B.C.’s long-maligned rental market is slowly becoming viable again—for renters and builders alike

Macro headwinds are making the mess of rental projects even messier.

Rental health_Byron Eggenschwiler

Credit: Byron Eggenschwiler

Macro headwinds are making the mess of rental projects even messier

Jade Buchanan, a young Métis lawyer who moved to Vancouver from Regina five years ago to swim in a bigger, more exciting pool of the legal world, could probably have stretched to buy a home in the city as soon as he arrived.

Between what he makes at a blue-chip downtown firm, where he specializes in tech and privacy law, and the income of his wife, also a lawyer, buying wasn’t out of the question after they sold their home in Regina—though it likely wouldn’t have been more than a one-bedroom condo in Vancouver or a townhouse in Burnaby.

But the couple chose to rent instead. First it was a downtown apartment, later a duplex in Kits Point, where they were thrilled with the supportive community and convenient neighbourhood they found for themselves and their toddler. They were willing to pay a hefty amount, if necessary, rather than sinking all of their time and financial resources into the hand-to-hand combat needed to buy something in the Vancouver market, particularly when they knew they could comfortably afford to rent.

“In Regina, we weren’t worried about taking a loss. And, in Regina, if you’re not too fussy, there’s a house for you right now. But in Vancouver, if there’s a 10-percent drop and we had to move, that would be a big loss. And we don’t have spare time to commit five to 10 hours a week for six months to look,” he says.

Buchanan is not what people might think of as a typical renter in Canada in the 21st century. And, until a few years ago, he wasn’t. Not that long ago, renting was seen as a world dominated by younger people, new arrivals, workers who need to move around for jobs, seniors on pensions and, well, poor people of all ages.

But, over the last few years, more and more people like Buchanan are showing up in the rental world as the price of owning a home in Canada rises like a spaceship trying to achieve escape velocity. And while prices have cooled somewhat recently, things aren’t any more affordable than they were due to the substantial increase in interest rates. Buchanan appreciates the fact that, at least, he had options in the rental world. “It’s working fine for me, but it’s very obviously a terrible situation for the vast majority of people,” he says.

The proportion of people renting is ticking up after decades of decline, as home ownership has become either completely out of reach or, in Buchanan’s case, so financially illogical that even paying a small fortune in rent makes more sense. Multiplied by tens of thousands, that dynamic is contributing to what was already a bad situation in Rent World: freezing-level vacancy rates, waves of renovictions by landlords who want to pry long-term rent-controlled tenants out in favour of higher-income renters, and a general sense of insecurity. It has also hobbled one part of the housing motor that was still working. For decades, what had made the rental market function with something approaching normalcy was the steady movement of renters with reasonable incomes into home ownership. That freed up rentals on a steady basis.

Rental stats

“In the ’90s, there was very easy access to home ownership. About 800,000 renters left the market [in that period], creating so many vacancies,” says Steve Pomeroy, an Ottawa-based consultant who has long been analyzing the Canadian housing market. “Now you have a whole bunch of wannabe homeowners becoming renters.”

The trend is altering the political landscape. Younger people who feel like they’re shut out of any sense of housing stability are frustrated and even angry. That’s driven some to support anti-development politicians. Others, like Buchanan, swing more to the YIMBY, build-as-much-as-you-can side. It’s made Conservative Party leader Pierre Poilievre suddenly popular with younger people as he rants about the lack of housing affordability.

It’s also altering the dynamics of a Canadian housing universe that has been preoccupied for decades with homeowners: federal and provincial policies have focused almost exclusively for the last 30 years on how to get as many people as possible into the ownership market.

An unintended consequence of that focus was the near elimination of new apartment buildings purpose-built to be rentals forever. After the federal government cancelled certain tax benefits for apartment investors and builders that had been in place during the ’60s and ’70s and, at the same time, individual provinces introduced legislation to create the conditions for condo ownership, the idea of building for renters almost disappeared. Apartment developers started to realize that building and selling condos was a lot easier and came with a quicker financial reward.

Now, it’s become apparent that many people who might have been buyers in previous eras will remain as renters for longer periods—or indefinitely—and all levels of government are pivoting to find ways to encourage rental-apartment construction, providing everything from low-interest financing (the federal National Housing Strategy) to the power to zone for rental only (B.C.) to various incentives or requirements for rental developments (Vancouver, Burnaby, New Westminster, Coquitlam, the City of North Vancouver, notably).

