A Toronto condo developer is buying hundreds of single-family homes in Ontario, intending to rent them out and take advantage of the housing crisis ravaging the country.
Core Development Group Ltd. is building a large-scale single-family home rental operation, an unproven business model in Canada where the market is fragmented and individual investors rent out a small number of their own properties for income.
Institutional home rentals have become very lucrative in the United States, with private equity firms, pension funds, and large corporations pumping billions of dollars into this asset class. In Canada, big-budget investors, as well as real estate investment trusts, have already acquired hundreds of apartment buildings to take advantage of strong rental demand, but have not moved into rental housing.
Founder Corey Hawtin and Executive Vice President Faran Latafat asked why there isn’t a similar business in Canada, which has had a rental vacancy rate of less than 3 percent since the turn of the century.
“We were trying to answer the question: why isn’t anyone doing this in Canada? We couldn’t find an objective answer to this. In Canada, it works as well or better than in the United States, ”said Ms. Latafat, president of single-family development at Core.
Core’s main activity is condo development and it has 14 projects in the Toronto area. Last fall, Mr. Hawtin raised $ 250 million from investors to buy about 400 properties, add basement apartments and turn the houses into two rental units.
Core is targeting eight mid-sized cities in Ontario and this year began purchasing properties in Kingston, St. Catharines, London, Barrie, Hamilton, Peterborough and Cambridge. He will soon start buying in Guelph. Its medium-term goal is to have a billion dollar portfolio of 4,000 rental units in Ontario, Quebec, British Columbia and Atlantic Canada by 2026.
Mr. Hawtin said Core rental units will provide affordable housing for families and residents who do not wish to live in small apartments. If Core is successful, it could prompt major investors to follow suit.
Ms. Latafat and Mr. Hawtin believe that a major home rental business will thrive in Canada due to decades of low rental vacancy rates, the desire for more space and high immigration. They also point out that most of the country’s population is concentrated around a few employment poles.
Additionally, the pandemic housing boom has excluded even more residents from the housing market, with renting the only option. National home prices are 20% above pre-pandemic levels, with values 30-50% higher in parts of Ontario, British Columbia, Quebec and the Maritimes. The typical price of a single-family home in Guelph and near Kitchener-Waterloo is now over $ 800,000, according to the Canadian Real Estate Association. This is about $ 200,000 more than a year ago.
Economist David Rosenberg said that an affordable rental home may become more attractive to a potential buyer because home prices are so high.
“The relationship between house prices and rental rates is so extreme that new entrants to residential real estate will gravitate towards the rental market,” said Rosenberg, who heads Rosenberg Research & Associates, adding that if more If potential buyers are forced to rent, this could potentially reduce competition in the residential real estate market and slow the rise in house prices.
Ms. Latafat said Core chose Ontario’s eight cities because they all have strong local economies, are close to larger employment centers, have growing populations, and low housing vacancies.
In Barrie and Guelph, the rental vacancy rate is closer to 2%, according to data from the Canada Mortgage and Housing Corporation. Meanwhile, in the first year of the pandemic, rental rates rose 10% in Barrie, Guelph, London and St. Catharines, according to CMHC.
“They have tight vacancies, like no vacancies,” Mr. Hawtin said. “Immigration is increasing, the population is increasing and buying a house or a condo has become less and less feasible. It really worsens rental demand in all of our markets, ”he said.
So far this year, Core has spent $ 50 million on 75 properties, executives said. Their two-bedroom basement apartments cost about $ 1,600 per month and a three-bedroom above-ground unit costs about $ 2,100 per month. These prices are higher than the average rental rate of $ 1,407 for a two-bedroom apartment in Ontario, according to CMHC data. Although Core rentals are newly remodeled units in homes with gardens.
Rentals of institutionalized family homes began south of the border after the US housing bubble burst in 2007 and businesses bought thousands of homes at clearance prices. Businesses and their investors now own swathes of American neighborhoods and earn money on rent, like apartment building owners.
Toronto-based Tricon Residential, one of the largest single-family rental operators in the United States, said Core’s decision to split the properties into two rental units made sense given the price of homes in Canada.
“The problem in Canada is that homes are so expensive,” said Gary Berman, CEO of Tricon, whose company has wanted to import single-family homes for rent into Canada for years, but concluded that it wasn’t. not feasible due to high real estate prices.
Tricon owns approximately 24,000 single-family homes in 18 major US cities. Most are found in warmer climates like Orlando and Phoenix. Mr Berman said this makes the homes easier to maintain compared to Canadian properties, which must withstand long and harsh winters.
Tricon maintains its purchase prices below US $ 350,000 per home and rents the entire property for approximately US $ 1,500 per month. Mr Berman said the key to the business is scale, saying Tricon aims to have at least 500 rental units in every city.
Core is also trying to scale up and buy homes within 15 minutes of each other to form a cluster of around 50 properties or 100 rental units in each city. Ms Latafat said it took about a month for Core to rent their new units and their vacancy rate was below 2%. She declined to comment on when the rental business would be profitable, except to say that the rental units were “cash flow positive” about five months after they were purchased.
Mr Hawtin said he plans to start fundraising for the next stage of the rental business as early as next year and may consider going public at some point.
Editor’s Note: An earlier version of this story stated that Faran Latafat ran Core’s single-family home rental division. It has since been clarified that she is Core President of Single Family Home Development.
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