Apartment Rentals Under Construction Hit Record High

Steve Saretsky -

Given the uncertainty in the Canadian housing market, inflated home prices, elevated levels of household debt, and mortgage stress tests, it seems more and more buyers are opting for the sidelines, choosing to rent instead. It appears real estate investors and developers are taking note, funnelling money into purpose built rental units. A good chart from Ben Rabidoux of North Cove Advisors highlights a record number of rental apartment units currently under construction across Canada.

rentals under construction Canada
Source: North Cove Advisors

While these units should provide relief to a national housing market ailing with low vacancy rates, I am hearing anecdotally of more property builders in Vancouver switching to rentals given the obvious weakness in the resale market where sales have tumbled to near two decade lows throughout the year.

The data appears to back those rumblings. Per CMHC, there were 4226 rental units under construction in Greater Vancouver for the month of June, just off a record high set in May.

Rental unit construction Vancouver
Rental units under construction in Greater Vancouver

Further, housing starts for new rental units remains elevated. The 12 month monthly average for new housing starts remains close to record highs.

rental housing starts Vancouver
Greater Vancouver rental housing starts.

I suspect rental housing starts will continue to trend higher, given the weakness at pre-sale centres across Greater Vancouver. The pre-sale absorption rate was just 14% in June, down from 73% in June of 2018. More developers will opt to switch from selling condos to building rentals as opposed to sitting on empty land until the market recovers.

More rental supply will impact Greater Vancouver’s slowing multi-family market. According to commercial broker David Goodman, multi-family apartment transactions fell 50% through the first half of 2019, with dollar volumes dropping 62% from last year. According to the latest Goodman Report, “Corresponding with the decrease in activity and values, average cap rates have increased by 50% in Vancouver in the first quarter of 2019, as compared to last year’s average. Vancouver is averaging 3.73% so far this year as compared to 2.49% in 2018. But don’t fret! This is largely due to the influx of new purpose-built rental buildings that typically command higher cap rates—the numbers are skewed as buildings will trade at approximately 100–200 basis points higher as compared to existing old rental stock.”

cap rates Greater Vancouver
Multi-family apartment cap rates in Vancouver. Source: The Goodman Report

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