Demand for purpose-built rental housing in Toronto and Vancouver is through the roof and, with institutional investors competing for precious inventory, smaller, private investors are hitting it big.

The vacancy rate in Toronto’s multi-residential market is 1.8%, according to CoStar Group, and although it’s increased from near-zero pre-COVID-19 pandemic, it guarantees investors hefty returns, Carl Gomez, CoStar Group’s Chief Economist and Head of Market Analytics Canada, says.

“The multi-residential purpose-built market was largely played by small, private investors who own the vast majority of stock in the market, and what’s happened over the last several years is they have been net sellers of properties,” he says. “Institutions have been coming back in since 2018-19 because they want diversification—they saw multi-residential as an opportunity—but since the pandemic started it’s been REITs and public entities dominating the market so far. Institutional investors and REITs are the net buyers, and the net sellers are small, private players.”

It's an "Opportune Time" to Offload Long-Held Units

These private investors are mostly offloading plexes and smaller high-rise apartment buildings in the suburbs, many of which they have owned since the 1970s. A lot of the buildings have been neglected to varying degrees, Gomez says, largely due to parsimonious investment in elevators and balconies. However, rising land values and low vacancies have ensured profitability.

“It’s an opportune time to unload these assets because deep-pocketed investors, like institutional investors and REITs, are knocking at their doors,” Gomez said, adding that leasing volumes have decelerated as a pandemic-induced consequence of fewer immigrants moving to the GTA. “Many students also couldn’t go to class and were staying in the suburbs with their families, so a good chunk of demand slowed down during the pandemic. But what we have seen during 2021 and into 2022 is some improvement in demand. It hasn’t returned to pre-pandemic levels but demand is coming back, partly, from students returning to classrooms and the country opening up to population growth, which, in Toronto, is also coming from other provinces. Immigration targets are very large and the federal government has opened up the gates to get more people in here, yet it has not fallen in line with absorption numbers.”

Demand in the GTA is also being offset by new purpose-built housing stock after years of neglect, which the development community has long attributed to rent controls.

“If you go from 1.8% to two and a half, that’s still a tight market,” Gomez continued. “Supply will help tightness in the market, not withstanding that demand will still be strong.”

Rental Demand Stronger Than Ever as Pandemic Impact Fades

The urban exodus during the initial phase of the pandemic proved a powerful, albeit short-lived, headwind in the multi-residential market. Todd Nishimura, Senior Director of Marketing, Leasing and Communications at GWL Realty Advisors Residential, says higher vacancies in the company’s Canada-wide multi-residential portfolio meant it had to offer renters inducements, like a free month’s rent or paying for moving costs, which were ultimately subtracted from rents owed.

“We manage 10,000 units, roughly, across the country, so when you add all of that in, it is significant because pre-pandemic we never did this, or we did on very, very rare occasions,” Nishimura said. “We were very loath to do that but our hand was forced, and what made it palatable to do was that all of our other competitors had to do it. If you didn’t do it, you suffered. We were all fighting for crumbs.”

That was then. Now, Nishimura says, interested renters are booking tours regularly and, following respectable absorption in 2021, GWL Realty Advisors Residential anticipates leasing will be strong this year. And, while the Omicron variant has thrown a spanner in the works, rising inoculation rates and a prevailing feeling in the air that people are ready to get on with their lives, even if it means living with the newest coronavirus, is cause for optimism, he adds.

“There was an article recently saying rents are now decreasing,” he says. “The name of the game is to keep increasing the rate if you can, but we have not yet had to lower ours because we are seeing reasonable demand. If things slow down, it may dictate a decrease, but Omicron has thrown a wrench in everything.”

GWL Realty Advisors Residential vacancy rate in Montreal is higher because leasing rates have declined commensurately with COVID restrictions, the latest of which includes a 10 p.m. curfew. But, with 65-70% of its portfolio in Ontario, Nishimura reports vital absorption rates in Toronto, which he expects will further ameliorate when more immigrants begin arriving at Pearson International Airport.

“We’re bullish. Our projections and plans, which were built in Q4 2021 for this year and contained a lot of optimism, if they were written today there wouldn’t be too much changed,” Nishimura said. “We’re going to come out of this and all indications show we are coming out of this. We’re gearing up for spring, and while pent up demand returned for Q4 last year, there is a sector of society that isn’t doing anything during the pandemic until it’s over. I’m talking about folks who don’t need to move and can afford to put things on hold.”

Montreal a Growing Investor Focus

CoStar says the Montreal rental market, comprised of more than 500,000 units, typically has a healthier vacancy rate in the neighbourhood of 3-4%, which is around 2% below balanced conditions. The city’s strong economy has attracted a lot of immigrants, as well as young people from the rest of Québec, but investors aren’t as bullish on the market because of surplus inventory and vigorous rental controls.

“Rent control is strenuous in Toronto too, but it’s tighter in Montreal, so landlords are limited to the type of rent growth they can get in the city,” Gomez said. “There are aging apartment buildings all over the place that need capital improvements and most landlords can’t pass those improvements onto tenants, so there’s less investment potential in Montreal than in Toronto because of that. Montreal is a solid rental market, though; there is population growth and opportunity to develop new product, as well. But rents are considerably lower in Montreal and rent growth prospects are limited, so we’re not seeing the same investment push as we are in Toronto and Vancouver.”

The vacancy rate in Vancouver’s multi-residential sector is 1.6%, which, like Toronto, Gomez says, is high relative to where it was pre-pandemic. At around 0.4-0.5% in 2017-18, Vancouver’s rental market was unaffordable, and remains so today. Consequently for investors, there’s little movement from renters who, rather than pay market rents, live in their rent-controlled apartments for protracted periods of time.

But that hasn’t dissuaded large players from investing in Vancouver’s multi-residential sector.

“Vancouver is an extremely unaffordable market for homeownership, and that means there’s lots of rental demand. A higher proportion of people are renting as a percentage than in Toronto. One thing Vancouver has a big issue with is very limited supply, with not a lot of new supply coming into that market over the last several decades, making the market very tight,” Gomez said, adding that the cap rates in the city average 2.4%

“Some cap rates in Vancouver’s multi-residential sector are lower than 2%. With those yields so low, you can go to a GIC or a bond and get a better yield. The whole point there is you’re not buying it for an income stream, you’re buying it for capital appreciation. Capital appreciation growth is so high and that’s the real reason investors buy the city’s multi-residential.”