Anshu Arora LLM, MSc, PMP

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Rental Housing Supply not likely to improve short term as developers adjust to higher interest rates

An adequate supply of rental housing is essential to restoring affordability in Canada. According to one of our recent studies, it would require an investment of at least $1 trillion to achieve this. In this context, the private sector plays a crucial role.

Research conducted earlier this year showed that most of the recent purpose-built rental housing stock in Canada is owned and developed by the private sector. In order to launch the construction of new rental development projects, return expectations by investors need to be met. As a result, larger-scale developers with the deepest pools of capital and a greater ability to source upfront equity have been playing a significant role in the development of new rental housing.

Purpose-built rental developers in Canada are facing an increasing number of market challenges. Under these circumstances, developers have adjusted in several ways; by either reducing the potential future supply of rental housing or adapting their strategies to move along new construction projects. For most rental projects planned in 2022, the limited return premiums have motivated the decisions to pause or cancel projects. Other developers who decided to move along projects saw the need to raise rents to offset increasing borrowing, construction and development costs. It is worth mentioning that developing a multi-family housing project requires several years and the timeline may vary across different cities, with some taking longer than others.

Research suggests that important financial adjustments needed to be made to ensure financial viability. These include, increasing rent prices, using lower quality materials and/or reducing the square footage of units. In this context, economic and financial conditions are contributing to the deterioration of future rental affordability.

Larger-scale developers (1,000+ units) should be responsible for more than 3 out of 4 new rental units among survey respondents in the coming years. They also represent 9 out of 10 respondents who are leveraging public sector funding, such as CMHC programs, hence incorporating a greater share of affordable housing units into their portfolios. That said, market rent was mentioned as the most common product strategy.

Partnerships between larger institutional investors, such as pension funds and public companies (that is, REITs), and private developers can allow for reduced upfront cost and greater access to alternative financing. These partnerships were mentioned to be increasingly leveraged to build new rental housing. Larger scale developers are seemingly putting more focus into creating affordable housing opportunities. Collaboration and partnerships between different development typologies and investors will be foundational in the future rental housing development ecosystem.














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