Condo developers rethinking sites once planned for condos
The condo sales office had barely opened and demand was expected to be strong for suites in The Selby, a 49-storey tower right on the subway line at Sherbourne and Bloor.
Then co-developer Cityzen got an offer it couldn’t refuse: An institutional investor was looking to snap up all 441 condo units and turn them into something rarely seen downtown in decades – brand new rental apartments.
Incredibly, they aren’t the only ones.
Cityzen Development Group president Sam Crignano says he’s also talking to other institutional investors looking to build rental towers on sites where Cityzen had hoped to eventually construct condos.
“Rents have crept up to the point where the economics of these kinds of deals make a lot of sense,” says Crignano.
“Plus, let’s be frank, one of the issues we’re facing now is affordability. People are finding it harder to just come up with a down payment,” even for new-build condos which are now averaging $454,476 across the GTA.
Even veteran apartment developers The Minto Group, which owns and manages some 17,000 apartments but has largely shifted its sights to building condos, is now taking another look at rental.
Minto recently raised more than $300 million in equity. It is looking to build or refurbish some 6,000 units of rental housing to service what it sees as a seismic shift in how the young – and the old – are going to be living in costly urban centres like Toronto.
“The condo market has shown that there is a deep base of demand now for rental product,” says Greg Rogers, executive vice president of investments for Minto.
Simple economics and demographics are behind the interest in rental, says Paul Golini, executive vice president of Empire Communities, which is also looking at sites that may make more sense for rental than condo towers.
Thankfully, few expect to see a replay of what happened this week to buyers of 181 condo units in Urbancorp’s Kingsclub project on King St. W.: Three years after that developer took deposits averaging about $40,000 per unit, it quietly decided to convert the three planned condo towers to rental.
Rental is back on the radar because rising rents and low interest rates have combined to drive down capitalization rates dramatically, from about 7.3 per cent in the third quarter of 2003 to 4.2 per cent in the same period of 2014, says Nick Yanovski, managing director of capital markets for commercial brokerage Cushman & Wakefield Canada.
That means rental construction – which had virtually died in the wake of rent controls — is actually profitable again. It’s also now seen as a low-risk, long-term hold with the GTA’s population, and land prices, continuing to rise and the vacancy rate at just 1.6 per cent – even less in the downtown core, says Yanovski.
It’s not just that more first-time buyers are finding themselves priced out of ownership. Many don’t want the responsibility. They want to be downtown, free to seize opportunities in other cities or plough all their spare cash into getting their own companies off the ground.
Strangely enough, aging baby boomers are increasingly in a similar boat.
“Many are living in their retirement savings account,” says Minto’s Rogers.
Baby boomers are likely to start cashing out on their houses in the coming years to free up money for retirement, travel and to help out their kids, he adds. They like the idea of carefree living in professionally run rental buildings, with the ability to move with two months’ notice and no real estate fees if they decide to be closer to the grandkids.
“We’re seeing baby boomers who aren’t sure about moving into a condo, so some of them are just renting and trying it on for size to see how it feels,” says Cityzen’s Crignano.
Builders believe rental demand is likely to keep growing at the expense of home ownership which, as of 2011 in Toronto, stood at historic highs of 65 per cent among 30 to 44-year-olds, up from just 57 per cent in 1991, according to Ottawa-based housing policy researcher Steve Pomeroy.
He’s less confident that institutional investors will get back into rental housing in a big way, given they’ll be competing with a force that has taken over the last decade in Toronto’s housing market – mom-and-pop and foreign investors who’ve bought up condos to rent them out.
Daryl Chong, president and CEO of the Greater Toronto Apartment Association, the umbrella group for apartment owners and property managers, warns that any new rentals are going to be very high end.
In fact, Yorkville seems to be a major focus right now among developers looking for the best rental possibilities.
That’s why the association has proposed a number of incentives – still under consideration at city hall – to boost the supply of more affordable rental, from cuts in development charges (they add about $28,000 per two-bedroom unit) to property tax relief.