Welcome to my blog on housing, culture and design in Toronto, Ontario, Canada.
My name is Steve Fudge. I’ve been a realtor and housing consultant in Toronto, Ontario, Canada, for 35 years.
In this month’s installment of Dear Urbaneer, where I tackle real estate questions from clients and followers, I’m providing counsel to a potential condo Buyer who is wondering how current market conditions, including the supply of new condominiums and purpose-built rentals, should inform his outlook.
Dear Urbaneer.
I’ve been considering purchasing a property downtown for my kids to live in when they attend university. As I analyze the market, I’ve noticed that the increase in recently registered condominiums and purpose-built rental buildings has brought much new supply, which I believe is why rents are trending lower. Is the purpose-built rental market growing? What should we expect with purpose-built rentals in the coming years? And is it going to have any impact on ‘Mom & Pop’ investors?
Signed,
A Dad With A Long-Term Plan For His Kids.
Here is my reply:
Dear Dad:
First, to be fully informed, anyone considering a real estate purchase should always examine all the variables, including how different housing types and their markets oscillate. This is especially critical when it comes to property investment. With higher borrowing costs, softening prices, and an uptick in supply, you will be well-served by thoroughly educating yourself on all the factors in play.
If you’re purchasing a condominium that you may rent out for some time or indefinitely, understanding the purpose-built rental market in Toronto today is essential. Nine years ago, in my post, A Shift In Toronto Real Estate Property Investors Should Note, I forewarned that the development and acquisition of new purpose-built rentals by institutional investors could be detrimental to condominium investors who rent their properties. Nowy a decade later, a shift in market conditions has triggered an oversupply of rental units. Mom & Pop condo landlords compete against newer purpose-built rental buildings to secure tenants.
Let’s explore.
A Shift From Condo Development To Purpose-Built Rentals
A year ago, when I wrote Why Canada Lacks Purpose-Built Rentals & Other Shelter Issues, I examined why the construction of purpose-built rental buildings declined after the post-war boom. I found in the 1970s, rent controls disincentivized developers, the provincial government focused on affordable housing policy, and the federal government stepped back its housing investment. In the 1980s, it was more costly to create purpose-built rentals than new condominiums, which also generated quicker returns. In the 1990s – when the real estate market was recovering from collapse and austerity measures led to the introduction of GST/HST – the depressing development proformas during flatlining market conditions made purpose-built rental buildings a non-starter.
In the 2000s, in lieu of purpose-built rentals, large and small investors started building their investment portfolios by purchasing preconstruction condos and putting them on the rental market on completion. This continued unabated for over two decades, creating an enormous supply of investor-owned rental properties while madness fueled speculation and a housing bubble. When the Bank of Canada started increasing interest rates in March 2022 in an effort to tame inflation, it impacted both the resale and new home markets, which continue to this day. However, it’s been particularly challenging for the new condominium market because it generally takes around four years from launching a development in presales to its delivery as a completed building. As we’re seeing, the market conditions in 2021, when many new condominiums started construction, and our market’s conditions today as these units are completed and delivered to Buyers can be radically different.
During this time, developers watched as many investors – one of their largest target markets – moved to the sidelines and stopped buying preconstruction condominiums. The impact of this has been significant. After all, developers are a big contributor to our shelter economy, employing thousands of construction trades, purchasing materials ranging from concrete to appliances, and engaging professionals in every facet related to real estate development. They’re tapping into the purpose-built rental market to maintain momentum and keep everyone employed to the best of their abilities. This article published in December 2024 – “STOREYS’ Trend Of The Year: The Pivot To Purpose-Built Rentals” – chronicles how the shelter industry has shifted away from the “embattled preconstruction condo development market” towards rental product. In the article, Shawn Hillebrand of Urbanation says, “Until recently, it’s been more economically attractive for developers to build condos. With demand for new condos becoming virtually non-existent, more are pivoting to purpose-built rentals. This is also being encouraged by federal loan programs and incentives for building purpose-built rentals, as well as interest rates starting to come down.”
The impetus to build purpose-built rentals started a decade ago when the federal government introduced the ‘Rental Financing Housing Incentive’ (renamed the Apartment Construction Loan Program in 2023). According to CURE, the features of the program included: “a loan at a very favourable below-market interest rate for a 10-year term, amortized over a 50-year duration once the project achieved a full stabilized rent up; and pre-approval for a private lender insured loan at the 10-year renewal with no insurance premium. In addition, depending on achieving a set of social outcomes relating to energy efficiency, accessible design and very minimal affordability criteria, it is possible to secure financing for 100% of the cost. However, a maximum of 90% is more likely”. Shortly thereafter, it became more attractive in Ontario when the provincial government removed rent controls for new units completed after November 15th, 2018. More recently, in September 2023, the federal government announced it would “Remove GST From The Construction Of New Rental Apartments, ” and a provincial initiative in November 2023 stated, “Ontario Plans To Remove 8% Tax On New Purpose-Built Rental Housing “.
