The Canadian multifamily real estate market continues to exhibit some of the most compelling property sector fundamentals in North America. The demographic and economic characteristics underpinning the Canadian housing market have resulted in a perfect storm of low supply, high demand, and a growing shift to renting as the rising cost of homeownership puts purchasing out of reach for many prospective buyers.

Investment in new construction continues to flow into the Canadian residential market, but it has been lumpy over the past 12 months, as the market digests recent interest rate increases. For example, from December 2022 to January 2023, seasonally adjusted total investment in the residential sector across Canada rose 1.9 percent to about $11 billion (14.9 billion Canadian dollars). However, investment fell by 2.38 percent between October and November 2022. By comparison, U.S. residential construction investment fell 0.6 percent in January, continuing a residential investment contraction that has lasted for seven straight quarters, the longest such stretch since 2009.

Even with headwinds coming from high interest rates, why is Canada a market that should be closely watched by investors?

UNPRECEDENTED POPULATION GROWTH

In 2022, Canada’s population increased by more than 1 million, or 2.7 percent, the largest increase on record. Unlike previous record growth that drew upon the baby boom in 1957, international migration accounted for 96 percent of all growth. This influx followed five years of long-term growth at 5.2 percent between 2016 and 2021, a pace twice as fast as any other G7 country and on par with India and Mexico. Looking ahead, Canada’s strong population growth is anticipated to persist over the coming years due to bipartisan support for skilled immigration. It is important to note that immigration is one of the largest drivers of rental demand; according to the Royal Bank of Canada, 56 percent of the roughly 1 million new immigrants in the country are renters and will remain so for five to 10 years.

VACANCIES AT ALL-TIME LOW

Canada is currently experiencing the lowest national apartment vacancy rate since 2001, at 1.9 percent; by comparison, the U.S. apartment vacancy rate ticked up to 6.6 percent during first quarter 2023. There is some variation across markets, but low vacancy rates are prevalent throughout the country and are lowest in major cities. In 2022, Vancouver vacancies sat at less than 1 percent. Toronto saw vacancy rates of 1.7 percent, a return to pre-pandemic levels. Job recovery in the 18-24 and 25-44 age groups helped drive demand as employment also returned to pre-pandemic levels.

DEMAND OUTPACING SUPPLY

According to a recent report by the Royal Bank of Canada, there is a current shortage of 30,000 rental units across Canada, a figure that is forecasted to quadruple to 120,000 units by 2026. Canada added more than 70,000 new apartment units in 2022 as construction for rental housing hit a record high, with the highest growth in new starts in eight years. Despite the strong volume of new supply, to achieve a balanced market with rent stability, Canada will need to add 332,000 units by 2026 (well more than the indicated shortfall), requiring an average annual add of 83,000 units per year in the next few years (20 percent above 2022’s record level). The new supply of purpose-built apartments is still not strong enough to put a dent in demand across Canada’s largest cities.

HOMEOWNERSHIP INCREASINGLY OUT OF REACH

Home prices across Canada continue to rise, driving even more incremental demand for rental housing. As home prices continue to move upward, the renter population has increased at three times the rate of the homeowner cohort over the past decade.

Affordability has become a significant factor supporting residential rental demand. As of third quarter 2022, according to Royal Bank of Canada, the average cost of a condo in Vancouver is $769,000; on average, purchasers were paying more than 53 percent of their monthly income toward a mortgage. In Toronto, the average condo price was $719,000, requiring more than 50 percent of monthly income toward a mortgage. Across the nation, there is a 20 percent disparity in the average monthly cost between renting and owning a two bedroom apartment. This disparity is likely to continue to increase rental demand, driving more renters by necessity.

HISTORIC OPPORTUNITIES

Reducing Canada’s housing shortfall amidst an ever-increasing population of renters is going to take a monumental effort by investors, developers, and provincial and national governments. For investors and developers, this unprecedented supply and demand imbalance driven by secular trends presents a unique and limited-time opportunity to deliver on much-needed housing across the nation.

Tricia Peterson is managing partner and COO at Accord Group Holdings.