Construction workers work on the top floor of the Time and Space condominium project in the Front St. East and Sherbourne St. neighborhoods of Toronto on October 11.Fred Lum/The Globe and Mail

Rental apartment construction fell sharply in Toronto in the first half of the year, according to a new government report which suggests it has become ‘increasingly unsustainable’ for developers to shoulder the rising costs of construction.

Apartment starts fell 24% to 1,436 units in the first half of this year compared to the same period last year, the Canada Mortgage and Housing Corporation said in a new report released on Tuesday. . Four of the five other major cities surveyed by CMHC posted increases in rental apartment starts, with Calgary more than doubling over the same period.

Across the country, there has been a push to build more rental housing, also known as purpose-built rental housing, to help house the growing number of residents who have long been shut out of the housing market.

But in Toronto, developers have less incentive to build purpose-built rental properties because demand is so high from investors looking to buy pre-construction condos.

Additionally, many potential buyers cannot afford a home, as the typical sale price is over $1 million in the Toronto area. Condos are relatively cheaper.

The sharp rise in construction costs has also been a factor for developers. CMHC said costs have risen 22% year over year. These expenses, along with rising interest rates and higher land costs, “appear to be making” purpose-built rental construction in Toronto “less and less tenable,” according to the report.

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Due to the high demand for pre-construction condos, it is easier for developers to quickly recoup their costs on them. Once a condominium is completed, buyers close their units and the developer gets paid.

“You sell and you’re done,” said Dana Senagama, CMHC’s senior specialist for the Toronto region.

With a purpose-built apartment building, however, developers face a longer period to recoup their costs. Renting a building can take more than a year, and even then this does not cover all development costs. “You kind of have to wait a long time to recoup that cost,” Ms Senagama said. “So it’s just not attractive.”

The CMHC report looked at the proportion of new high-rise units that are rental apartments versus condos, and said Toronto was the only major urban center where condo construction exceeded rental apartment construction in first half of the year compared to the average for the previous year. five years. Purpose-built housing starts accounted for 10.7% of Toronto high-rise housing starts in the first half. In the previous five years, the average was 17.4% for the first half.

Montreal also posted a decline in purpose-built rental construction over the past year. But overall, housing starts accounted for 67.6% of high-rise housing starts in Montreal in the first half of this year. This figure is higher than the previous five years, when the average was 61.2%. Similarly, in Vancouver, Ottawa, Calgary and Edmonton, developers are turning to purpose-built rentals.

For Toronto, this year’s housing starts marked the lowest level since 2017. The CMHC report said the decline suggests “some builders may be pausing to reassess the feasibility of development.”

The slowdown comes as monthly rental rates soar. The average condo rent hit $3.57 per square foot in the second quarter of this year, according to condo research group Urbanation Inc. The average monthly rent for a one-bedroom condo was $2,182. $ in the Toronto area.

The demand for rental housing has increased due to several factors. Potential buyers continue to either rent or look for a place to rent, as they are no longer eligible for a home loan, now that the cost of borrowing has skyrocketed. Additionally, international students and Toronto workers are back in the city as most government restrictions related to COVID-19 have been lifted.