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Will Purpose-Built Rentals Disrupt the Market?

by John Brydon-Harris on March 7th, 2017

RentalAptBldgThere’s a growing commercial real estate trend that is quietly, but surely, creating ripples in the market, and it’s time we paid it some attention: purpose-built rentals are back and they’re growing in popularity.

Thanks to an ideal set of “growing conditions,” including a lack of affordable inventory for would-be buyers, changing attitudes about long-term or permanent renting, and low borrowing rates for buyers and developers, there’s a new wave in construction of purpose-built rental buildings, defined by the Canada Mortgage and Housing Corporation as “privately initiated, purpose-built rental structures of three units or more.”

The resurgence of purpose-built rentals

Purpose-built rental buildings are, of course, far from a new idea, but new builds have all but disappeared in recent years. According to a recent article, the all-time-high interest rates of the early 1990s saw construction of new purpose-built rental buildings slow to a trickle, as they became too expensive to build. In recent years, especially in cities like Toronto and Vancouver, the focus has been on building high-rise condo towers comprising all for-purchase units or a mix of for-purchase and for-rent residences; it’s been rare to see new builds of rental-only units.

But that’s changing. According to a recent report from Urbanation, a Toronto real estate market research group, close to 12,000 purpose-built rental units are under construction, nearing completion, or proposed for construction in the Greater Toronto Area. As senior vice president Shaun Hildebrand comments, “The development industry realizes the demand for rental has longevity – this is not a fad.”

The trend has significant benefits for both renters and developers. For renters, a professionally managed rental building may mean a better quality of life. Superintendents and building managers are likely to abide by regulations and pay attention to maintenance of units and outdoor spaces. These buildings may also have sought-after amenities like laundry rooms, party spaces, underground parking, and even pools and gyms.

For building owners and operators, rental units can be the gift that keeps on giving. Instead of a onetime sale of a brand-new condo unit, rental units bring in a steady cash flow for the lifetime of the building’s use as a rental residence. And the rental price can legally be raised according to schedule, ensuring profit.

The downsides

There are drawbacks, too. As evidenced by the number of older buildings that have seen their demographics shift, vacancy rates rise, and quality decline, purpose-built rentals can quickly lose their luster in the shadow of new rental buildings or condominium towers. They require significant upkeep and cosmetic work to keep them as attractive options for renters.

It’s too early to determine just how much the trend will grow, and if or how it will produce significant shifts in the housing market. But for now, as affordability and inventory of homes decline, and investors look for smart places to put their money, purpose-built rental buildings remain a trend to watch.

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