After years of being dormant, the purpose-built rental market is starting to come to life again as more developers consider building rental housing but there are still many challenges in the way.
We need more rental housing in the GTA as one measure to help deal with our housing supply shortage and affordability problems. With housing prices in the GTA as high as they are, and so many people now priced out of home ownership, renting is becoming a popular alternative.
Greater demand for rental housing has created more builder interest in purpose-built rental projects and development is growing. More than 5,000 new rental units are currently under construction and another 28,000 units were proposed in the last quarter of 2016, according to a recent CIBC report.
While there is increased developer interest is building rental, it is not easy and like building condominiums, purpose-built rental development must be financially viable or they won’t get built.
One of the biggest challenges and one that would have a major dampening impact on the construction of new rental housing is the possibility of expanded rent control legislation.
The government is currently considering changes to rent control rules and while extending rent control regulation to new construction may appear to be a good thing, it would in fact have a detrimental impact on the feasibility of building the much needed rental housing. If the province imposes restrictions on what can be charged in rent, developers will have no incentive to build units. Instead of improving our housing problems, expanded rent control on new buildings would do the opposite – push housing prices higher as rental supply decreases.
There are also a number of other challenges that builders need to weigh before taking on a rental development. From an overall business perspective, it can be financially risker to build rental housing as opposed to building condominiums. With condo projects, a large portion of the units are sold before starting construction which reduces the investment risk for a builder. This isn’t the case with rental developments – units can only be rented once the building is complete and ready to go to market, increasing the uncertainty of being able to rent all units in a timely manner.
On the front end of the planning policy process, developers also face the same challenges with rentals as they do with condo projects. There is reluctance to give height and density approvals, out-of-date zoning by-laws and excessive red tape increase approval timelines and delay construction, and ultimately these obstacles add costs to the projects.
Like condominium development, NIMBYism is another growing challenge that builders need to deal with when proposing a rental project within an established neighbourhood. Many projects are being met with opposition from local residents who are concerned about high-rises popping up next to their homes not wanting their community to change. In order to make these projects viable, developers need to build in locations where potential tenants want to rent such as transit-oriented areas that include a range of amenities including retail, restaurants, schools and parks within walking distance.
Purpose-built rentals could be one of the solutions we need to meet the housing demands of a growing region however developers can only build them if it makes good financial sense.