It’s been a long time coming, but the Canadian purpose-built rental apartment industry is undergoing a renaissance.
Demographic changes, the easing of regulations and limited supply are combining to make purpose-built rental apartments one of the best-performing sectors of the real estate industry as it enters 2020. With more developers realizing the benefits to investing in rental, we will see a boom in rental apartment development over the next decade.
I’ve said it before: Canada, it’s time to build new apartments. The benefits of investing and developing purpose-built rental have been clear for the past decade.
Rental apartments emerged from the 2008 recession as the top sector in real estate. As demand for rentals increased, vacancies dropped. Rents rose. Cap rates fell to historic lows. This has meant that the value of renovated and new apartment buildings has dramatically increased.
Check out the chart included with this article (see below, or for a scaleable PDF NACSoldCanadaOver100Units). It details the 40 biggest apartment building sales in Canada in the past 10 years. In 2008, the best deals for large apartment buildings were around $275,000 per unit. In 2018, the Annex in Ottawa sold for $578,616 per unit. Over the past 10 years, the 40 largest sales of purpose-built rental apartment buildings across Canada have sold for over $2.4 billion.
Looking back on a fantastic decade
Over the past 10 years, I’ve had the privilege of brokering 11 of the 40 largest apartment building sales in Canada.
It has been exciting seeing the sector change and grow. A lot of the change in demand has had to do with changes in demographics. People are turning away from the dream of a big home in the suburbs.
Young urban professionals and millennials are looking for a more urban setting to live. They want a smaller, less expensive space in a vibrant neighbourhood. They see their apartment as their bedroom, and the surrounding neighbourhood as their living room.
Baby boomers want to be nearer their grandchildren, and their grandchildren are growing up in town. Selling their homes and finding an apartment closer to the downtown is an increasingly desirable option.
However, the biggest change, in my opinion, is the increased confidence developers have in the purpose-built rental apartment industry.
In the early part of this past decade, most merchant builders were looking for a quick profit from condominium towers. Many developers had not yet caught on and were operating with a quarter-century-old view of apartments tainted with rent control and overregulation.
Regulations have eased, rents are rising, and as the supply of older, convertible apartment buildings have been bought out, new construction just makes more sense.
Condominium developers can now see the long-term stability and profit of purpose-built rental. They’re not only a hedge against a potential downturn in the demand of the condominium market, but they offer a steady, long-term income that enhances the final sale price of these buildings.
A decade of learning
As the industry and developers have grown and changed over the past 10 years, so have I.
I’ve learned a lot over the past decade selling apartments. Brokering properties is not a quick endeavour. People don’t just walk into my office and say, “hey, can you sell my apartment building?”
More often, the sale actually began three to five years before the building was put on the market. Many were started when we did the initial feasibility study for the developer on what they should build. We helped them understand the marketplace better so they could bring their building into being, and we established a non-brokerage relationship with our clients that evolved into a brokerage deal.
Developers need to understand the purpose-built rental apartment industry before they get into it. It’s not as simple as building a condominium and renting it out.
There is a different risk profile in building apartments. The condominium developer pre-sells all or most of the units before construction begins. An apartment building has to be built first before the developer gets to see how successful the development is.
Opportunities and challenges
My colleagues in SVN Rock Advisors’ Department of Research and Consultancy work with developers to show them the opportunities to be had and the challenges to overcome. A comprehensive, unbiased feasibility study allows developers to benefit from the knowledge of experienced professionals who offer unbiased advice on what developers should build, where they should build, and whom they should build for.
Marketing should begin the day the developer puts up the hoarding, even before.
The No. 1 question every developer has asked me is, is there a demand for rental product? My answer is, yes, absolutely, but what type of product?
Developers who build following a comprehensive feasibility study will understand who is living in the neighbourhood, their income, how old they are, what amenities they want, and so on. This will ensure the long-term stability of a leased-out building offering the best rents.
An apartment building is something a builder – even a merchant builder – should be prepared to keep.
Looking to the future
As we approach the 2020s, I see more apartment buildings being built, and greater innovations on the size, scope and style of the new projects.
As suburban centres look to increase their urban aesthetic, major retail centres could look at replacing underused parking lots and expanding their business and revenues by building new apartment buildings on them. These buildings can become the new anchor for future shopping centres.
As cities across Canada look to manage growth and increase density, purpose-built rental apartment buildings will become more prominent and numerous. Projects are already underway in Toronto, Vancouver, Montreal and elsewhere to build rental towers of 50 storeys or higher. Really, the sky’s the limit.
What won’t change are the relationships. The apartment industry is all about relationships.
It’s about working together to share knowledge. No single developer knows everything. Everyone needs professionals to help them understand the market they are investing in, and how to sell to that market.
Canada is finally building new apartments. It’s been a long time in coming, but it has been a privilege to see this industry flourish. I look forward to the 2020s, when all of these investments pay off.
Canada’s 40 largest apartment building transactions