And there’s a new surge of interest from those who now see rental as a potential profit centre. Real-estate investment trusts and pension funds have been ramping up steadily to capitalize on this suddenly more attractive new asset class. “Forty, 50, 60 years ago, it was blue-collar people who started building and buying apartments,” says David Hutniak, CEO of the advocacy group LandlordBC. “It’s not like that anymore. The merchant developers have a growing presence in development.”

Developers who had built nothing but condos for years have re-discovered the formula for financing and building rental apartments. And a new wave of small-time private investors has moved into the game.

Shifting Models

At a recent all-day real-estate forum put on by real-estate-investment evangelist Ozzie Jurock at the Pinnacle Hotel in downtown Vancouver, the room was filled with the new wave, listening attentively to the predictions of where to invest next—where to buy properties that down-paymentless renters will pay the mortgage on for years, making the new owners rich. There was also advice on avoiding city crackdowns on Airbnbs, the benefits of evicting existing renters, and how to gain control of strata councils. The new investors were all there: men with man buns or in blazers, women in sharp suits or T-shirts and jeans, all of the city’s diversity of age and race and sartorial style on display.

Rental features key observationsCMHC Starts and Completions Survey

In spite of the interest and the incentives, rental is not an easy product to churn out. Life has changed since B.C. (and all of Canada) saw the country’s biggest-ever wave of rental construction during the post-war decades. The federal tax breaks for rental-construction investment that launched thousands of four-storey wood apartments disappeared long ago. The calculus for building rental has become much more complicated, as rules and regulations have increased. In Vancouver, experienced developers say they now go into projects expecting no more than a 3-percent return on whatever money they invest. That’s less than what someone could get on a conservative five-year GIC. And there’s general agreement among anyone who has ever had anything to do with housing—nonprofit housing organizations, policy advocates, developers—that it’s impossible to build apartments that can be rented for a price that’s affordable to anyone making less than about $50,000 a year unless there is one or more boosters: free land, direct government subsidies, low-interest financing, development-fee rebates.

And back then, renters and homeowners didn’t look that different when it came to socioeconomic status and income. Now, renters, who account for a third of households in B.C. and more than half of the population in cities like Vancouver and Victoria, are a big, diverse group with a much wider range of incomes and circumstances than homeowners. They are impoverished seniors or people with disabilities living in subsidized apartments, families that may have relatively good incomes but not $200,000 for a down payment, students camping out for a few years in university towns, service workers and young professionals occupying basements or homes bro- ken up into multiple suites, well-paid tech workers arriving in droves who plan to stay only for a short while before flitting off to San Francisco or London or Shanghai, and much more.

In a shift that has many developers in the province reluctantly learning to love him, premier David Eby has said that private industry will have to supply a lot of the housing that is needed—government can’t do it all. At the same time, he’s not naive about the pitfalls of the private sector.

Like everyone, Eby has been hearing the word “financialization” a lot—a term that’s surging these days among academics, economists and advocates to describe how large corporate, investment and institutional entities are moving into the housing world. While the concept of making a profit by renting people places to live is hardly new, critics say that the power of pension funds, REITs—which harness the money of thousands of small investors—and investment companies has increased exponentially.

The B.C. Bump

Canada hasn’t seen quite the same onslaught of Godzilla-like corporate apartment-gobbling that the U.S. has. But it has seen some. In B.C., that’s led to a wave of recent big buys. In the past few years, Starlight Investments has bought five concrete apartments, including the famous “pink palace” in West Vancouver, from the Lachman family, along with eight buildings with 485 apartments in Victoria. Ottawa’s InterRent REIT and Toronto’s Crestpoint REIT bought 15 buildings for almost $300 million from the Hollyburn family empire, after founder Stephen Sander died in 2020.

“Before, if you wanted to make money, you had to go in with some people and buy a building. Now, you can raise money in public markets,” says Martine August, a planning professor at the University of Waterloo who specializes in studying this new movement in the housing market. The new, more anonymized entities behave differently, she says. “There’s just a more aggressive pursuit of profit. And if you’re trying to extract more value, it’s basically coming from one place—the tenant.”

B.C. is in a different category from Ontario, Quebec or the U.S. In spite of those high-profile purchases, August’s data shows that the penetration of REITs into the B.C. housing market has been lower than in the east, a phenomenon she attributes to this province’s more stringent rent controls.

Rental housing starts as percentage of total housing startsStatistics Canada

Brokers and apartment analysts say there’s another reason, which is that there’s just not as much to buy here of the kind of product that real-estate trusts and institutional investors prefer—mid-size to large apartment buildings. “In Vancouver, the size of the purpose-built rental market is one of the smallest proportions in the country. There is definitely a difference in the characteristics of the stock,” says Steve Pomeroy.

