Canada's building more apartments than it has in years. Can the trend continue?

It might be hard to believe but last year, more new rental apartments were built in Canada than any year in the previous three decades, data from the Canada Mortgage and Housing Corporation (CMHC) shows.

This new-found supply didn't come close to keeping up with demand, as cities across the country saw rental prices skyrocket and vacancy rates plunge. 

The level of construction also varied region-by-region. Some cities like Calgary saw a big boost in new apartments last year, while others like Saskatoon saw a plateau, or in Toronto's case, even a decline.

But while every market is different, in recent years the high-level trend in Canada has been steady growth in the construction of new rentals.

Still, it's unclear whether it can continue at the same pace. The number of Canadians who rent is growing faster than the number who own their homes, as high prices and rising interest rates push more people to rent rather than buy. People moving to Canada — and within Canada — have also added pressure to different markets, and as immigration ramps up as a way to fill critical labour shortages, the demand for rentals is expected to continue to grow. 

While surging demand for rentals could spark a further boom in this type of development, some warn that building apartments is a tricky financial proposition at the best of times, and that high interest rates and inflation could slow down momentum just as the need accelerates. 

The recent rise in rental construction has been driven, at least in part, by the economic conditions of the last few years. Interest rates were low, while rents have generally been on the rise. 

Some experts worry this era may have already come to a close, amid the high cost of borrowing, labour and construction materials. Each factor drives up the price tag for builders.

"A builder who would have thought it's a good idea to build a high-rise multi-residential unit building in downtown Toronto, say, in 2021, might be looking at the environment today and say, 'Oh, it's not quite as attractive now,'" said Bob Dugan, chief economist with the CMHC.

Another problem: while rents may be on the rise, there's a limit to how much people are willing (or able) to pay for something they don't own.

That means developers have to deliver rental buildings at a lower cost than condos to make the projects feasible, said Heather Campbell, chief operating officer of Kitchener-based Vive Development. It's all the more difficult amid the inflation pinch on pocketbooks. 

"It's a challenging environment today," said Campbell, who said her firm has no plans to move away from rentals, but is being more careful about new acquisitions and potential projects.

The problem is affecting all types of multi-residential development, but CIBC economist Benjamin Tal expects rental developers will be hit hardest, in part because — unlike condo builders — they don't have buyers' deposits as a source of cash. 

Tal believes new rental projects will be put on hold as builders wait for sunnier days to proceed.