By Alison King

With interest rates and Ontario’s rental market hotter than ever, the construction of purpose-built, multi-residential units spells opportunity for many developers. But before making the jump from traditional home and condo construction to rental property development, a number of factors must be considered before deciding if the rewards are worth the risks.

The rental landscape in Ontario’s urban centres has changed dramatically in recent years. Tight rent controls through much of the 1970s and 1980s limited the incentive for owners to provide more than the bare minimum to renters, often resulting in friction between landlords and tenants. While the boom in condo development resulted in many individually-owned units being available for rent, construction of new purpose-built rental properties was almost non-existent—until now. Throughout Ontario cities, the rental market is being redefined by new properties offering a range of features, finishes and amenities that were previously unheard of.

According to Jack Winberg, CEO of Rockport Group in Toronto, a confluence of factors is driving the dramatic change. “The seeds were planted in 1991 when new purpose-built buildings were exempted from rent control,” says Winberg. “But since then either interest rates were too high or average rents were too low to spur any new development. You just couldn’t justify investing in purpose-built in that economic climate. But now we’ve got the low interest rates, a strong demand for new product and a willingness to pay for more high-quality options by renters, which is making the rental market more attractive to a variety of players.”

If anyone appreciates the challenges and opportunities of rental development compared to traditional condominium construction, it’s Winberg. Rockport Group is an industry pioneer, having registered the Toronto area’s first condo corporation in the late 1960s. Since then the company has added seniors housing, retail, industrial and self-storage projects to its portfolio and recently launched The Montgomery, a new luxury rental development in Toronto’s trendy Yonge & Eglinton neighbourhood.

Incorporating the historic Art Deco facade of Toronto’s Postal Station K, the 233-unit property will include 20,000 square feet of restaurant and retail space, as well as a host of amenities, such as 24-hour concierge, a west-facing outdoor pool, fitness facility, yoga room and theatre, as well as in-suite laundry and high-end fixtures and finishes. On-site management services can take care of everything from maintenance requests and cleaning to package delivery and storage at the touch of a button, thanks to a smartphone app. This level of condo-like services and amenities in today’s new rental builds appeals to the next generation of renters and sets a new industry standard.

“Since the age of rent control, vacancy rates in Toronto have been ridiculously low,” says Winberg. “Supply and demand meant landlords didn’t need to focus on customer service; a unit was going to rent anyway. With The Mongtomery, we are redefining the playing field for people who choose to rent for business, lifestyle or financial reasons.”

While many residents are choosing rentals over condo ownership because of the flexibility, lack of long-term commitment and the predictability of costs, the same can’t be said for developers.

“The risk profile of purpose-built rentals is different than that of condos,” cautions Winberg. With condo development, the biggest concern is costs increasing between pre-sale and build. With rental properties, the costs are set and you are borrowing money for a long period. That’s a huge interest rate risk and you need to count on rates remaining low.”

Greg Bierbaum, president and CEO of London-based Old Oak Properties, takes the long view when assessing the risks and rewards of rental property development. “London doesn’t have a lot of condo activity, so Old Oak has always been more involved in the rental market,” he says. “We build our properties with the anticipation of holding them for 40 or 50 years. The long-term nature of the investment makes it much less risky than a short-term development, where you need to get your money out quickly. We have the time to ride out any temporary economic fluctuations.”

Bierbaum adds that low interest rates and the stability of those rates has brought a lot of new players into the market, and he cautions those considering the opportunity that long-term investments require long-term commitment.

“Don’t underestimate what’s involved in managing rental properties in a competitive market,” he says. “With a condo, you can build it and walk away to your next project. We’re here every day—not just from the design process and through construction, where we serve as our own general contractor—but long term. We are here maintaining the property to a high standard and creating a community that meets residents’ expectations and needs. With rentals, it’s essential to be aware of the many regulations and to build an effective staff well-versed in tenant attraction and retention. I’ve seen a lot of companies who simply didn’t know what they were getting into. They made the mistake and then retreated from rental.”