Despite this, the flow of capital to the purpose-built rental market may not have even crossed the radar of investors snapping preconstruction units during Toronto’s booming real estate market. After all, with the projections for Toronto’s economic growth and immigration being infinitely touted and highly appealing and the market charging forward unabated, very few people anticipated our real estate landscape would flip from good to bad. But, Surprise! When interest rates rapidly escalated in 2022 through 2023, it triggered a contraction in the market and the flight of capital. Fast forward to 2025 and we have an economy in flux, the threat of tariffs looming, and an intentional decline in immigration. The byproduct? The demand for (luxury) rentals and condominiums is shrinking, further conflated by the reality that many newly completed condominiums and purpose-built rentals are beyond the thresholds of affordability for many Torontonians. All of these factors are converging on our market at the same time.
Looking At The Numbers
In last month’s installment of Dear Urbaneer: What About Buying A Property That’s An Assignment Sale?, I shared the stats on the number of condo completions in recent years. This is notable for a few reasons, chiefly because investors have primarily purchased preconstruction condos to serve as rental units. For now, they’re a more significant source of new rental units than purpose-built rentals.
In that Dear Urbaneer post, I note: “According to Urbanation, the number of condo completions in the GTA reached a record 22,473 in 2020, fell to 13,885 in 2021 due to pandemic-related supply chain disruptions and construction delays, soared to 32,000 in 2021, with 24,117 unit completions in 2023, 24,386 unit completions in 2024 and – get ready! – 29,800 units in 2025. That’s 146,000+ condo completions in the GTA over 6 years, or 16 percent of all the condos built over the past 60 years. Wowsers!”
To compare, in 2021, 7,740 purpose-built apartments were completed, the highest total in more than 30 years. According to Urbanation, “Purpose-built rental completions totalled 5,537 units in 2024, decreasing 4% from the recent high in 2023 (5,779 units) but remaining 86% higher than the 10-year average of 2,977 units. The number of purpose-built rental completions is expected to reach a multi-decade high in 2025 with 8,872 units scheduled for delivery in Toronto.”
As the supply of purpose-built rental buildings and new condo towers purchased mostly by investors complete, rents fall as the supply of rental housing grows. According to the latest data from Urbanation, vacancy rates in the GTA have reached the highest levels since the pandemic. Furthermore, according to Urbanation, although the percentage of signed leases in 2024 grew 29 percent over 2023, the percentage of active listings grew by 72 percent by the end of the year. The result? An increase in vacant units and a decline in rents as landlords compete for tenants.
The smaller units saw the most significant drop in rents, likely because more of this product – which has been favoured by investors – is competing for the shrinking pool of tenants. The larger units of 1000 square feet or more have held their rents – which indicates there is more stability in this segment of the market (and likely a smaller number of units this size coming available for lease) – which may be a deciding factor for those seeking to purchase a rental property today (more on this, and how size matters, below).
Unfortunately, developers looking to construct rental buildings for consortiums or investment funds may not find winning contracts. High borrowing costs and a general market softening have also seen the number of purpose-built rentals decline. This article – “Purpose-Built Rental Starts “Nearly Quadrupled” In A Decade (And More Are On The Way)” – indicates that purpose-built rentals “enjoyed a renaissance” over the last decade.
In terms of numbers, this article from the Toronto Star, entitled “Toronto’s Rental Construction Was At Its Highest Level Since The 1990s. Why Is It Now Slumping?” said, “Purpose-built rentals went from 1,850 units under construction in February 2014 to about 18,300 in February 2024, according to the Canada Mortgage and Housing Corp. (CMHC), although the numbers dropped in March & April 2024 to 17,970 and 17,280 respectively”, indicating as projects completed fewer new ones were coming on stream.
A report from RBC – “Are Falling Rents In Canada Temporary Relief Or A New Trend” – says that new purpose-built starts have nearly quadrupled in the last decade, thanks to various government incentives encouraging development, particularly after 2018. Although new purpose-built rental housing development is subject to ebb and flow under shifting market conditions like all housing types, all layers of government have not lost sight of the fact that we’re still in a housing crisis.
