, so they need to think less of today and more of where the market will be in the next decade.
Defying old stereotypes
Centre city neighbourhoods like downtown Toronto are defying the stereotypes of old. The streets are as safe, if not safer, than neighbourhoods in the suburbs. More amenities are within walking distance. Some of the best schools can be found downtown, and there are parks and other things for parents and kids to do.
What’s missing are apartments which cater more to families than to bachelors. These include buildings with two or more bedrooms, with safe and secure playgrounds or pools. Apartment developers who understand how to serve the needs of the young, affluent families that are setting up downtown will reap the benefits of being at the ground floor of a market that can only grow in the years to come.
As always, a developer should consider carefully what to build and where to build. While it is easy to see the overall trends, one needs a detailed feasibility study to ensure that a particular project is designed properly to obtain the best return for one’s investment. Be sure to use a qualified and impartial third party with experience in the industry to ensure the data received is accurate and unbiased.
Derek Lobo is the founder and CEO of SVN Rock Advisors Inc., a real estate brokerage with over 30 years of experience in helping investors make the most out of buying, selling, and renovating purpose-built apartment buildings. Learn more about SVN Rock Advisors Inc., Brokerage on their website at www.SVNRock.ca.