Instead, B.C., and especially Vancouver, has proportionally far more amateur landlords than elsewhere, after a couple of generations that saw almost all new rental supply come from small-time investors. That includes mini would-be entrepreneurs supplementing their day jobs (university professor, plumber, MLA, sound technician, auto sales rep) by buying one or two or nine condos or townhouses to rent out. They’ve been joined by new immigrants and overseas investors who’ve also seen that rental investments are a relatively low-barrier way to earn a living. The B.C. scene includes a cohort who inherited tiny empires of small, low-rise apartment buildings from a founding generation. And it is boosted by the many homeowners who have come to rely on tenants in basements, spare bedrooms or laneway houses to keep up with the mortgage payments on increasingly expensive houses.

That scene includes people like Nitin Sharma, a 46-year-old Coquitlam father of two who runs a chimney-cleaning business as his main gig but, as a result of his parents’ early investments, is also a landlord with a triplex in east Vancouver. “It does get frustrating sometimes, but I wouldn’t get out. In Vancouver, prices just keep going up so the property will appreciate or at least hold its value,” he says.

As a result of the shortage of attractive properties, the pension funds and REITs are taking a different path in B.C. They’re partnering with developers to build new rental housing. The Safeway site at Broadway and Commercial is a joint venture between Ian Gillespie’s Westbank and Crombie REIT. An apartment complex in North Vancouver is a joint venture between Darwin and Minto REIT, which has just started to dip its toes into B.C. waters. Minto also has a joint venture for an apartment building on Kingsway with Rize Alliance.

“Vancouver has been one of our targets since 2018,” said Minto CEO Michael Waters, whose Ontario-based company was founded in 1955 as an apartment-development venture. “But it’s an incredibly difficult market—the most expensive rental housing market in the country from an investment perspective. It was always a tight market. Now it’s crazy.”

So why do it? “We look at the population in the Lower Mainland today and the projections are for 3.5 million,” Waters says, referencing an April 2021 report that predicted Metro Vancouver will hit 3.8 million people by 2050. “The demand is going to soar. And [the asset] continues to appreciate as a scarce resource.”

Other apartment developers say it’s mainly the equity gains they count on to rationalize their decisions. Or a need to keep the family company humming along. Or, even, a desire from some of the hometown builders to help people find a place in the city. Whatever their reason, those developers are getting pitched by REITs and pension funds to do joint ventures with them.

“The scarcity is creating a strong rental market that is attractive to investment,” says Mike Mackay, president of Vancouver-based real estate developer Strand.

But many are wondering whether the window has closed on that.

Building the Future

In recent months, apartment sales have slowed and many developers have quietly put projects on the shelf as interest-rate increases take huge bites out of pro formas. “It’s dramatically worse,” says Hani Lammam, executive vice-president at Vancouver-based Cressey Development Group. “Usually, 15 to 18 percent of a building budget is financing costs. Now it’s 25 percent.” Construction costs, in less than a year, have gone up 15 percent. The estimated cost per square foot for a four-storey, mixed-use retail/condo building on Vancouver’s east side is now $415 per square foot—what used to be the cost for a luxury concrete tower.

Rental Stats

Commercial broker Lance Coulson, who specializes in apartments, says that sales have almost flatlined. Unless someone has been holding a piece of land for a very long time and has few or no costs related to that, the spreadsheets now show that building rental is actually a guarantee of losing money. Financing costs are at 4.3 percent. The cap rate is at 3.6 percent. That equals going backwards.

For renters, that’s a disaster—it just turns up the heat under the already tense game of musical chairs that has been the norm in B.C. Existing landlords are feeling more stressed because the province has disallowed or severely capped rent increases for three years, meaning many tenants who pay low rents are simply choosing not to move. That has left those landlords with few options for getting the extra revenue they would have earned if new, higher-paying tenants moved in.

Rental stats iStockStatistics Canada, Census of Population 2016 & Census of Population 2021

It’s not a pretty picture.

As for Eby, it’s clear from the housing platform he announced in October that he sees this as a battle that must be fought on many fronts. Eby, at times, sounds almost frantic about B.C.’s need for much more.

“When you look at, for example, Amazon and federal immigration targets, we just have so much demand,” he says. “Rental housing is so important or we’ll have a worse crisis. If we don’t get to build new, people will buy the older stuff. That drives me crazy.”