Across Canada, vacancy rates are dropping, average rents are increasing, and cap rates on all buildings have dropped substantially. Canadian apartment buildings are selling for some of the highest prices in history, and new construction is ramping up in all markets.
The apartment industry has outperformed all other sectors in real estate, and has largely ignored the 2008 recession.
It’s worth asking what has promoted this turnaround.
Are the current good fortunes a cyclical accident, or is a more dramatic shift going on within the marketplace? What factors are driving up rents and driving down cap rates?
Looking behind the statistics, we see a perfect storm that has been years in the making. Repressed supply combined with loosening regulations along with demographic changes that have made apartments desirable, and a little hard to get.
Regulations suppressed supply
Supply remains constrained from the period between 1975 and 2000 when new apartment construction nearly ground to a halt in Canada. Heightened government regulations and rent control in Ontario eliminated the incentive for developers to build new apartments, and they went elsewhere. These were difficult times in the industry, but they helped set up what followed.
In the 1990s, regulations and rent controls eased, to the point that many rents were able to find their natural levels in the market, but the supply remained skewed. Most buildings were more than 20 years old, which meant that any investor that bought an old building and renovated it, upgrading the features, immediately repositioned that building in the marketplace and gained a substantial increase in rental income. This started to attract the interest of investors by the late 1990s.
At the same time, interesting things were happening on the demand side of things.
What the market wants today
Fifty years ago, graduating baby boomers looking to start families drove the demand for large single-family homes in the suburbs. High-rise apartment housing was seen as the realm of unmarried young people, widowed older people, or families on social assistance.
Today, families are having fewer children and, in many cases, both parents are working. Baby boomers are retiring; their children have grown up and left the nest. Two major demographics – young urban professionals and older empty nesters – are now looking for smaller homes closer to amenities.
Young families in particular want to save time on commutes and save money on home maintenance. They’re finding this in urban high-rise apartment living, rather than in suburban sprawl.
This is why, between 1991 and 2011, the number of apartment dwellers in the Greater Toronto Area increased from 500,000 to more than 700,000. Vancouver experienced similar growth, from 200,000 people to more than 300,000. According to the 2006 Canadian census, half of all households in Montreal and more than 35% in Vancouver and Toronto live in apartments.
This trend has been encouraged by increasing housing prices, rising condo fees and mortgage costs, which place as much as a $1,000 per month extra burden on owning a condominium suite compared to renting one. Thus, renting has become an attractive alternative.
Looking to the future
The supply and demand conditions described above are long-term factors that should ensure the viability of the apartment sector for many years to come. In terms of available rental stock, the apartment industry has a lot of catching up to do before demand is met.
Indeed, given the sharp increase in prices that older apartment buildings have fetched in Toronto and Vancouver over the past five years, it would appear that the older stock available for repositioning has largely been bought out, and more investors are buying to increase density.
Canada Mortgage and Housing Statistics, as well as research conducted by ROCK Advisors Inc., Brokerage show that, since 2000, more than 400 new apartment buildings have been built across Canada.
Lowering vacancy rates and rising average rents show that the marketplace has easily absorbed these new units, showing that demand remains strong. Demographic trends indicate that our baby boomers will continue to get older, and that young urban professionals are having smaller families.
It appears that the dream of a big house in the suburbs has been replaced by a more compact apartment in a vibrant urban neighbourhood.
Marketing to the new apartment age
To see what new apartments will look like in the next decade, one need look no further than the condominium market. High-rise condominiums have helped make high rise apartment living fashionable, and hundreds of units have risen in the centres of Canadian cities. Indeed, these high-rise condominiums have contributed a number of units to the rental market, as owners have leased their units to tenants.
Condominiums have attracted empty-nesters and young urban professionals by offering amenities that enhance the quality of their lives in a more compact space. The increasingly affluent apartment tenant is drawn by such features as in-suite washers and dryers, high-quality finishes, and a location that is close to work and to shops and restaurants. The aging baby boomers are looking for units which are easily accessible, with fewer stairs to navigate.
As demand for downtown living increases, housing prices and rents have risen at the same time, and some developers have responded by offering micro-apartments for young and single individuals. These 400-square-foot-and-under units offer affordable rents in some of the most desirable areas of our cities.
Canada’s apartment sector has emerged from decades of dormancy, thanks to eased regulations and increased demand. The factors behind these changes suggest that the next few decades will change the face of our cities, bringing the affluent back from the suburbs, and making more of us happy renters instead of owners.
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.