The Canada Mortgage and Housing Corporation (CMHC) released its 2024 Canadian Rental Housing Construction Survey in late November, offering a comprehensive look at the challenges and opportunities facing purpose-built rental developers across the country. The report indicates that Canadian rental developers see improving conditions in some regions, driven by slowing construction costs, strong rental demand, and increased government support. However, rental developers are also reporting ongoing barriers, such as financing difficulties and high land costs, which continue to hinder development in other regions.
Improvements in Some Markets
The survey reveals a growing sense of optimism among rental developers in regions like Québec and parts of Ontario outside the Toronto Census Metropolitan Area (CMA). Slower increases in construction costs, lower interest rates compared to 2023, and targeted government measures have created a more favourable environment for development in these areas. Developers in Québec, in particular, report the most positive outlook, buoyed by a combination of local market conditions and policy incentives.
With Continuing Challenges, Especially in High-Cost Areas
On the other hand, high-cost regions like Toronto and British Columbia continue to face significant challenges. High land prices, the difficulty of financing large loans, and limited room for rent growth due to already high rents make new projects harder to justify financially.
Larger Developers Lead
Larger developers, those managing over 1,000 units, are expanding their pipelines and showing more confidence in the current market. They benefit from better access to capital, lower debt exposure, and economies of scale, allowing them to take on new projects even in challenging environments.
While Smaller Developers Struggle More
In contrast, smaller developers face greater struggles. Financing remains a persistent hurdle, as lenders often require higher equity contributions upfront. For many smaller players, this restricts their ability to start new projects or resume paused ones. According to the survey, 85% of developers report difficulties securing financing, with smaller firms disproportionately affected.
Impacts of Government Support
One of the survey’s key findings is the impact of the federal government’s decision to remove the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) on new rental construction. This measure, implemented in the spring of 2024, has been welcomed by developers. Seven out of ten survey respondents said the tax removal would positively influence their long-term strategies, and 52% reported a development pipeline of more than 1,000 units, up from 43% in 2023.
This policy, along with CMHC programs and easing monetary policies, is helping to improve the feasibility of rental projects. In some cases, developers have resumed paused projects or initiated new ones, suggesting some recovery in the rental construction market.
Strategic Adjustments in Development
Developers are adapting their approaches to navigate both the opportunities and challenges in today’s market. While the traditional “develop-and-hold” strategy remains popular, improving market conditions are prompting some developers to adopt shorter investment horizons, with this shift influenced by varying outlooks across different market areas.
Other strategies include increasing rents in tight markets, reducing unit sizes, and lowering construction costs by using less expensive materials. Site intensification building more units on already-developed land is gaining traction as cities push for greater density. However, raw land acquisition remains the dominant strategy, as it is generally simpler to execute.
Repurposing non-residential properties, such as converting offices into housing, is still rare. Despite declining office space values, the cost of conversion often exceeds the potential return. However, CMHC notes that these projects could become more viable with targeted incentives in areas with larger declines in office demand, such as Calgary.
Financing
Despite some positive trends, financing remains a major obstacle for developers. Purpose-built rental projects, unlike condominiums, cannot rely on pre-sales to offset costs. Instead, developers must secure substantial capital upfront and wait until the building is fully leased to generate income. Smaller developers, in particular, find it difficult to meet lenders’ equity requirements, which limits the number of projects they can take on at once.
While challenges remain, the CMHC survey findings offer some optimism for the future of rental development in Canada, as easing monetary policies, government tax incentives, and strong rental demand are creating opportunities for growth.
