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Evidence suggests rent control is misunderstood

by Neil Sharma on 23 May 2018

While it’s long been speculated that rent control impedes the construction of purpose-built rental buildings—of which there’s a pronounced shortage in the Toronto region—data from Urbanation dispels that notion.

“At the end of the first quarter of 2018, we had recorded close to 8,000 purpose-built rental units that were under construction across the GTA,” said Urbanation’s Senior Vice President Shaun Hildebrand. “Midway through Q2, we’ve already surpassed 10,000 units that are in dedicated purpose-built rental developments. I have been getting a lot of interest from developers for market feasibility work for purpose-built rental developments for sites across the wider GTA region, extending up into Ottawa and Montreal, so there’s broad-based interest of building purpose-built rentals right across the province.”

Six purpose-built rental apartment developments comprising 1,723 units began occupying in 2017, and nine developments encompassing 2,669 units are projected for delivery this year. According to Geordie Dent, executive director of the Federation of Metro Tenants’ Associations, those numbers prove profitability isn’t hampered by rent control.

“Future gouging and rent increases have stopped, but you can still get a profit,” he said. “The biggest risk to [purpose-built rentals] has been the condo sector, which is far more profitable, but this is a long-term investment. If you look at a lot of the owners of rental housing in Ontario, even Canada, you see a lot of pension funds and hedge funds.”

In addition to the long-term return on investment, rents have rapidly surged to the point that—even with rent control and, consequently, reduced tenant turnover—purpose-built rental buildings have become very lucrative.

“One of the reasons you’re getting development right now is because, if you’re a company looking to get into the market here, it’s cheaper to build rental yourself than it is to buy it,” said Dent.  “That’s because it’s a profitable industry right now. Rents are going through the roof, you’re going to get a certain degree of turnover, and when there is turnover there’s no vacancy rent control, which means you can jack it up to whatever you want. You just can’t do that with sitting tenants, which is good in our estimation.”

The rents being achieved today in occupied projects far exceed their pro forma modeling, and Hildebrand says that’s attracting keen interest from developers.

“In the GTA, rents have gone up 25-30% in just over three years,” he said. “What wasn’t feasible then is now because of the jump in rents. While the condo market is levelling off, the rental market is still extremely heated and vacancy rates are continuing to fall, and rents still seem like they have more upside.”

 

Related stories: 
Amid purportedly slower market, one sector's ablaze
Rising rates percolating through market

 



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