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Calgary developer places big bet on rental apartments

By: Share Crowther, The Globe and Mail

The number of purpose-built rental apartments in Calgary has been in decline since the early 1990s when developers turned their attention to the more lucrative business of building condos.

According to Canada Mortgage and Housing Corp., stock of purpose-built rental apartments in the city, which it defines as “privately initiated, purpose-built rental structures of three units or more,” fell 27 per cent between 1990 and 2016.

While the number of condo units rented out in Calgary over the same period almost trebled, with population growth, the ratio of rental units to people still fell more than any other major city in Canada. Now, despite rental-vacancy rates continuing to soar, real estate developer Strategic Group is putting its faith in rental apartments falling back into favour as it breaks ground on its fifth apartment building in as many years. Furthermore, it’s in planning stages for a further six sites cross the city.

“We decided to diversify our portfolio from a commercial rental portfolio to a residential and commercial rental portfolio in 2013,” says Randy Ferguson, Strategic Group’s chief operating officer. “In light of that, we took some strategic land positions in what we consider to be key neighbourhoods for growth in Calgary: Beltline, Inglewood, Marda Loop, for example.” Strategic has so far built four infill apartment buildings, all in established, inner-city neighbourhoods, all between 50 and 100 units. Its most recent, ONE6 on 16th Avenue Northwest completed in August. Mr. Ferguson describes the initial three buildings as “stable and occupied,” while ONE6 is “soon-to-be stable and occupied.”

Now, Strategic is preparing to begin construction on Marda, a six-storey, 66-unit rental apartment building on the corner of 34th Avenue Southwest and 20th Street SW in the neighbourhood of Marda Loop, a site Strategic purchased in 2014.

“We’ve experienced quite a bit of success with our strategy so far, but we’re still refining the way we do things with each new build we undertake,” Mr. Ferguson says. “In Marda Loop, we believe the customer is seeking a more upscale rental product, so that’s what we intend to deliver. We may make some adjustments to finishings closer to completion, depending on what the market tells us they want at that time. The units are also a little bigger, at the larger end, than our downtown apartments.”

The $25-million development, previously a gas station and three single-family homes, will open its doors to renters in the spring of 2019, by which point Strategic hopes to have at least one further rental development project under construction.

“We have six other sites around the city, which are in planning stages for rental apartments, and that’s in addition to any offices, which we may repurpose into apartments along the way,” Mr. Ferguson says. Strategic is currently repurposing one of their Edmonton offices into an apartment building and hope to replicate the undertaking with some of their commercial assets in Calgary. “We have a lot of office space in Calgary, which we feel would be better utilized as residential,” he adds. “That’s a high priority.”

Currently, rental vacancy rates in the city are sitting at over 7 per cent; a 25-year high and 5 per cent above 2013. Variances within the city indicate that southwestern neighbourhoods, with a slightly lower vacancy rate of 5.4 per cent, may be a safer bet for the rental developers.

“This will be the first modern purpose-built apartment building in Marda Loop and we’re confident it will do well,” Mr. Ferguson says. “Marda Loop has a very strong nearby employment district at 50th Avenue and Crowchild, which is a 20-minute walk from our development. We believe there’s demand for this.”

“Marda Loop is one of those neighbourhoods which is evolving into its own personality. It has a vibrant street culture with great amenities, it’s very walkable and has good public transport – meaning more people on streets and fewer people in cars. Those are the neighbourhoods we like to work in; that’s what’s working for rentals in Calgary right now,” he adds.

In addition, Mr. Ferguson says Strategic’s market research “points to an increasing propensity towards renting as opposed to ownership and that’s both in the newer market – the millennial cohort – as well as in the fading market – the baby boomers.”

“The rental spectrum is broadening and deepening. The younger cohort is embracing a ‘sharing economy’ lifestyle; they don’t need to own a car or a home,” he explains. “On the empty-nester side, people are finding they can monetize their real estate investment and redirect it towards travel. In that mature set, there are as many who will buy condos as rent apartments, but both sides are present. That attitude is absolutely clear.” “Alongside that cultural shift, there just isn’t the same drive for home ownership that there once was because the requirements to qualify for a mortgage are more difficult, the down payments are higher and it’s becoming more challenging to buy,” he continues. “We believe people are deciding to put there investments elsewhere.”

Mr. Ferguson also believes migration to Alberta from outside of Canada will strengthen the province’s rental market.

“We’re observing a significantly higher migration of international, new Canadians coming to Alberta than there is existing Canadians migrating here from other provinces. We know those international citizens moving to Alberta have a higher propensity to rent and they’re looking to live within a community of like-minded individuals. We also know they’re looking for walkable, urban centres to set up home.”

Gerry Baxter, executive director of the Calgary Residential Rental Association, agrees – to some extent.

“New Canadians from overseas do tend to become renters initially and home ownership is expensive for young Canadians right now. I’d agree that a lot of people now are renting as a matter of choice because they don’t want the responsibility and rent is still affordable for most people in this city,” he says. “But I’d also add that we know from our own research that 40 per cent of people who move out of rental in Calgary do so to move into their own home. That points to a lot of people still desiring home ownership.”

Mr. Baxter says the ratio of primary and secondary rental units may have shifted in the past couple of decades, but he sees no lack of inventory over all.

“There’s no shortage in rental units in Calgary. Our vacancy rate is still very high. We may have fewer purpose-built apartment buildings than we once had, but there are 55,000 condo units in this city and almost 18,000 of those are rentals. You add that to the overall rental availability and there’s a lot,” he explains.

“That said, we do remain optimistic that things will come back. Right now, the feedback I’m getting from our members is that they’re starting to notice a slight turnaround in the market,” he continues. “There are more enquiries and viewings than there were, say, a year ago and most landlords have stopped offering incentives over and above rent reductions. That’s certainly promising.”

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