Toronto Purpose-Built Rental Apartment Market

With contributions from Vice President of Real Estate Wanli Zhang and Real Assets Investments Analyst Neo Huang.

Despite significant rental demand growth driven by immigration and rising homeownership costs, the Canadian purpose-built rental (“PBR”) apartment market remains heavily supply-constrained due to regulations and development costs. This supply/demand dislocation has resulted in extremely strong fundamentals in markets such as the Greater Toronto Area (“GTA”) and presents opportunities to generate attractive risk-adjusted returns. However, prospective investors face increasing competition, particularly from foreign institutions, and must navigate a complex, uncertain regulatory landscape.

Demand

Canada has leveraged immigration as a major driver of economic growth and a means to combat an aging population for years. After ramping up immigration targets to counteract post-pandemic labor shortages, Canada’s population grew by 3.2% in 2023, the highest rate since 1957, with 98% of that growth attributable to immigration.¹ A significant portion of Canada’s immigrants choose to settle in the GTA due to its strong economic opportunities and cultural diversity, contributing to the GTA’s status as one of the fastest growing metropolitan areas in North America. The population of the GTA is projected to grow from 7.5 million residents in 2023 to 10.5 million by 2046,² which will drive housing demand and necessitate significant densification.

Canada’s housing stock has been unable to keep up with its rapid population growth, which, coupled with elevated interest rates, has resulted in a drastic increase in homeownership costs. The situation is particularly prevalent in the Vancouver and Toronto metropolitan areas, which now rank among the least affordable housing markets in the world. The ratio of median house price to median annual household income in Toronto grew from 6.7x in 2015 to 9.3x in 2023,³ and average homeownership costs rose to approximately 80% of median household income.⁴ With homeownership increasingly unattainable, many Canadians have turned to renting as a more affordable alternative.

As part of the effort to alleviate pressure in the housing market, Canada’s 2025-2027 Immigration Levels Plan targets 0.2% population decline in 2025 and 2026 followed by 0.8% population growth in 2027.⁵ While Canada’s housing supply will have two years to catch up, there is still much to do once population growth restarts.

Supply

The Canadian population grew rapidly in the decades following WWII, necessitating heavy residential development. In the 1960s, Canada implemented a number of tax incentives for rental housing, which resulted in the construction of many PBR properties. However, subsequent tax policy changes and the implementation of rent controls in the 1970s and 1980s significantly reduced the viability of PBR projects, causing developers to shift their focus to condo development. As a result of this drastic shift, approximately 70% of Toronto’s PBR apartment stock is now over 50 years old.⁶ PBR development only recently began to ramp up again with the introduction of various policies intended to address housing availability and affordability, including a provincial rent control exemption for units first occupied after 2018. In the meantime, the role of PBRs has been partially filled by condo units: In 2024, 40% of condo units in the GTA were rented, up from 29% in 2014.^7,8 However, this is not a sustainable solution in light of the current affordability crisis, as condo rental units in the GTA average approximately 50% higher rents than comparable PBR units.⁸

Toronto PBR: New Supply Deliveries⁶

In Toronto, PBR development is hindered by a number of factors: 

• Much of the GTA is covered by the Greenbelt, a protected area where most types of development are prohibited, preventing urban sprawl. Most of Toronto is subject to low-density Yellowbelt zoning, which only permitted single-family housing prior to a recent amendment to allow multiplexes. The scarcity of available land for mid- and high-rise development has resulted in intense competition between developers, driving up land costs.
• The average number of laborers per unit working on a new construction project fell from ~6 to ~4 between 2012 and 2023 across the country, while average job tenure also decreased, contributing to longer completion times and higher wages.⁹
• The permitting process is both lengthy and expensive. A 2022 study found that the average approval timeline for residential developments in Toronto was 32 months.¹⁰ Municipal development charges range from ~C$24,000 to ~C$68,000 per unit for PBR properties and are even higher for non-rental properties.¹¹

With such high development costs, it can be very difficult for PBR projects to pencil. Using the province of Ontario, of which Toronto is the largest city, as an example, the housing shortfall is expected to grow over the coming years. In 2022, Ontario’s housing stock was 6.0 million units. Under a “business as usual” scenario, the housing stock is expected to reach 6.6 million units by 2030, which falls well short of the 8.1 million units needed to reach affordability targets.¹² While short-term immigration cuts are expected to result in a slight reduction in demand, the affordability crisis cannot be solved without also increasing supply. Ontario would need to triple its construction pace to close the supply gap and restore affordability by 2030. Various stakeholders are enacting policies and implementing programs to make strides in the right direction, including the More Homes Built Faster Act introduced in 2022, but there is still more work needed to combat the systemic challenges that the Ontario housing market faces.

