How has the rental housing industry changed over the 15+ years I’ve been working in it? Obviously, if you do one thing long enough and if you pay attention when you’re doing it, you notice when it changes and how it changes. Here’s what I’ve observed (in no particular order).
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The industry used to be sort of a ‘closed shop’ dominated by a group of long-time firms, mostly property management firms who owned the bulk of larger rental properties in portfolios of various sizes, plus a small number of developers who were building the small number of new rental properties which made it to market each year. With a relatively small number of firms dominating the industry, it was normal to meet the same people all the time (real estate firms, though they often own or control millions and millions of dollars worth of properties, often have relatively small numbers of people working for them). Today, there are many new firms and many new faces operating in the industry, partly due to generational replacement, but mostly due to ‘immigration’ to the industry. Today, property ownership has broadened out, with more firms holding or controlling properties, plus more international ownership, although the industry is still dominated by local—i.e. Canadian—ownership.
The industry used to be dominated by rental housing owners, managers, and operators, with lenders involved at the margins (not overlooking their key role in supporting development projects). Recently, the industry has experienced increasingly direct involvement by Bay Street, which is always searching for new opportunities and which now seems to recognize that rental housing can be a good investment and is worth exploring more directly. There’s a learning curve to be ridden, though, and it will take a while for Bay Street to become really comfortable with rental housing, overcoming its traditional disinterest in the industry. How much of this is being driven by the search for new investment opportunities and how much by a tightening up of opportunities in other industries, I cannot say, but it’s definitely happening and it means a whole new group of participants in the industry, many of whom have a lot to learn.
With the increased involvement of Bay Street, there has been a shift towards an investment-ready stance among landlords and developers. Developers in particular used to build new rentals to hold in their own portfolios, but today they’ve realized there’s a big demand on Bay Street for high-quality rental properties. They’ve reacted by building not only investment-friendly products, but products designed to be sold to REITs and investment funds as soon as possible after construction is finished and full occupancy is reached (and in some cases selling before full occupancy is reached). Shifting from building to hold to building to sell means a big shift in mentality and it narrows the gap between condos and rentals—when a new rental building is sold a year after construction is finished then it’s not a lot different than selling all the condo units in a condo building, at least in terms of the developer’s time commitment.
The rental housing market in Ontario has changed from low demand for rentals to high demand. This is due to a huge undersupply problem in most cities and towns in southern Ontario—basically, not enough new rental product has been constructed, and even in places where a lot has been constructed, such as London, demand remains unmet. The opportunities for developers today are big since the question of demand, and hence absorption, is basically a non-issue (although it’s still difficult to convince developers and lenders of this fact, even as each new rental building that reaches market leases up successfully).
The rental housing market in Ontario has changed from high vacancies to very low vacancies, or, to put it another way, the market has changed from a renter’s market to a landlord’s market. This is an extremely important shift since it means prospective renters have much less choice and in some markets no choice at all—they have to rent whatever comes available at whatever rent is asked. Landlords do well in these market conditions, naturally, although low vacancies means low turnover (because renters can’t move if they can’t find another place to move to) so landlords, who know they will be stuck with incoming renters for a while, have to qualify them carefully. That said, landlords know they don’t need to use waiting lists and they know they can ignore most prospects because when a unit becomes vacant, or when notice is given by the tenant, the landlord will have several prospects calling the same day and the vacancy will be filled almost immediately.
On the new development side, the industry used to be dominated by a small number of developers, all of whom had experience developing rental housing and were often owners. Today, a much larger pool of developers are either developing or considering developing rentals. Most of these developers are drifting to rentals from condominium development, but many have little or no experience with rentals, such as single family homebuilders. For condo developers, switching to rentals is not a big jump, but for homebuilders it’s a new product type (although if you can build and sell townhouses you can build and rent townhouses, for example). For the moment, most of these ‘new’ developers remain wary about developing rentals, although as more and more rentals get built they’ll eventually see the opportunities—this is where consultants and existing rental developers can help by explaining and demonstrating the opportunities rentals offer.
Site intensification is much more common today than in past years, especially in Toronto and the GTA where land prices keep rising. Intensification is taking two forms: adding new rental units to existing rental housing properties, and adding rentals to retail sites that never had housing. In the first case, some landlords have realized they can squeeze in another rental tower or two next to their existing rental buildings, thereby increasing the rent revenue generation of an older site. This sort of intensification is often accompanied by upgrades to the older rentals, thus lifting the whole site. In the second case, retailers have realized that many of their retail malls and plazas are underdeveloped, so adding rental housing to their sites increases revenues and overall value, plus it creates a supply of on-site customers. There is no question in my mind that in major cities intensification of retail properties will be the biggest source of new rental housing.
Newly constructed rental apartment buildings have changed from modestly appointed mass housing to products which are equivalent to condominiums in terms of amenities and appointments, and more generally in terms of configuration. What do I mean? If a new rental building was constructed next to a new condo building in a major city like Toronto, for example, most people who toured both buildings would find it hard to tell, without being told, which building was intended to be rented as purpose-built rentals and which for sale as condominiums: the unit mix, unit sizes, unit features, building amenities, and overall configuration and design would be virtually the same.
The emergence of purpose-built student housing is a particularly interesting change to the industry. Purpose-built student rentals—by which I mean off-campus, privately owned and operated rentals targeting students only—didn’t really exist when I started in the industry, other than a small handful of properties which had been built in the 1980s and 1990s. Today, student rentals have been developed in most major cities in Canada, but it’s in Waterloo where most of the action has taken place—in fact, it’s probably safe to say that over the past decade as many new student beds have been developed in Waterloo as in the rest of Canada combined. I’m not going to discuss Waterloo in detail here, other than to observe, as a University of Waterloo alumni, that the city has been transformed. However, despite strong demand for quality student housing among students (and their parents), purpose-built student housing is still not widespread and still hasn’t been fully accepted it as a viable market segment by the rest of the rental industry; its day will come, but for now student housing is still viewed with caution.
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Okay, that’s enough for now. I’m sure there’s more changes that I’ve seen that aren’t springing to mind right now—when they come to me I’ll post them, perhaps in a follow-up post. There’s always a danger for topics like this to come across as a bunch of old war stories, but I hope I’ve avoided that!