The Rise of Purpose-Built Rentals in Canada: A ‘Rentalssance’ in the Housing Market

After years of stagnation in the rental market and a surge in home prices, Canada is witnessing a transformative shift toward purpose-built rentals. This trend not only marks a pivotal point for developers and investors but also holds significant implications for tenants across the nation. Purpose-built rentals — properties designed specifically for leasing rather than ownership — are reshaping the landscape of Canadian real estate.

A Purpose-Built ‘Rentalssance’

According to RBC Economist Rachel Battaglia, purpose-built rental starts have quadrupled in the last decade. This unprecedented growth is attributed to several converging factors, notably a marked increase in the completion of rental projects initiated years earlier. The rise in rental construction is a direct response to escalating demand, fueled in part by government policies aimed at increasing rental housing availability. Battaglia describes the current climate as a "rental renaissance."

Demographic Shifts and Declining Ownership

Two key demographic trends are influencing the booming demand for rental properties. One is the rapid population growth in Canada, which has been primarily driven by newcomers who tend to rent for their first five to ten years. The other is the diminishing affordability of homeownership, leading many Canadians to choose renting as an alternative. The national homeownership rate has declined by 2.5 percentage points since peaking at 69% in 2011, highlighting a broader shift in housing tenure.

Rising Demand and Government Intervention

As demand for rental properties continues to escalate, rents have surged, catching the attention of both developers and policymakers. Government initiatives, such as the National Housing Strategy and various provincial housing plans, have sought to bolster rental supply. These programs include commitments to rental housing construction and various financial incentives to promote new developments.

Rachel Battaglia, RBC Economist

The Developer Perspective: A Strategic Pivot

As Canadian condo sales continue to plummet, developers are increasingly shifting their focus from condos to purpose-built rentals. With many projects once intended for condos now being converted to rental developments, the market is witnessing a notable transition.

Economic Viability of Rentals

Historically, it has been more economically attractive for developers to build condos. However, with dwindling demand for new condos, particularly in the pre-construction market, purpose-built rentals are becoming a favored alternative. Shaun Hildebrand, President of Urbanation, notes that federal loan programs and interest rate stabilization have encouraged this pivot. Recent market shifts have encouraged companies like Baker Real Estate, once focused on condo sales, to establish dedicated divisions for purpose-built rentals.

The Economics of Building Rentals

Building purpose-built rentals presents a different financial landscape than constructing condos. Developers traditionally rely on upfront sales from condos to fund subsequent projects. In contrast, rentals allow for smaller, incremental payments over a longer term, making them more economically suitable under current market conditions. The recent removal of GST on new rental projects has further enhanced their viability, enabling quicker developments without overwhelming financial burdens.

Demand for Affordable Housing

While newer rental units may still appear costly, industry leaders are making efforts to dispel the notion that these developments cater only to the affluent. As Michael Tsourounis of Hazelview points out, the rise in population, plus a stable need for housing, fosters the argument that purpose-built rentals can indeed serve as a long-term solution for Canadians across various income brackets. The reality is, many newcomers and young professionals are seeking modern amenities in a rental market that is evolving.

Enhancements in the Tenant Experience

Purpose-built environments cater to the needs of today’s renters, offering security and community. These developments often include amenities designed to foster a sense of community and ensure that residents feel secure, alleviating the fears associated with traditional rentals.

Tenants benefit from professionally managed properties that address maintenance issues more efficiently. Activities and community events create an inviting atmosphere, fostering connections among residents. This, paired with modern conveniences, such as smartphone applications for rent payment and maintenance requests, makes purpose-built rentals increasingly appealing.

Addressing the Housing Crisis

While purpose-built rentals contribute to the overall housing supply in Canada, they are not a panacea for the escalating housing crisis. Experts suggest that increasing the overall supply across various housing types is crucial for improving affordability. As higher-income households move into new luxury rentals, the resultant vacated units can offer lower-income families more accessible options.

Despite the significant role purpose-built rentals play in alleviating housing pressures, challenges persist. With demand outstripping supply, high rents will likely endure until new constructions can stabilize the market. Some industry veterans argue that for significant changes to occur, governmental incentives and charges related to development must be reevaluated.

Confronting Slowing Development Trends

Despite the promising trajectory of purpose-built rentals, recent market trends suggest a potential slowdown. Heightened interest rates and climbing construction costs have created a challenging environment for developers. Adrian Rocca of Fitzrovia emphasizes a concerning 75% drop in new projects from levels seen just a few years prior. The pressures of market economics, coupled with insufficient new housing supply, can jeopardize future efforts to meet increasing demand.

Conclusion: The Future of Purpose-Built Rentals

The rise of purpose-built rentals in Canada reflects a changing housing landscape, catering to an increasing need for affordable living options. This burgeoning segment has the potential to significantly influence future real estate trends, but sustaining momentum will require collaboration among industry players and supportive governmental policies.

As the rental market matures and adapts, developers are poised to shift their focus — not just toward luxury offerings, but also to affordable and inclusive options designed for diverse demographic needs. In this evolving landscape, purpose-built rentals could play an essential role in solving Canada’s ongoing housing crisis, making it an area to watch closely in the coming years.

While the current challenges are daunting, with the right strategies, the future of rental housing in Canada could lead to more sustainable living conditions for all Canadians.