Fewer Tenants In The Immediate Future
While supply has flowed (and is still coming), factors are suppressing demand, adding an extra tilt to the supply/demand mismatch.
Rentals are the housing choice for new Canadians when they first enter the country. Aggressive immigration targets were scaled back, which means this flow will be much smaller, at least in the short term.
The number of international students, comprising a significant portion of the rental pool, has been slashed. Several colleges and universities in Ontario have drastically cut programming, and the local rental markets will likely be much softer in the short term.
As the above RBC report points out, the population and household size are expected to shrink significantly, by 46 percent, over the next three years, thanks to slower immigration and an aging population.
We are experiencing a softer labour market, particularly in gig or service-sector jobs, which are held by renters rather than property owners. This means this demographic is having to move back home or group together in shared housing to afford rent, which means that the demand for smaller condominiums is further reduced.
As interest rates drop and property prices fall, some prospective Buyers who have previously been shut out of the housing market and have been renting can now buy homes, which will increase the vacancy rate.
Size Matters
As the Urbanation report mentioned at the beginning of this piece points out, while rents are dropping on average, larger units are maintaining their rents partly because of supply.
Below is an excerpt from this article by Stats Can: “The Condo Market In Toronto And Vancouver: A Home, An Investment And Increasingly A Rental Property. “
“Size matters when it comes to buying a condo as a home or a rental property, with those who live in the property buying a larger condo on average compared with those who buy as an investment property. In 2020, the median size of condominium apartments in the Toronto metropolitan area was 822 square feet, while the size of those used as an investment in the same metropolitan area was 711 square feet.”
The median size purchased by end users is 111 square feet larger than those bought by investors. That’s the size of a bedroom, which suggests that end users are buying 1+1 or 2-bed units. In other words, the data shows that end users don’t want what investors have been buying, which is worrisome because it implies that if end users have never been interested in units they consider ‘too small,‘ it means that the pool of Buyers for small units is other investors who won’t want to pay a price that requires negative carry. They’ll want to purchase a property with a cap rate reflective of our here and now, which is in the range of 5 to 6%, compared to the 2 to 3% we saw during the pandemic.
The Reality of Negative Carry
In previous years, when housing prices in Toronto were skyrocketing, and borrowing costs were consistently low, it wasn’t uncommon for property investors to secure a purchase with 20 percent down and finance the rest. However, this would often result in a negative carry position where the investor covers the monthly shortfall between the actual carrying costs and the insufficient rental income. Negative carry is not the most prudent of property investment strategies, but it has become a widely accepted practice. For it to pay dividends, real estate prices need to continue to rise, so the property eventually yields a better return despite the added risks and expenses in the short term.
Unfortunately, the condo market is suffering and facing a significant correction. For the past 24 months the new condos nearing completion aren’t appraising for their original purchase price and the resale condo market is now experiencing price drops . Sales have been declining for both new and resale condos too. As a result, negative carry doesn’t make sense anymore because condo values stopped going up.
Data shows that 80% of the new condos completions in 2024 purchased by investors are negative carry. In dollar terms, investors who closed on a condo in 2023 had an average negative monthly cash flow of $597, and about 30 percent were losing more than $1,000 per month. Another way of saying this is that many new condo investors who took title in 2023 (24,000 units were delivered that year) is losing $7,000 to $12,000+ yearly.
The horror negative carry investors are having to face is that real estates prices will effectively be rolling back in value until they align with old-school investment fundamentals – whereby the value of a property is dependent on its rental income and the average cap rate for the property type at the time of sale. This is something to think of as a property investor to help guide your price point.
In the pandemic, investors were buying properties with a 2 to 3% cap rate. Today, the cap rate varies from 4.75% to 6%.
I think we are going to see condo values drop and flatline for a decade. End users will buy a condo because it’s ‘just like rent’. Prices will soften in the resale market, especially for the small units that end users don’t want.
In this post, Dear Urbaneer: What’s Going On With The Toronto Condo Market, I discuss the challenges associated with the oversupply of small units that – over the past 5 years at least – were purchased for sums that never aligned with investment fundamentals.
What this does, among other things, is reinforce the need for solid fundamentals behind property investment, including making much more conservative purchases, and anticipating a softness in the market (including a wider cap rate).
Private Rental Investors Versus Corporate Landlords
As more purpose-built rental units are completed, the choice and options for prospective tenants expand. Purpose-built rentals often have layouts, finishes, and amenities similar to those of many new condo buildings so that one-time advantage is neutralized. Renting in a professionally managed rental building lets the renter retain a certain measure of control that they may not necessarily have living in an investor-owned condominium, including not having to worry about their landlord’s plans to sell their unit, potentially turning them out on the street.
