Capital primed for a rental revival

When Toronto’s “condo king,” Brad Lamb, raves about the opportunities in the Ottawa market these days, he’s actually not talking about condos.

To be sure, the man behind such downtown developments as SoBa and Gotham has made his mark on the capital’s condominium scene. But what really gets Mr. Lamb excited about his latest Ottawa project, the Bronson, is the fact it might not end up being a condo development at all.  

He says there is about a 70 per cent chance that his company, Lamb Development Corp., will either market the 19-storey, mixed-used tower as an apartment complex itself or sell it to another institutional investor, which will then reap the long-term rewards of rental income.

The city's planning committee recently voted to recommend city council approve zoning bylaw amendments allowing the project to proceed.

“I think Ottawa’s a very good town for new apartment buildings,” Mr. Lamb says.  

The Toronto developer is hardly alone in suggesting the capital, like other major Canadian cities, could be witnessing an apartment renaissance.  

According to commercial real estate brokerage CBRE Group Inc., there were nearly 24,000 rental units under construction across Canada in the second half of 2014, an increase of 52 per cent from a year earlier.   

Ottawa isn’t as far along that path as some other major centres such as Toronto, which has more than 20 apartment projects under way, but many housing analysts say it’s only a matter of time before things pick up here.   

They point to a multitude of factors – including low interest rates that make borrowing cash for construction cheaper, a flat condo market, rising rents and inflated home prices – as factors in the upswing in apartment construction.  

Throw in the hard reality that much of Ontario’s stock of rental housing is nearly four decades old, leaving potential tenants starved for new, higher-end digs, and “the perfect storm has happened,” says Derek Lobo, CEO of Rock Advisors, a Burlington-based brokerage that specializes in apartments.  

“On the renters’ side there’s demand, and on the investors’ side there’s demand,” he says. “There’s an opportunity here, and it’s a big opportunity.”

Investors such as pension funds and real estate investment trusts like stable assets, Mr. Lobo notes. That makes apartments attractive to them, and Ottawa, with its steady economy, is a particularly enticing market, he adds.  

Mr. Lamb suggests another factor is at play in the looming apartment boom.   

While condos might provide a greater return on investment, he says, they generally cost more and take longer to build and cause developers more headaches because units must be tailored to individual buyers’ tastes. Apartments, on the other hand, are usually built to a uniform standard.  

“The amount of work and trouble is greatly diminished in an apartment building,” Mr. Lamb explains, noting that the buildings are usually zoned as condos, meaning developers can sell off individual units down the road if they so choose. “There are the two options you have, which is beautiful. You can still do a condo project and sell it, or you can just sell it as an apartment building. If you can do it, it’s a great way to go.”  

A few local developers have begun jumping on the bandwagon. Brigil, for example, is planning to market its new 140-unit project at 460 St. Laurent Blvd. solely to renters, and is considering a mix of condos and apartments at other proposed sites such as 121 Parkdale.  

“There’s a need for new apartments,” says Alain Grandmaison, Brigil’s general manager of real estate. “I think (Ottawa) is going to be a very good market.”  

Analysts say recent events seem to support that optimism. Last November, Lepine Corporation sold its 152-suite Kanata Lakes Apartments II complex to a group led by Killam Properties for $48.7 million, or about $320,000 per unit. That’s well above the national average of $125,000 per unit, according to CBRE Canada.   

“With these new rentals, you’re getting everything that a condo offers,” says Oliver Tighe, managing director of valuation and advisory services for Colliers International’s local office.  

“There’s a compelling story to get renters into new, condo-quality rentals in this market. The fact that someone was willing to buy a purpose-built rental in Ottawa for $300,000 a door proves that (investors) like Ottawa, the economics of Ottawa make sense.”  

Many developers are now “looking to build purpose-built rentals to a condo standard” to compete with condo owners who rent out their units, says Nico Zentil of CBRE’s national investment team in Ottawa.  

Still, just how much demand exists for high-end rental units remains to be seen, they note.  

“You’ve kind of got to build this whole thing and hope the renters come,” says Mr. Tighe. “It’s a concern, I think, for the developers because in their mind it’s riskier and it’s a concern for the lenders because in their mind it’s riskier. You’re really guessing. That’s the big question right now from a developer’s perspective – how long is it going to take to rent this thing?”

Mr. Zentil agrees.  

“The jury’s still out on how much of this stuff gets put into production,” he says. “I wouldn’t anticipate dozens of towers. At the end of the day, we still need to absorb these units.”  

Mr. Tighe says developers who focus on affordable, mid-sized units will ultimately be the winners.  

“The guys who are going to do it well are going to be the guys who adjust,” he says.  

Many builders are keeping a close eye on projects such as InterRent REIT’s major renovation of its 444-unit apartment complex at 201 Bell St. before jumping into the fray, he adds. He predicts that will be the “litmus test for the market” when it is complete.   

“It’s sort of a wait-and-see approach right now,” Mr. Tighe says. “I think the next six months will be telling.”

COST COMPARISON

BUYING VS. RENTING

TWO-BEDROOM, 750-SQ.-FT. UNIT

TO OWN (PER MONTH)

Price per square foot:        $480

Condo price:        $360,000

Mortgage:             $1,362

Condo fees ($.50 PSF):    $375

Utilities:            $200

Property tax:        $355

Total cost:        $2,292

TO RENT (PER MONTH)

Rent:            $1,750

Parking:            $100

Utilities:            $200

Total cost:        $2,050

This scenario assumes a buyer puts down 20 per cent and has a mortgage at 3.92 per cent. Utility costs are estimates.

Source: Oliver Tighe, Colliers International