The vast majority of new purpose-built rental housing in Canada relies on CMHC-insured loans to make them financially feasible. In 2024, CMHC estimated that their construction financing programs backed an estimated 88% of new rental starts across the country.
But anyone in the industry will tell you that the terms in which these loans are made available to developers are constantly changing. And I think it's pretty clear that many of the changes being made are intended to push, maybe force, developers into building some percentage of affordable homes as part of their projects.
At the political narrative level, this makes sense: Canada needs more affordable housing. But it's important to remember that homes pegged to below-market rents are not financially feasible to build on their own. So, unless equivalent subsidies are being somehow provided, the remaining market-rate homes will be forced to shoulder the additional costs.
We talk about this a lot on the blog (see inclusionary zoning posts), and I don't see it as an equitable solution. But there's also the problem of it further choking off new housing supply. And my sense is that that's exactly what is happening. It's only getting harder to underwrite new rental housing — certainly in cities like Toronto.
This will have the opposite effect on overall affordability. It also increases the probability that my supply predictions will prove roughly correct. I can't see a world where new rental supply is able to step up and fill the gap being left by new condominiums, a large portion of which was serving as new rental housing.
Toronto is on a path toward a severe housing shortage, and it's very hard for the private sector to do much about it in the current market environment. When that will change remains to be seen.
Cover photo by Darren Richardson on Unsplash
The Financial Times published an article (paywall) over the weekend about the Nobu Hospitality Group.
It stated that they have some 50 restaurants, 40 hotels, and 20 residential projects (i.e. branded residences) either open or in development around the world. One of the first of these branded residences was here in Toronto. And as of July 2024, which was a major liquidity event for the company, it was valued at US$1.3 billion.
According to group CEO Trevor Horwell, their approach always starts with a restaurant: "It's an upside-down business model where the restaurant is the social engine. If we believe a Nobu restaurant can become a genuine social hub for locals, then the hotel and residences can follow."
I like this business model because as we talked about a year ago on the blog, "everything is branded." Knight Frank out of the UK estimates that the number of branded residences around the world is going to go from 611 this year to around 1,020 by 2030. So it seems destined to become a bigger part of our business.
But the other reason I'm drawn to it is because it's a good business to be in. If you own a brand that has value, you can do licensing deals all around the world — which is what Nobu is doing — and not take on the same equity risk that developers typically take on. It's capital-light.
However, the trade-off risk is that you're dependent on the continued attractiveness of your brand. If Robert De Niro ceases to remain involved and/or Nobu just loses some of its cachet over time, then the business won't do as well. But that's true of any hospitality-type business, or any brand for that matter.
Way back when everyone wanted to buy development land, my friend Jeremiah Shamess of Colliers used to always tell me that the only way to do this was to either (1) pay the most or (2) believe in something that others don’t. This — making non-consensus bets — is something I like to talk about a lot on this blog, but what did that mean back then?
Well, when sites were seeing dozens of offers and the market was hyper-competitive, you really had to work to find any sort of overlooked value. Maybe it was an assembly. Maybe it was a density opportunity that others were missing. Or maybe it was a rail setback that the market felt would neuter the site, but that you had a solution for. Whatever the case, believing in something different was hard work.
Today, things are a lot different. The consensus bet would be to not buy development land in the first place, and the non-consensus bet would be to buy. But instead of having to believe in unique unlocks for a site, it’s obvious that the greater obstacle is believing that the market will be there to absorb your space. And if it is there, at what price?
Nobody really knows, and that’s what makes it non-consensus. But as always, non-consensus bets are where the greatest opportunities exist. That was true when the market was booming, and it remains true today.
Cover photo by Alfan Ziyyadan on Unsplash