Bloomberg’s Ari Altstedter discusses the growing distress in Canada’s condo market that’s turning lenders into developers.
The flood of money that drove one of the world’s biggest condo building booms has abruptly dried up, creating an opportunity for deep-pocketed investors to step in.
Apartment construction — fuelled by institutional investors financing whole buildings — reached a high last year in Canada. And in the past few years, such projects have overtaken condos as the major source of multifamily construction in the country, which is desperate for more housing.
That’s come as the army of mom-and-pop investors who transformed Canada’s major cities by financing condo towers disappear. Buying before construction began to rent the units out on completion, these investors were a key driver of new housing supply in recent decades.
But high borrowing costs, languishing rents and falling prices have now pushed many of them out. That’s providing an opening for the pension funds and wealthy families who until now have largely sat on the sidelines of Canada’s housing boom.
Last year, Blackstone Inc. became one of Canada’s biggest apartment developers when it bought Toronto-based Tricon Residential. And some of the country’s largest pension funds are building whole new neighborhoods out of their existing malls — such as one planned by British Columbia’s public-sector pension fund for Toronto’s Cloverdale Mall — while smaller funds finance dozens more individual buildings across Canada.
It’s a shift that’s set to transform where most Canadians live, while opening up a role for big money in the country’s housing market it’s never had before. Condo developers such as Mazyar Mortazavi are already retooling to appeal to the larger investors.
“I don’t think the condo market is going to come back in the way it was,” said Mortazavi, chief executive officer of Toronto-based TAS. Individual “investors are no longer fueling the condo market, hence there’s a market opportunity. That opportunity is going to be picked up by institutional capital.”
Until last year, developer Carlo Timpano was weighing options for a site in Toronto that could fit a 50-story building. But he and the wealthy families backing him eventually opted for rentals instead of condos.
“When you ran the math of holding a property for a recovery in the condo market versus building it as rental, the math simply looked better as rental,” said Timpano, president of Capital Developments. “We’re speaking to new capital partners to see if there’s an interest in growing, not just one or two, but five or 10 buildings, on a go-forward basis.”
Developers Are Building More Apartments Than Condos | After a multi-decade condo boom, Canada is shifting to building rentals (CMHC)
The exit of Canada’s condo investors began when interest rates started shooting up in 2022. Rent growth couldn’t keep up, which meant that many of the mom-and-pop investors with a mortgage saw their monthly cash flows turn negative. Even a subsequent decline in borrowing costs last year has not entirely alleviated that. And new supply kept hitting the market, depressing resale values for existing owners.
That combination of falling prices and negative cash flows have in turn cratered investor demand for new condos. And because developers have come to depend on those buyers to finance construction in the first place, that’s caused a sharp pullback in new projects breaking ground.
Any construction slowdown threatens to reverberate throughout Canada’s political landscape, with some of the country’s cities consistently ranking among the least affordable in the world. That’s put the housing crunch high on lawmakers’ priority lists, with Prime Minister Justin Trudeau announcing measures last year to fuel more building.
Little supply
While the condo market is still working through the flood of new supply, dwindling construction could be a boon for investors embarking on new projects. By the time those buildings are completed in five years or more, there could be less competition for owners trying to lure renters.
“There will be a dearth of supply in four to five years into which we’ll be delivering our product,” said Timpano, who’s developing the rental building in midtown Toronto.
For now, enough other apartment developers are seizing on that opportunity to make up for the slowdown in condo building. Last year, national housing starts rose by 2% to over 245,000 units, driven in large part by rental construction, according to the national housing agency Canada Mortgage and Housing Corp. That’s driven in part by large institutions taking over and repurposing condo projects that couldn’t get enough pre-sales to start.
“You had these condo developers that did all the work entitling that land, and then they got to the point where they actually can’t put the shovel in the ground,” said Christina Iacoucci, head of Canada for global real estate investment manager BGO. “We were getting a lot of interesting opportunities because of that.”
BGO, which oversees about $30 billion (US$21 billion) in Canada on behalf of pension funds, insurance companies and endowments, has 10 rental buildings in various stages of development.
Tough shortage
But it may still not be enough. While apartment starts are projected to rise further in coming years, the much steeper slowdown in condo building will start to drag down Canada’s overall homebuilding numbers by next year, according to CMHC forecasts. New housing starts are expected to range from 226,600 to 243,000 this year, below 2024’s levels, the projections show.
“We’re nowhere near what we need to be producing to make our way to an affordable market,” Tania Bourassa-Ochoa, deputy chief economist at CMHC, said. “We should not only be maintaining the rental construction we’re seeing right now, but accelerating that.”
Ari Altstedter, Bloomberg News
