Investor preferences for smaller condo apartments remains a major part of Canada's multifamily market, with builders offering tinier units.
There is a higher proportion of investment properties among smaller units, classified as under 600 square feet, than among larger, more family-friendly units that offer over 800 square feet of living space, Statistics Canada said in a report.
"Investors are perceived to prefer these units because rent per square foot of living area tends to be higher for smaller units," according to the federal agency. "This may have contributed to the shrinking size of condominium apartments in census metropolitan areas."
By 2022, StatsCan said, private investors were the buyers of 64.5% of Toronto's condominium apartments built after 2016 that were under 600 square feet. In comparison, investors acquired 44.1% of the condo units over 800 square feet, the report said.
In Vancouver, 58.4% of new condominium apartments under 600 square feet were investment properties in 2022, compared with 38.9% of those were are 800 square feet and over, according to the report. The proportion of smaller units in new construction is also increasing in Vancouver, the largest city in British Columbia.
Builders respond
Developers have reacted to this investor preference by building smaller units. While only 7.7% of new builds in the Toronto region were classified as smaller in the 1990s, 38.4% of those built after 2016 fell into that category, StatsCan said.
The median living area of a Toronto condominium apartment built in the 1990s was 947 square feet but has decreased to 640 square feet for units built after 2016, StatsCan said. Vancouver-area condos shrunk to 790 square feet from 912 square feet, during the period.
Rentals.ca has noted the pace of rental increases is starting to slow down, with average asking rents in August up just 3.3% from a year ago to $2,187. The slowdown in rent increases has prompted concern in some quarters that investors are now abandoning a market dependent on them for rental supply.
Meanwhile, there are has been an uptick in so-called purpose-built rental apartments in which one firm or investor usually owns the entire building. Canada Mortgage and Housing Corp. reported this month that developers continued to focus on multiunit apartment buildings, with 49,172 apartment starts in the first half of the year, making up 72% of all new home construction in the six largest metro areas,
The Crown Corporation noted supply still needs to catch up with demand.
Based on media reports, StatsCan said the rental market might not be able to count on the condominium investors buying high-rise units to supply rentals in the future. Also, rents are projected to steeply increase over the next several years.
"Investors are increasingly wary of purchasing pre-construction condominium apartment units because they often lose money relative to mortgage payments on existing rented units (negative cash flow), even with rising rents," StatsCan said. "In addition, some investors do not envision strong future price growth amid higher interest rates."
Moveover, StatsCan said, "This has contributed to a sharp drop in pre-construction sales, causing developers to delay or cancel projects, which may lead to lower future housing supply."