The Shift in Canada’s Condo Market: From Investors to Institutional Development

Introduction

In recent years, Canada has witnessed a seismic shift in its condominium market—a transformation fueled by the drying up of investment capital that once drove a booming condo building industry. As mortgage costs rise and the market becomes more volatile, the landscape of multi-family housing is changing, with institutional investors stepping in where mom-and-pop investors once thrived. Ari Altstedter from Bloomberg delves into this growing distress in Canada’s condo market and highlights what it means for potential homeowners and the overall housing landscape.

A Booming Past

Until recently, Canada was in the grip of one of the most significant condo construction booms globally. Driven by a plethora of institutional investors, apartment construction surged, with multifamily units outpacing condos as the primary source of new housing. This trend aimed to meet the desperate demand for housing across the country, particularly in major urban centers.

Historically, the "mom-and-pop" investors played a crucial role in this growth, purchasing units before construction commenced. These smaller investors effectively transformed Canada’s major urban landscapes by financing condo towers, contributing substantially to the new housing supply over the decades. But the tide has turned dramatically.

The Erosion of Investor Confidence

The onset of high borrowing costs in 2022 significantly dented investor confidence. Rising interest rates and stagnant rents led to a scenario where many investors found their cash flows turning negative. Even the ensuing decrease in borrowing costs did little to restore their confidence, as ample new supply flooded the market, further compressing resale values for existing condo owners.

With falling prices and diminishing cash flow, the allure of buying new condos has diminished, causing a sharp reduction in new projects breaking ground—a stark reversal in fortunes that could have long-lasting effects.

A New Dawn with Institutional Investors

As smaller, individual investors retreat, a tidal wave of institutional capital is stepping into the void. Wealthy families and pension funds are now taking charge of the market, marking a significant departure from the conventional dynamics of real estate investment in the region. For instance, Blackstone Inc.’s acquisition of Toronto-based Tricon Residential highlights this shift, allowing it to become one of Canada’s largest apartment developers.

Major pension funds are also pivoting, transforming outdated retail spaces into vibrant new residential neighborhoods, as seen with British Columbia’s public-sector fund developing the Cloverdale Mall project in Toronto.

Developers themselves are adapting to these changes. Mazyar Mortazavi, CEO of Toronto-based TAS, states, "Individual investors are no longer fueling the condo market, hence there’s a market opportunity. That opportunity is going to be picked up by institutional capital."

The Case for Rentals Over Condos

Given the current market conditions, many developers are opting for rentals instead of condos. Carlo Timpano of Capital Developments reflects on his past projects, noting that the arithmetic of holding onto properties for a recovery in the condo market no longer made sense.

“When you ran the math… the math simply looked better as rental,” he explains. Timpano emphasizes looking for new partners to expand their rental ventures, moving to capitalize on this changing landscape.

The Supply Crunch Ahead

While the condo market currently grapples with an excess of supply, the slowdown in new construction could ironically create advantages for future rentals. As proposed buildings start coming online in five years or so, demand may outstrip supply, reducing competition for renters.

The national housing agency Canada Mortgage and Housing Corp. (CMHC) recently reported a 2% rise in national housing starts, pointing towards a surge in rental construction primarily driven by institutions repurposing stalled condo projects.

Christina Iacoucci of BGO encapsulates the situation succinctly: “You had these condo developers that could not put the shovel in the ground.” Institutions are stepping in to seize these unique opportunities.

The Bigger Picture: A Looming Housing Crisis

Despite a growing focus on rental construction, experts warn that it may not be enough to tackle Canada’s ongoing housing crisis. Projections show that overall housing starts could decline, with CMHC anticipating new builds ranging from 226,600 to 243,000 this year—levels below those of 2024.

Tania Bourassa-Ochoa, deputy chief economist at CMHC, pushes for not merely sustaining current rental construction but accelerating it, emphasizing that Canada is “nowhere near what we need to be producing to make our way to an affordable market.”

Conclusion

Canada’s condo market is at a pivotal stage, marked by shifting dynamics that pivot away from individual investors to large institutional players. This evolving landscape presents unique challenges and opportunities that will surely ripple across the broader housing environment and influence where Canadians live in the future.

The need for new housing in Canada has never been more pressing. As the nation seeks to adapt to these changes, the involvement of institutional capital may help navigate the challenges ahead. However, without a substantial increase in construction, affordability remains at grave risk. The next few years will be crucial in determining how effectively the Canadian housing market can turn this crisis into a clearer path towards sustainable and affordable housing for all.