The 2024 Canadian Rental Housing Construction Survey highlights improved conditions for purpose-built rental development in some Canadian regions. Lower construction costs, strong rental demand and increased government support are key drivers. Larger developers are expanding their pipelines with optimism, while smaller developers remain cautious due to financing challenges. High-cost areas like Toronto and British Columbia, however, still struggle with project feasibility.
In some regions of the country, Canadian rental developers are starting to have a more positive outlook. Tighter market conditions and slightly easier access to financing have contributed to this shift in sentiment. However, accessing financing and raising capital remain difficult for most developers (especially smaller ones) and this is holding future projects back.
Increasing new housing supply — especially purpose-built rental supply — is critical for addressing Canada's housing crisis. Continued support from all levels of government is a must.
More than half of respondents reported a development pipeline of over 1,000 units, up from 43% in 2023
According to the 2024 Canadian Rental Housing Development Survey (PDF), developers and investors are reporting, on average, increased viability for new rental construction. Decreasing construction costs, a relaxation of monetary policy and high rental housing demand are key factors leading this shift.
Government initiatives and CMHC programs, alongside these market changes, have been important in strengthening Canada's rental development sector.1 Some evidence of this: more than half of survey respondents are actively engaging in new rental projects or are restarting paused ones.
The removal of the Goods and Services Tax and the Harmonized Sales Tax on new rental construction has also been well received by industry stakeholders. As a result of the tax removal, developers are increasing their development pipeline: 52% of respondents reported over 1,000 units under construction or set to begin construction within the next 5 years.
However, not all respondents share this optimism, and it varies depending on developer size and region. Major developers (those with more than 1,000 units in their development pipeline) report greater improvement in market sentiment than their smaller counterparts. This is because of their lower debt exposure, their ability to use scale and their easier access to capital.
Regionally, developers see market conditions for long-term rental development as most promising in Québec and Ontario (outside the Toronto CMA ). On the other hand, developers in high-costs areas, like British Columbia and the Toronto CMA, are seeing greater challenges to project feasibility. Contributing factors include the high cost of land, modest rent growth potential since rents are already high and the need for larger loans or capital investment.
Access to financing and raising capital continue to be challenging
Getting financing for projects remains difficult for many rental developers given the large equity contribution needed at the start of projects. Unlike condominiums, which benefit from the sale of pre-construction units, rental construction developers need to secure this capital in other ways. A rental building can start to sustain itself financially only once the development cycle is finished and the building is occupied by tenants.
The results of our Canadian Rental Housing Construction Survey, conducted in early 2024, indicate that in the current environment:
- 85% of developers report difficulties getting financing for their projects. However, developers that manage a smaller amount of assets (less than $100 million in assets under management, or "AUM") are struggling much more to get financing than those with more than $1 billion in AUM.
- Loan-to-cost ratios are decreasing for all developers. This is likely because of minimum debt-coverage requirements. With high interest rates and construction costs, meeting debt payments becomes more challenging. As a result, developers are putting more equity into projects, and this can limit the number of projects they can build at the same time.
- Smaller-scale developers need higher equity contributions than larger developers when they're trying to get construction loans2. This is true even when they use CMHC programs and mortgage loan insurance.
The disparity in the capital market environment suggests that major lenders prefer larger projects.
However, developers of all sizes play a vital role in Canada's housing system by contributing to the diversity and availability of housing options.
Our survey revealed that, facing these conditions, developers use different tactics to make a project financially viable. These tactics may include:
- increasing rents when the rental market is tight
- using lower-quality materials
- reducing the square footage of units
Site intensification and shorter-term investment horizons among strategic shift in property development
Site intensification is becoming more popular as Canadian cities pursue greater densification. Still, acquiring raw land remains the development strategy developers rely on most, since it's relatively easy.
There is also a trend towards shorter investment horizons alongside the traditional "develop-and-hold" strategy. In this approach, developers build and retain ownership of rental properties for long-term income and value appreciation.
This shift likely reflects an opportunistic response to improved market conditions in regions with lower capitalization rates, such as British Columbia and Ontario, which are generally viewed as safer investments.
Developers remain hesitant to repurpose non-residential assets, such as converting offices to residential use. For conversions to be a viable opportunity, the land value must exceed the asset's current value as office space, given the high cost of converting. Despite a decline in office-space valuations, this condition is often not met, discouraging developers from pursuing this largely untested approach.
Still, as indicated in CMHC's Housing Supply Report, these projects can be feasible if incentive programs are implemented in areas with a more significant downturn in the office market, such as Calgary.
Navigating opportunities and challenges
In some regions, developers are experiencing slightly more favourable market conditions. Additionally, government support contributes to the viability of projects in the pipeline. Still, access to financing for projects remains a challenge for many developers, especially for smaller-scale developers.
The recent easing of monetary policy and expectations of further easing, combined with new government initiatives, are expected to help developers advance new projects. These changes may also contribute to the expansion of the housing stock.
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