Like Winberg, Bierbaum points to the post-rent control era as a major force driving higher consumer expectations for increased service levels, quality finishes and a variety of amenities. Old Oak’s new Pomeroy Place development in southwest London delivers in that respect. Nine-foot ceilings, high-quality tile, quartz countertops and rich laminate flooring add a designer touch to the spacious suites, while a range of amenities, green technologies and elegant common spaces appeal to the modern renter.

“While the cost of multi-residential construction has increased significantly over the years, the costs of fixtures and finishes hasn’t necessarily gone up as much, so it’s actually a smaller percentage of your per-unit cost,” says Bierbaum. “Development charges and fixed costs are the same no matter what, so the variance of offering a product with condo-quality finishes is less per unit than you’d think. The consumer is willing to pay a premium for larger, nicer suites and it’s a distinct advantage in a competitive rental market like London.”

Who are these renters driving the demand for service and luxury? And with mortgage rates so low, why are they choosing to rent rather than buy? The demographics vary by location, but tend to include students and young professionals, empty-nesters and seniors. According to the Canada Mortgage and Housing Commission’s (CHMC) Spring 2015 Rental Market Survey, the vacancy rate remained steady or dropped from April 2014 to April 2015 in the vast majority of Ontario centres covered by the report. The few areas that recorded significant increases in vacancy rates were Timmins, Collingwood, Thunder Bay and Lambton Shores.

Another CHMC report cites sluggish wage growth and rising house prices as a factors in continued strength of the rental market, despite low mortgage rates. Employment instability, immigration and the growing senior population may be other driving factors.

According to Bierbaum, renting in a luxury property such as Pomeroy Place may be as much a lifestyle choice as a financial one. “For a lot of our residents, the move to rental is seen as a step up, not a step down in terms of space and finishes,” he says. “They like not having to commit to holding real estate. Living a carefree existence—you can walk away from it with 60 days’ notice—is appealing to this demographic.”

While the flexibility of rental is one of its major attractions, Winberg points out that living in a purpose-built rental community offers a level of stability not available to tenants who rent privately-owned units. “Many of the new condo units in Toronto have been rented out privately but there is no security of tenure for the residents,” he says. “The owners can decide to sell, or use the unit for themselves or family members at any time. With purpose-built rental, the property is owned by a professional company that is in the property management business. You get condo-quality amenities and condo finishes, but it’s better than a condo, because the owners are going to be there managing it every day.”

Candace Taylor, a Senior Property Manager with Auburn Developments, meets clients every day who are looking for that mix of quality and flexibility in a rental property. With more than 50 years in the rental management business, Auburn is the company behind the development of Waterloo’s Barrel Yards community, a mixed-use neighbourhood featuring a variety of living options, including townhomes, apartments and live/work spaces. Its Cooperage and Onyx projects promise luxury apartment living in a vibrant setting.

“This is a serious community for serious renters,” says Taylor. “A lot of our residents are young professionals who have recently moved to the Waterloo area for work. They are seeking a certain quality of lifestyle and design, but because of the nature of their jobs, don’t want to make a long-term commitment. Others may be downsizing and simplifying their lives, or counting on the predictability of rental costs to free up funds for second homes or vacation properties.”

As with the advent of new purpose-built rental developments in other Ontario cities, Auburn’s new properties are a breath of fresh air in the Waterloo market, where most of the existing rental inventory was built in the 1970s. Taylor stresses that they are creating apartment communities, not merely apartment buildings. Common areas such as outdoor terraces with stunning views, indoor lounges, libraries, movie theatres, fitness centre, yoga facilities and social events encourage residents and guests to meet and interact with each other. In-house newsletters and a strong social media presence help to keep residents up to date on community events and connected with each other in this digital age.

 

“An apartment is more than just a place to rent; it’s a place to live,” says Taylor. “Happy renters are long-term renters.”

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