Canada's building more apartments than it has in years. Can the trend continue?

It might be hard to believe but last year, more new rental apartments were built in Canada than any year in the previous three decades, data from the Canada Mortgage and Housing Corporation (CMHC) shows.

This new-found supply didn't come close to keeping up with demand, as cities across the country saw rental prices skyrocket and vacancy rates plunge. 

The level of construction also varied region-by-region. Some cities like Calgary saw a big boost in new apartments last year, while others like Saskatoon saw a plateau, or in Toronto's case, even a decline.

But while every market is different, in recent years the high-level trend in Canada has been steady growth in the construction of new rentals.

Still, it's unclear whether it can continue at the same pace. The number of Canadians who rent is growing faster than the number who own their homes, as high prices and rising interest rates push more people to rent rather than buy. People moving to Canada — and within Canada — have also added pressure to different markets, and as immigration ramps up as a way to fill critical labour shortages, the demand for rentals is expected to continue to grow. 

While surging demand for rentals could spark a further boom in this type of development, some warn that building apartments is a tricky financial proposition at the best of times, and that high interest rates and inflation could slow down momentum just as the need accelerates. 

End of an era?

The recent rise in rental construction has been driven, at least in part, by the economic conditions of the last few years. Interest rates were low, while rents have generally been on the rise. 

Some experts worry this era may have already come to a close, amid the high cost of borrowing, labour and construction materials. Each factor drives up the price tag for builders.

"A builder who would have thought it's a good idea to build a high-rise multi-residential unit building in downtown Toronto, say, in 2021, might be looking at the environment today and say, 'Oh, it's not quite as attractive now,'" said Bob Dugan, chief economist with the CMHC.

Another problem: while rents may be on the rise, there's a limit to how much people are willing (or able) to pay for something they don't own.

That means developers have to deliver rental buildings at a lower cost than condos to make the projects feasible, said Heather Campbell, chief operating officer of Kitchener-based Vive Development. It's all the more difficult amid the inflation pinch on pocketbooks. 

"It's a challenging environment today," said Campbell, who said her firm has no plans to move away from rentals, but is being more careful about new acquisitions and potential projects.

The problem is affecting all types of multi-residential development, but CIBC economist Benjamin Tal expects rental developers will be hit hardest, in part because — unlike condo builders — they don't have buyers' deposits as a source of cash. 

Tal believes new rental projects will be put on hold as builders wait for sunnier days to proceed. 

"The issue will be two years from now, when those projects should be completed and they will not be available, at the same time demand is still rising and growing," said Tal, who said the pressure is likely most severe in big cities like Toronto and Vancouver. 

The case for building more rentals

Costs are no doubt on the rise and have to be considered before deciding to break ground on a new project. Even so, some say the long-term business case for rental development may outweigh the current pressures. 

"I think we are undeterred," said Alkarim Devani, president and co-founder of RNDSQR, whose firm builds family-oriented rental projects in Calgary and Winnipeg. 

Mike Bucci, vice-president of Bucci Developments, says rentals have made up a growing share of his business in recent years  — a trend he expects will continue as home ownership becomes increasingly out of reach for many, as housing preferences shift, and as more people move to Canada.

"We're seeing the demand side for rental is pretty clear, pretty strong and pretty sustainable," said Bucci, whose company has offices in Calgary and Vancouver. 

Another incentive: developers who build rentals can get low-cost loans and mortgage loan insurance with lower premiums and longer amortization periods through the CMHC, if they hit certain benchmarks for affordability and other factors.

"Without those programs it would be, I think, unfeasible to provide new rental products in today's market," said Campbell. 

Those CMHC incentives might even be attractive enough to persuade some struggling condo builders to shift gears and start building rentals instead, says Amar Nijjar, a board member with the Commercial Real Estate Lenders' Association. 

"[That's] one, perhaps, silver lining," said Nijjar, who is also CEO and founder of Finneo, a debt platform for commercial real estate financing. 

Even if construction continues, it won't be enough

How much new housing is built in the years ahead — rental and otherwise — won't just depend on large-scale economic trends, but on local factors like zoning rules and the cost of land.

But the overall level of housing construction in Canada needs to ramp up significantly — and in many parts of the country — in the years ahead. By 2030, the CMHC predicts Canada will need another 3.5 million homes of all kinds above current building projections to restore affordability.

While last years' uptick in rental construction was good news, it wasn't quite good enough. 

"I worry that we're not going to get the surge we need," said Dugan.