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Canada’s rental market has hit a critical low in vacancy levels, but developers are struggling to keep pace with the growing demand for new housing.

Despite a national vacancy rate of only 1.5% this year, the lowest on record since 1988, plans for new multifamily buildings are stalling, according to Emma West, an urban planner and partner at Bousfields.

"The vacancy rate is very low, but there's not a lot of development that's happening there," West told CoStar News. "It's a real challenge because we do need housing in Toronto, in Ontario, all across Canada. But the numbers aren't working right now for those new multifamily buildings to be built."

She noted that high construction costs and market conditions make it difficult for developers to launch new rental projects. This challenge comes amid a slowdown in condo presales, traditionally a critical component for financing new builds and providing rental supply.

In Canada’s biggest cities, new condo sales fell to a 30-year low in the third quarter of 2023, according to condo research firm Urbanation. Without enough presales, many planned condo projects have been delayed, creating a backlog of inventory just as high interest rates make it tougher for potential buyers to commit.

Canada Mortgage and Housing Corporation (CMHC) reported earlier this year that the country’s 1.5% vacancy rate is the lowest on record since tracking began in 1988. While construction is slowly picking up, especially for purpose-built rental projects incentivized by tax rebates and fee waivers, it’s far from meeting the demand.

In Toronto, developer Devron Developments is rethinking the standard condo format, betting that larger units will appeal to both residents and investors. Devron’s latest project, 101 Spadina, is designed with spacious units averaging 800 square feet, compared to the 665-square-foot average seen in condos built between 2016 and 2017.

“When you have market corrections in any industry … [people] start to re-evaluate merit and value and say, 'OK, where did things start to deviate from really actually providing value?'” Pouyan Safapour, co-president of Devron Developments, said in an interview with CBC News.

By offering larger units, Devron hopes to address shifting buyer preferences amid the sluggish market for smaller condos.

In recent years, smaller condos became the norm as developers worked to cater to affordability.

John Pasalis, a Toronto real estate broker and head of Realosophy, explained that unit sizes shrank to help first-time buyers and investors afford homes with lower down payments.

“As investors started to make up a bigger share of the condominium market, they wanted more affordable units,” Pasalis said. “They needed a lower down payment. So, one way to make the units less expensive is just to make them smaller.”

Many of these “micro-condos,” some as small as 300 square feet, were snapped up in pre-sales by investors, allowing developers to meet financing thresholds for construction. Pasalis estimates that investors own about two-thirds of all micro-condos in Toronto and Vancouver.

However, with recent interest rate hikes, demand for these smaller units has cooled significantly. Thousands of units are now listed for sale in Toronto’s condo market, with about 11,000 units available in recent months—the highest level for any single month on record.

The slowdown in demand for small condos is causing developers and industry experts to rethink the approach to multifamily housing in Canada.

Safapour sees the trend as an opportunity to “re-evaluate merit and value” in new developments, focusing on building spaces that meet genuine needs rather than maximizing the number of units per project.

While construction of larger, purpose-built rental apartments is slowly gaining traction, the mismatch between demand for housing and the economic feasibility of new developments remains a significant barrier.

Source: Canadian Mortgage Professional