Canada is expected to experience another remarkable year of population growth, anticipating a record number of newcomers through immigration and student visas.

As a result of this growth, the housing markets in urban areas like Toronto, Vancouver, Montreal and other major cities, which remain the primary destination for newcomers, are expected to face some further strains on housing supply.

Large development pipelines

In this environment, demand for rental homes is soaring at an all-time high, and developers are trying to meet that challenge for purpose-built rental units. But, they’re also facing some challenges of their own.

Michael Tsourounis, managing partner & head of real estate at Hazelview Investments, a Toronto-based owner, developer and manager of global real estate investments, says the company has more than 21,000 new rental homes in its development pipeline for the coming years. Hazelview currently has a portfolio of about 24,000 apartments across Canada.

“We have a clear development pipeline across the country in most major markets, Halifax, the Greater Toronto Area, Calgary, Montreal … we could build that we feel are great long-term rental sites,” he says. “And, we feel we’re part of the solution to help solve the supply/demand imbalance that we have currently in the housing market.”

Tsourounis notes the company currently has four projects actively in construction – a two-tower site in Halifax with just over 500 units, two master-planned communities in Toronto just short of 1,000 units and another standalone tower in midtown Toronto of about 330 units.

“We have a good pipeline of stuff in construction and some completed construction over the past 12 months that is currently going through lease up and stabilization stage right now,” he says.

Timing determined by investment

As for time frame, Tsourounis says it all depends on the municipalities.

“That 21,000 is kind of a full pipeline. How quickly things get into the ground really depends on economic conditions. We need investment in the multi-family space in order to build housing … We need investments where there is a suitable economic return for the investor or investors to embark on a strategy of building rental housing. There are a few market factors that play out how quickly everything would go into production.”

Challenges meeting a huge demand

Tsourounis says Canada has very strong foundational fundamentals when it comes to the need for housing including a growing population base and a robust immigration strategy.

“If we continue to have the pressures from immigration as well as international students, everyone who shows up in Canada ultimately needs somewhere to live. So, we have a pretty robust stream of demand that’s coming on an annual basis and we foresee that continuing well into the future.”

He points out that the country was already well undersupplied compared to its G7 competitors – our per-capita housing supply has been low.

“We’ve been substantially underbuilt for a very long time. We’ve already had a pretty big imbalance between supply and demand for housing and then when you add on a pretty robust immigration strategy that just further fuels that supply/demand imbalance.”

Plus, he points out, interest rates rising over the past couple of years, significant inflationary pressures on pricing throughout COVID and a pretty scarce skilled trade and labour base to construct housing put significant pressures on costs to develop and to build.

While demand is very strong, developers across the country are facing some challenges in meeting that demand, particularly with costs and the time to get things built through an approval cycle. There’s also a need for more skilled people in not just the trades but in planning, urban design and engineering, too.

CMHC backlog

Kendal Harazny, principal of Wexford Developments in Calgary, says the company has projects under construction in Victoria, about to break ground in Kelowna and recently completed in Calgary.

The Calgary project was a small 61-unit rental building that was finished just under a year ago and is fully leased. The Kelowna project is 164 units in McKinley Beach that has all permits in place and is ready to break ground.

“We, along with most multi-family rental developers I know in the country, are waiting on the CMHC (Canada Mortgage and Housing Corporation) insured debt. That department at CMHC is enormously backed up. Where it once took three months, now we’re looking at I don’t even know – nine, maybe. Six to 12 depending on the file. We’re just waiting to break ground as soon as we get that MLI Select (multi-unit mortgage loan insurance) debt.”

Wexford also has a 105-unit project in Esquimalt, British Columbia, which is under construction and will be completed in February 2024.

“The majority of apartment buildings in Canada are being financed through this CMHC MLI Select program,” says Harazny. “And the only way to make projects penciled in today is using that debt, largely. So, that program is very backed up which is causing delays in getting more apartments built.”

Harazny points out the company is dealing with interest rates that have tripled in the last 12 months, which “just adds significant costs during the process of construction of a rental building along with the interest you have to service when you take out a permanent mortgage on the completed building.”

