Back in the fall of 2018, the provincial Ford government announced they were unwinding the previous Liberals' policy of implementing rent control on all private rental units, regardless of when they were built. Now, any rental that was registered on or following November 15, 2018, is no longer subjected to rent control of any kind -- and that's led to a trend of investors turning their attention to newer builds.

"That’s one of the major reasons investors choose new builds -- it’s because they don’t fall under that rent [-controlled] guideline,” Realty Co-Founder Ryan Coyle said. “In an environment like ours, with certain things unknown and inflation and interest rates rising, you can increase your rents instead of being stuck under a low-inflation guideline.”

For 15 years, Realty has specialized in the preconstruction condominium submarket and Coyle says there has been pronounced shift in investor activity from the resale to the presale market. According to a February report from Urbanation, condominium apartment resales declined by 11% year-over-year -- although, granted, they fell from a record high -- which also explains new listings increasing by 12% to 3,819 units two months ago. In contrast, Urbanation's year end new construction survey found 2021 was one of the strongest years on record for the pre-construction market, with 30,844 new condo apartment units sold, marking an increase of 69% from 2020, and just below the huge construction boom of 2017.

READ: GTA New Condo Sales Just Had Their Second-Strongest Year Ever

Toronto condo resales are also quite expensive, with prices increasing 24.5% year-over-year in February to $799,966. In the City of Toronto, prices appreciated by 21.5% during the same period to $822,090, while the 905 saw greater growth of 34.2% to $756,146. During the first two months of 2022, condo prices in the GTA increased by 12.4% compared to the same period a year prior.

Due to their prohibitive cost, rental income from Toronto-based condo apartments haven’t carried mortgages for at least half a decade now, which Coyle attributes to the aforesaid shift in investors’ appetites from resale to presale units.

The Impact of COVID on Pre-Sale Investor Appetite

Government-mandated proscriptions brought about by the COVID-19 pandemic have influenced renters’ behaviour, too.

“Rental demand picks up and dies down with every reopening and closing,” Coyle said. “People want to move back to Toronto and then, with closures, things slow down, but it’s kind of incredible to see how there’s a direct correlation to people wanting to enjoy Toronto by living there. Now rents are through the roof.”

Somewhat surprisingly, demand in Toronto is highest outside of downtown, which Coyle surmises is because the core’s condominium rental units are much smaller and can, therefore, become wearisome during lockdowns. Consequently, downtown condos are appreciating at a slower pace than units outside of the core.

“Other areas outside of the downtown core have seen an uptick in demand but whenever [mandates] are lifted, people start coming back to the core, and as the rules continue loosening, we’re starting to see rents increase faster,” he said.

Investors Are Avoiding Older, Purpose-Built Stock

Rents in the multi-family sector, on the whole, tend not to be as high as in the secondary rental unit market, but because of rent control, there has been a paucity of purpose-built rental construction for the last few decades. Although the trend began reversing a few years ago, there’s hardly enough newer stock for institutional money to invest in.

REITs have tended to avoid Toronto’s older rental stock as a result, says Dayma Itamunoala, Associate Vice President of Ontario’s Multifamily Team at Colliers.

“REITs are required to generate returns for their investors. They have to continue to pay people out with distributions and with what a lot of these apartments in Toronto are selling for, sub-3% caps, sometimes sub-2.5%, the math doesn’t really work for these guys, but four or five years ago, they were one of the dominant forces in the market,” he said.

REITs are instead more active outside of Toronto, like in Oshawa, Kitchener-Waterloo, Guelph and London, he added, however, asset managers and private funds have their fingerprints all over Toronto’s multi-family market. And because of how politicized rental housing has become amid swelling affordability problems in recent years, Itamunoala says these institutional landlords almost always play by the rules and forgo “greasy strategies.”

“Most of these guys who are big enough have to be really careful. The ones who are big try to do things properly and are not evicting tenants en masse, but how they are able to generate returns is on turnover,” he said. “It was a weird year with COVID because turnover increased for the first time in a long time, and that can help.”

In 2020, turnover across Toronto was 8% and it nearly doubled to 14.4% in 2021, according to Canada Mortgage and Housing Corporation data. Around the beginning of the pandemic, the municipal government regulated short-term rentals in Toronto and many condo investors added their units to the long-term rental pool. Additionally, the first COVID-19-induced lockdowns resulted in an exodus from the city, with people moving to the less densely populated suburbs and exurbs, or even to their parents’ homes, while international students fled.

But the turnover—which brought rents down and, for the first time in years, gave tenants leverage over their landlords at which point they either renegotiated their leases or moved to cheaper rentals—allowed institutional landlords to renovate units and start commanding higher rents, Itamunoala says.

“I think it’s a great thing when these funds, asset managers and institutional investors, whoever they may be, are able to add value to the building because it creates a nicer place to live for somebody,” he said. “A lot of the time, rents are drastically below what they are in condos, but they really spruced up these buildings without doing anything malicious like renovictions. They created nice environments and people are willing to pay for that.”

After industrial, multi-family is the hottest sector in the real estate market because the fundamentals are so strong. Even with rent control, turnover is inevitable and it allows landlords to charge rates dictated by the market, and as Itamunoala alluded to, landlords can tweak an apartment unit’s tangibles and intangibles to squeeze out a little more rent, which, in the face of rising insurance and property taxes, has become crucial.

“Shifting hydro payments onto the onus of new tenants is one thing; they can put in LED lighting as well as better windows so that the building retains more heat,” Itamunoala said, adding that until more rental supply is created, there will be no shortage of investors pining after multi-family housing.

"Landlords add value where they can and walk the delicate balance of increasing revenue and making the building more efficient. Until the supply part of the equation is handled, multi-family will be a safe haven for investors. But most sincerely want the City of Toronto and government of Ontario to make it easier to develop because if things get too crazy, it’s not good for anybody because tenants become unhappy and it paints everybody in a bad light when, in reality, we just need to build more.”