It wasn’t so long ago that buyers couldn’t go wrong with a preconstruction condo purchase — putting a large deposit down on a unit before construction on a building has even begun.
During the pandemic Toronto’s condo market boomed — there was little supply and huge demand, pushing prices ever higher. Investors knew they could rent the unit and make a pretty penny, or sell it before they closed and make even more money. Investors piled into the market, leading to what is expected to be a record number of unit completions this year.
“Buying preconstruction used to be like walking into a candy store,” said Jonathan Zadegan, managing partner and broker at real estate agency The Zadegan Group.
But once the Bank of Canada began hiking interest rates to cool inflation — to five per cent in July 2023 from 0.25 per cent in March 2022 — investors deserted the space. Plummeting sales and falling valuations have led to developers cancelling projects, leading experts to forecast a drastic 69 per cent drop in condo unit completions in the next three years. The situation is dire — at a time when people need housing, there will be a massive deficit.
But as presales for condos hit multi-decade lows, a silver lining has emerged: developers are pivoting to rental — at least for now.
Some are leasing out finished units if they’re unable to sell their remaining stock and others are turning to purpose-built rentals — buildings constructed to be rented out rather than sold — diversifying their portfolios to be less reliant on investors to get units built. Bigger units are being designed as a result and boosting much-needed rental supply.
“Developers are having these conversations right now. Do I hold on and leave it as a condo or am I forced to turn it into a purpose-built rental or sell?” Zadegan said.
“Developers with deeper pockets will hold on, but others will have to pivot.”
Developers face ‘largest housing correction’ since the ‘90s
This year, a record-number of condo units are set to be completed in the Greater Toronto and Hamilton Area (GTHA), with nearly 30,800 coming to market.
It typically takes three to five years for a condo building to be built. The record-breaking completions in 2024 and slated for this year are a result of the pandemic’s preconstruction feeding frenzy, mainly from investors who own 65 per cent of new condos built after 2016.
But 2024 marked the slowest year for new condominium sales in the GTHA since 1996 — when Canada was in a prolonged recession and the housing market crashed.
And by 2028, the number of new condo builds will drop drastically to just over 9,500, according to market research firm Urbanation. The projections are based on units currently under construction.
“Construction starts are plummeting and completions will halt, leading to this massive drop-off in supply,” said Shaun Hildebrand, president of Urbanation.
Because rents have dropped and mortgage borrowing costs have increased, the negative cash flow is a deterrent for investors. At the same time there is significant inventory in the condo market, heavily impacting the new-build market, as buyers tend to look at preconstruction when inventory is in limited supply.
It’s led to more than a dozen cancelled condo projects, said Hildebrand, with an increasing number expected in 2025 as more builders go into receivership.
“This is the largest housing correction this generation has seen (since the 1990s),” Hildebrand said. “From 2026 onward the market will be significantly challenged.”
When supply is constrained in the near future, conditions will be ripe again for developers to resume condo projects — demand will increase once more and with it prices. But until then, developers can’t have projects remain idle. To survive, some are turning to rental units.
Hildebrand said Urbanation counted 14 projects (2,806 units) that were officially cancelled in 2024, but six of these projects (1,434 units) were converted to purpose-built rentals.
Incentives help case for purpose-built rentals
Developers must pre-sell around 70 to 80 per cent of condo units to secure financing to begin construction, which is unlikely to happen as investors wait on the sidelines for conditions to improve, leading some developers to an impasse: do they hold on to their condo tower and wait for the market to turn around or pivot and turn to rental units?
This is real estate developer Vikas Soota’s dilemma. He has two Mississauga condo projects in the pipeline — one is 10 storeys and the other is nine storeys. The two sites were originally zoned by another developer to have stacked townhomes, but when that plan fell through, Soota stepped in and got the sites rezoned for midrise condos.
But seeing the conditions in the presale condo market, Soota’s considering building purpose-built rentals instead.
“In this environment the market has slowed down considerably,” he said. “That’s not necessarily a bad thing, the market was overheated and we needed to bring down the temperature.”
But it does come with uncertainty, in terms of the viability of condo projects if there simply aren’t the presales to support construction of the condo towers.
That’s why all three levels of government are providing incentives to have private developers pivot to rental housing. While there’s low demand for preconstruction units, there’s still high need for housing, especially in markets such as Toronto where the high cost of home ownership is resulting in residents renting for longer.
In November 2024, Toronto city council approved a plan to support the building of 20,000 new rental homes in the city. The incentives include a deferral of development charges, a property tax reduction, and forgone taxes and fees for affordable rental units. So far, 17 applications representing more than 2,000 affordable rental and 6,100 purpose-built rental homes have received approval for the city’s incentives.
In Mississauga, there is a 100 per cent reduction in development charges — fees paid to municipalities when land is developed or buildings are constructed — for family-sized (three-bedroom) units in purpose-built rental apartments. The incentive is for housing projects ready to start construction and obtain building permits by November 2026. The city also called on the Region of Peel to reduce property taxes by up to 35 per cent for new purpose-built rental housing.
“These changes are seriously making us see purpose-built rental as a viable option,” Soota said.
Purpose-built rentals require equity through institutional investors such as pension plans, publicly traded companies, high-net-worth investors and loans from bank lenders, whereas condos heavily rely on presales for funding.
“It used to be onerous to do purpose-built rental but now we have a great partner in our municipal government to support us. It’s an exciting opportunity,” said Soota.
‘They end up running a rental operation in what would have been a condo building’
Not all developers can pivot to purpose-built rental — the profit to be gained by constructing condo towers is greater and not all developers want to be landlords in the long run.
However, some developers who have struggled to sell the remaining 20 to 30 per cent of their units upon nearing completion are renting them out until the market heats up again.
One such project is Daniels Keelesdale, a 12-acre development of condos and townhomes at Keele Street and Eglinton Avenue.
Already 400 homes have been purchased with a few dozen available to rent.
“Like many developers in today’s market, we are adapting to the current slowdown in the condo sector by exploring all available options. In the short term, we are offering a portion of our inventory homes as rentals while remaining committed to our long-term vision for the development. This approach ensures these homes are occupied and serving the community while the market stabilizes,” Don Pugh, partner at The Daniels Corporation, said in a written statement to the Star.
The units in time would be sold. Tenants are also given the opportunity to buy the unit themselves with the Daniels Corporation’s Home Investment Program (HIP) which allows renters to accumulate $500 HIP dollars a month for up to $25,000 to put toward the purchase of a Daniel’s built home.
Hessam Ghadaki, general counsel of real estate developer Times Group, said there has been an increase in developers taking their own units and renting them out to sell them gradually in time.
“They end up running a rental operation in what would have been a condo building.”
For Ghadaki, he’s been developing both condos and purpose-built rental for years — recently jumping on the opportunity to build more rental when government incentives kicked in. The decision to do so has helped his company at a time when presales are at extreme lows, and point to the dangers of over-relying on investors to get housing built.
Developers shouldn’t pivot to only building purpose-built rentals as it requires substantially more equity to build compared to a condo, but sales have become a limiting factor and purpose-built rentals are decades-long assets that provide stability and longevity during tumultuous economic periods, he added.
“There’s no other way right now than diversifying your portfolio.”