Construction costs continue to increase, too. “So, there’s a lot of challenges getting rental housing built right now. The saving grace is that rents continue to trend up and that makes some projects penciled in today.”

Harazny says it’s very clear that new construction is starting to come to a halt for rental housing across the country due to the dwindling feasibility of most projects right now.

“I think there should be great concern that in two years when deliveries fall off a cliff of new rental buildings, we could see another significant spike in rents. So, everyone – the industry and the government – needs to put their heads together to get more rental housing built. And it’s multi-faceted – you can’t just do one thing. It’s great the GST was eliminated from costs but we also have to focus on how to increase supply. That includes faster permits, lower development charges at the municipal level, and hopefully some lower interest rates in the future.”

Rental units as investment properties

According to a survey released earlier this year by Royal LePage Canada, about 4.4 million Canadians currently own an investment property and 51 per cent of current investors as well as 23 per cent of non-investors are considering buying an investment property before 2028.

The report also found that 26 per cent of all Canadians say they are likely to buy an investment property within the next five years.

But where is this supply going to come from?

Phil Soper, president and CEO of Royal LePage, says it’s still from individual investors. He feels the condominium market is benefiting from the dire need for rentals as investors are scooping up units for rental purposes.

“The smaller entrepreneurial investor has been the primary supplier of rental units in Canada for some time now,” Soper notes. “There’s certainly an uptick in interest in purpose-built rental projects that are large in scale with corporations rather than smaller entrepreneurs as landlords, but at this stage, it’s been predominantly talk with only modest growth in substantial purpose-built rental projects.”

He continues about the demand for rental housing: “(It) isn’t lost on the average professional, the average working person that has disposable income to invest somewhere, whether it be a TFSA or an RSP or potentially in our housing market, because they see this long-term trend towards the need for more units and they know we have a shortage of them. Even if people don’t have a degree in economics, they understand when there’s a shortage of things and there’s lots of demand, it’s going to put upward pressure on prices.”

Soper says investment in rental properties is being experienced across the country and not just in major centres like Toronto and Vancouver. The tools are better today than years ago for an investor to buy a property remotely outside of where they live, he points out. They find the opportunity or a market that appears to be affordable and they hire someone in the local market to manage the property.

Toronto and Vancouver: Less demand in larger centres, buyers gaining power

However, when asked if agents are seeing more investors looking to purchase condominiums to rent out because of the current lack of supply in the rental market, Don Kottick, president & CEO of Sotheby’s International Realty Canada, notes, “Demand for conventional and luxury condominiums has softened in Canada’s largest metropolitan real estate markets, including Toronto and Vancouver, despite the current lack of supply on the rental market.

Elevated prices and mortgage rates, as well as an overall increase in carrying costs such as maintenance fees, utilities and insurance, have meant that potential buyers and investors are reconsidering their investment strategies and options, even though rents are high, and the rental market is tight.

They are weighing investment into condominiums against single-family and attached home properties, as well as other financial assets entirely.”

Because of this, Sotheby’s is seeing “a gradual build-up of resale and pre-sale condominium inventory in certain neighbourhoods. For savvy buyers and investors, the market ahead will offer real opportunities and buyers are already negotiating on price and conditions with increasing assertiveness, and with increasing success.”

Alberta: More demand means more earnings

Joel Semmens, a realtor with Re/Max Real Estate (Central) in Calgary, says the migration into Alberta has been phenomenal in the past year or so, fueling demand for housing in the market.

“As far as the investment side of it, I’ve found it’s been almost the last two years we’ve had heavy investment mainly out of Ontario … we’ve done quite a bit of small apartment buildings that investors have bought,” explains Semmens. “They’re just buying little condos downtown or (in the) inner city to rent out.”

He points out that many people bought condominiums in downtown Toronto about 10 years ago, which have doubled and tripled in value. “They made a lot of money there … (but) Calgary’s market has been stagnant for a decade. Values have actually gone down in the condo market in the last 10 years in Calgary – they haven’t gone up. So, a lot of interprovincial investors are buying in Alberta.

And then (with) the amount of migration we’ve had, people have to buy or rent a house. It’s made the rental market go bananas. And the amount you can charge for rent is up approximately 35 per cent this year.”