Fundamentals

With such dislocation between supply and demand, the strength of Toronto’s apartment fundamentals should come as no surprise. Despite an influx of new supply, Toronto reported a PBR vacancy rate of only 2.3% in 2024, in line with the historical average of 2.2% since 1998.¹³

Toronto PBR: Vacancy¹³

Most rental units in Ontario are subject to rent controls, with an average rent increase guideline of 2.1% since 1998.¹⁴ In practice, rent growth is often higher than guideline values due to various exemptions, including vacancy decontrol, whereby landlords may freely increase rents upon tenant turnover. Faced with substantially higher rents for new leases, more renters elected to renew their existing leases, resulting in a turnover rate of only 6.1% across all Toronto PBRs in 2024.⁸ Average PBR rents in Toronto grew at a 3.5% CAGR between 1998 and 2024, with record high growth of 9.2% in 2023.¹³ Rent growth subsequently normalized to 2.3% in 2024, with low turnover making it difficult to realize significant rent increases, and new apartment supply increasing competition.¹³ However, with construction starts in 2024 down 40% YoY,¹³ new supply is likely to subside in the coming years.

Toronto PBR: Rent Growth^13,14

Following the Global Financial Crisis, the GTA PBR apartment market experienced over a decade of cap rate compression, from ~6.8% in 2009 to ~3.0% in 2022.¹⁵  Since then, higher borrowing costs and seller distress have contributed to cap rate expansion, with an average cap rate of ~4.2% in the first three quarters of 2024.¹⁵ Meanwhile, average transaction prices have climbed from ~C$90,000 to ~C$330,000 per unit.¹⁵

Toronto PBR: Property Values¹⁵

Investment Dynamics

One unique advantage for apartment investment in Canada is the mortgage loan insurance program of the Canada Mortgage and Housing Corporation (“CMHC”), which enables lenders to offer highly attractive financing terms with government backing. CMHC programs allow for higher leverage, lower DSCR requirements, lower interest rates and longer amortization periods relative to conventional financing.¹⁶ Properties meeting certain criteria for affordability, energy efficiency or accessibility gain access to even more preferential terms.¹⁶ In the first three quarters of 2024, the CMHC provided mortgage loan insurance for over 200,000 apartment units, totaling C$48 billion of loan value – a 59% increase YoY.¹⁷ The CMHC plays a key role in tackling the housing crisis by supporting the financial feasibility of PBR projects, particularly those in the affordable/attainable segment. The federal government is also keenly aware of the role that the CMHC plays in Canada’s long-term housing policy evolution and continues to propose new initiatives for improvement.

The Canadian apartment market is less institutionalized than that of the U.S., presenting an opportunity for domestic and foreign institutional investors alike to increase their exposure to a relatively stable asset class with significant tailwinds. Foreign investors surged into the Canadian real estate market in 2023, representing 36% of transaction volume, up from only 14% in 2022.¹⁸ Intense buyer competition, strong fundamentals and the availability of low-cost financing all contribute to the aggressive valuations seen in Canada’s top apartment markets. High development costs similarly contribute to relatively low development yields.

Investors who are unhappy with the low cap rates and development yields of Toronto may look to nearby secondary markets, which have benefitted from Toronto workers taking on longer commutes in exchange for more affordable housing or transitioning to remote/hybrid environments. With less investor competition and lower development costs, markets like Kitchener-Waterloo typically have higher cap rates and development yields, at the expense of slightly weaker fundamentals. In Q3 2024, apartment cap rates were estimated to range from 4.25% to 5.50% in Kitchener-Waterloo, compared to 3.50% to 5.00% in Toronto.¹⁹ Regardless of what investor preferences may be, the PBR apartment markets of Toronto and its neighboring areas should continue to present highly compelling investment opportunities.