By the same token, when a tenant decides to move on, it can be a little tidier with a professionally managed company in that the tenant simply has to hand in their notice at the appropriate time, and that’s it. Plus, when a unit deficiency presents itself, like a broken faucet, the tenant doesn’t have to track down the landlord – who may be out of town – and instead just contact the onsite rental superintendent to get the repair done lickety-split.
In a January 2024 post by RENX.ca, it shared how “Units in some new purpose-built rental apartments, however, are renting at a five to 10 percent premium over those in condos because people are willing to pay more for onsite property management and increased security of tenure. Furthermore, some new purpose-built rental apartments owned by pension funds or other organizations with patient capital are now offering units that exceed the quality of those in condos, which is also leading to rental premiums.“ In other words, some condos won’t cut it as the supply of purpose-built rental housing grows.
In Storey’s, there’s a fascinating piece called “How Prop Tech Is Transforming Purpose-Built Rental Development“ that explains how advancements in property technology allow an institutional investor to “streamline the leasing process, enhance resident experiences, and improve asset management.” For example, prop tech can tap into and cultivate the growing desire for residents to feel like they’re part of a community by creating unique activities and experiences. Lifestyle events like a Singles Bingo Night, a Couples Weekly Cooking Class, or fitness classes geared to different demographics in a building could improve retention. An institutional investor could also capitalize on their size by negotiating with an insurer, as an example, to provide a rider in the building’s insurance policy that provides impacted tenants temporary housing and free rent if their unit suffers some unexpected building failure, like significant multi-floor flooding from a broken sprinkler system.
What small-scale, private or Mom & Pop investors must realize is that corporate landlords have very deep pockets that give them the opportunity and advantage to undercut rents to capture a shrinking pool of tenants and, as purpose-built rentals become more ubiquitous and prop tech elevates the tenant experience the Mom & Pop investor with the singular ubiquitous box-in-the-sky condominium may see their income stream dropping rather than increasing.
Furthermore, although the return of feel-good times in real estate for investors is a ways off, our housing crisis is still real. And all levels of government are committed to mitigating its severity. Because of this, all levels of government should continue funding the creation of purpose-built rentals, with added incentives when it includes affordable housing. For example, in November 2024, the City of Toronto “kick-started the creation of 7,000 new rental homes including up to 5,600 purpose-built rental homes and at least 1,400 affordable rental homes by offering incentives like the indefinite deferral of development charges on purpose-built rental homes as long as the development remains a rental property, providing owners a 15 percent property tax reduction for 35 years per purpose-built rental unit, and financial incentives and funding towards any affordable rental units included in a project”. What does this mean? More purpose-built rentals, of which many will be market housing mixed with affordable units.
I write this not to deter you from a property investment purchase but to underscore how essential it is to apply shrewd, conservative property investment fundamentals, which include choosing a property in an in-demand location, close to transit, shopping and parks, and preferably a unit larger in size. It’s also important not to overpay at purchase and to construct a financial proforma that provides a respectable cap rate. This means, without question, avoid negative carry until you’re certain we’re back on an upcycle boom.
Are you thinking about property investment? In today’s market, it is absolutely essential to approach your property search from an educated, critical and forward-thinking point of view. With decades of experience in all the ups and downs of the Toronto real estate market, I can help you navigate your way towards a promising investment.
I’m here to help!
Although I’ve written a few times about the similarities between the 1989 Toronto Real Estate crash and our current market, it’s also unfolded in completely unique ways. We are in uncharted waters, for sure, which is why doing this research and writing these blogs feels so imperative to me. Here are some more that may offer you further insights and guidance:
Five Reasons Owners Are Selling Their Toronto Real Estate At A Loss
What’s Trending In Toronto Real Estate?
Dear Urbaneer: Has The Toronto Real Estate Market Gone SLO MO?
It’s A Different Toronto Real Estate Market, Folks!
Dear Urbaneer: A Question About Letters Of Opinion And Estimating Fair Market Value
Over A Recent 90 Day Period, We Discovered 1 In 4 Sellers Of Downtown Toronto Lofts Lost Money
Dear Urbaneer: Which Property Owners Are Selling Their Toronto Real Estate Now In 2023?
Dear Urbaneer: Who Is Buying Toronto Real Estate In 2023?
Interest Rates And The Toronto Real Estate Market
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Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow, painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided hundreds of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial city into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.
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Steven Fudge, Sales Representative
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