Urbanation and Finnegan Marshall, in collaboration with the Building Industry and Land Development Association (BILD) and the Federation of Rental-housing Providers of Ontario (FRPO), has prepared a comprehensive report on the current state of the market for purpose-built rental (PBR) developments. This report is an important contribution to the ongoing discussions around how to increase purpose-built rental construction in Ontario. Rentsync has provided a helpful report summary, highlighting the key findings and policy recommendations.
Over the last ten years, the number of renter households in the GTA grew three times faster than the number of owner households. This trend is expected to continue in the next decade, with the GTA population projected to grow by 1.27 million by 2031, an extra 445,920 above growth recorded during the previous 10-year period. However, despite the rapid growth in renter households, the rental supply in the GTA has not kept up with demand. More than 300,000 rental units are needed in the next decade, with the number of renter households in the GTA projected to rise by 58% over the next 10 years.
The most common form of rental housing in the GTA is purpose-built rentals, which account for a 41% share of all rented dwellings. However, purpose-built rentals contributed the least amount of new supply over the past 10 years and contributed only 9% of total new rental units. In contrast, most new rental supply comes from condominiums, which have comprised 89% of total apartment completions and 54% of total rental supply growth in the GTA during the past 10 years. This condo dominance was a direct result of more private investors renting out their units. However, skyrocketing mortgage costs are driving many investors away from the market. At the current trajectory, it is expected that condo rentals will begin to decline and represent a shrinking population of renters.
With construction costs increasing nearly four times faster than rents over the last three years, purpose-built rental construction starts are beginning to slow down after reaching their highest level in nearly 30 years in 2020. Recent purpose-built rental projects completed in the City of Toronto have taken an average of 100 months, illustrating the lengthy process of bringing new rental units to market. Although there is a high demand for rental housing, the rental supply deficit in the Greater Toronto Area (GTA) is expected to double to 177,000 over the next decade. While around 135,000 new rental units are anticipated to be added through purpose-built rental and condominium projects, this falls significantly short of the estimated demand for 312,000 rental units.
Financial modeling shows that building purpose-built rental housing is significantly less financially attractive than condominium development due to differences in upfront capital investments and the differences in timeframes required to reach profitability. Despite the financial challenges, the need for rental housing continues to grow in the GTA. To address this issue, we suggest that all levels of government need to create an action plan to increase the supply of rental housing and make it easier for developers to build purpose-built rental housing. One solution is offering incentives to developers who build rental housing, such as tax credits or expedited zoning approvals. These incentives could offset the higher upfront costs of developing rental housing and make it more financially attractive for developers.
Increasing the density of new developments could also help address the rental housing shortage. This would allow developers to build more units on the same amount of land, which could lower the per-unit cost of construction and make rental housing more financially viable.
In conclusion, while the financial challenges of building purpose-built rental housing are real, they should not be a reason for us to ignore the rental housing shortage in the GTA. It is time for all levels of government and the private sector to work together to find solutions that will increase the supply of rental housing and make it easier for developers to build rental housing. With the right incentives and policies, we can ensure that our city has enough affordable and high-quality rental housing for all its residents.
You can find the full report here.