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Rental Construction Hits Lowest Level in Nine Quarters in the GTA

Rental construction in the Greater Toronto Area (GTA) has reached its lowest level in nine quarters during the third quarter. This comes at a time when the federal government has announced legislation to eliminate the Goods and Services Tax (GST) on purpose-built rental projects in an effort to stimulate growth.

The third-quarter report by real estate consulting firm Urbanation reveals that the number of purpose-built rental units under construction in the GTA dropped to 18,267. This represents the lowest level of construction activity since the second quarter of 2021 and is a nine percent decrease from the peak of 19,994 units under construction in the first quarter of 2022.

Shaun Hildebrand, president of Urbanation, believes that the recent GST announcement will have a positive impact on new rental construction in the GTA. However, he also emphasizes that more assistance is needed to improve the economics of building rentals. Hildebrand states, “The construction of new purpose-built rentals should be a primary policy objective in the battle to improve housing affordability in Canada.”

The decline in rental construction is especially significant in the more affordable areas of the GTA, particularly in the 905 region. Increased costs have made it financially challenging to develop new rental units in these regions where rents have not been high enough to support construction. In the third quarter of 2023, the number of rental units under construction in the 905 region declined by 42 percent compared to its peak in the first quarter of 2022, which had 5,083 units under development.

Despite these challenges, Urbanation remains cautiously optimistic about potential improvements in the rental market in the near term. The elimination of GST on new rental development is expected to boost construction activity in the future. According to the report, as of the third quarter of 2023, there were a total of 41,034 approved purpose-built rental units in the pipeline in the GTA that had not yet started construction, including 10,113 units in the 905 region.

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Rising Rents and Affordability Challenges

Despite the decline in construction activity, rental rates in the GTA continue to rise. In the third quarter of 2023, the average rent for condominium leases was $2,937, while purpose-built rental units completed since 2003 commanded even higher rents at $3,143. Both market segments witnessed a nine percent annual increase in the third quarter. Although this growth rate was slightly slower than in recent quarters, it remained well above historic averages, posing affordability challenges for many residents.

Despite the surging rents, the vacancy rate in purpose-built rental buildings completed in the GTA since 2003 remained low at 1.8 percent between July and September. This rate had only marginally decreased from 1.8 percent between April and June and had remained below two percent for the seventh consecutive quarter.

There is a glimmer of hope on the horizon as the GTA could potentially experience some short-term supply relief. The report states that 13 rental buildings comprising 2,639 units are scheduled to begin occupancy in the fourth quarter of 2023, surpassing the 1,739 units completed in the third quarter. This represents the highest quarterly total for new rental deliveries in the past 30 years.

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