Where Is Ontario’s Rental Housing Industry Headed?

Where is Ontario’s rental industry headed in the future? What changes and shifts and trends can we expect?

Here’s a list of possible future trends which I consider highly likely to materialize.

  • I think among developers there will be re-focus on developing mid-level rentals with modest appointments and more affordable rents. Although high-end, luxury, A grade rentals earn the highest rents and therefore generate the highest profits, it’s mid-level, B grade buildings which appeal to the largest pool of prospective renters and for which there is practically speaking limitless demand. There seems to me to be no point in competing directly with condos when building new rentals.
  • I think developers, recognizing that rentals don’t always have to be on premium sites, will start developing rentals on secondary and tertiary sites in major markets, including in the GTA. Of course, developers have been building new rentals on non-premium sites here and there, but I think this will ramp up considerably due to the high costs of acquiring premium sites, and I think we’ll see the stigma which has been attached to secondary and tertiary sites weaken and begin to disappear.
  • I think developers will significantly expand the development of rentals in smaller secondary and tertiary markets (i.e. towns, villages, and ‘population centres’). Now that primary markets are too expensive for most rental housing developers, they’ll have to seek opportunities in smaller population areas. I think the goal here should be “a new rental building in every town in Ontario”.
  • I think we will see someone crack the code for developing small-scale and micro-scale rental buildings suitable for development in small markets where depth-of-market and affordability are important factors.
  • I think we will see the reduction and perhaps elimination of retail elements in new buildings. These are usually required by municipal official plan and zoning regulations, but in too many buildings retail elements often sit empty or are under-utilized., which means wasted space.
  • I think there will be a recognition of the importance of appropriate parking coverage and a recognition that we are many years away from eliminating driver-owned vehicles (and hence on-site parking for tenants).
  • I think the industry will see steadily increasing involvement by Bay Street as bankers and financiers take much more direct roles in real estate firms and projects. I’m not sure if this is a good thing or a bad thing, and Bay Street players certainly have a lot to learn about rental housing, but once they do understand rental housing it should make it easier for developers to get funding for non-marquee projects.
  • I think the financialization of rental housing, which has been underway for 5+ years, will become highly prevalent to the extent that larger landlords will operate like financial firms not property management firms. I realize this is not a new thing and many industry players now see rental housing as little more than another investment asset, but I think this will become the norm and anyone who doesn’t look at rentals this way will be strangers in their own house. I think as a consequence there will be a huge growth in the number and size of residential REITs. I think some REITs will extend their holdings to include not only properties located in small markets but also small projects themselves (which to a large extent REITs tend to have avoided or overlooked to date).
  • I think retail REITs will add large amounts of residential to their retail sites, not only by repurposing parking lots but also by rebuilding and reconfiguring retail elements. I realize this is already happening, and it’s certainly not a brave new idea, but I think we are going to see it happen on a very large scale across the province, to the extent that development of new rentals by retail REITs will eclipse that of traditional rental developers, at least until REITs exhaust opportunities (which, frankly, will take a while).
  • I think, given the comments I’ve made about financialization and REITs, that landlords will be sorted into two groups: (1) large landlords with large holdings held mostly via REITs, (2) small landlords with a few buildings privately held. The small landlords will struggle/compete to acquire new assets and some will have to shift into developing their own small-scale projects in smaller secondary and tertiary markets if they want to grow.
  • I think the industry will see the emergence of professional leasing businesses operating independently from property management operators. Several leasing-only businesses used to exist in the industry in Ontario but a decade of extremely low vacancies made them superfluous. Although vacancies are likely to remain low for the foreseeable future, increasing supply at the luxury end of the rental market, the emergence of new rentals in markets unused to them, and involvement by developers without a track record in rentals, will mean greater demand for professional leasing services.
  • I think there will be a greater use of new data sources to definitively answer some of the ‘big questions’ around rentals which have not yet been answered. I’m thinking in particular of absorption rates and achievable rents. These are not yet ‘settled science’ and people who claim to have them figured out have been relying largely on guesswork and anecdotal observation, neither of which are adequate given the steadily increasing sophistication of the rental housing industry.
  • I think we will see an expansion of the consulting segment of the industry, with more firms providing research and analysis services to developers and lenders. This will be closely related to the growing presence of Bay Street players who will demand more professionalism, sophistication, and expertise than has traditionally been the case… and I’m saying this as a consultant with 15+ years of experience in rental housing!

Predicting the future is always a challenge, but most of the trends I’ve talked about in this post are already happening, so I’m not wildly speculating. Whatever happens, Ontario’s rental housing industry is going to change a lot in the near future, after several decades of remaining pretty static. It’s going to be interesting!