Reports indicate an uptick in vacancy, but market fundamentals are strong
In January, the Canadian Mortgage and Housing Corp. released a report saying purpose-built rental vacancy rates in the Kitchener-Cambridge-Waterloo region — a market largely driven by students — have hit a high not seen since 1993.
Despite that fact making an attention-grabbing headline, multifamily operators in Canada’s student-centric rental markets remain bullish on the asset class. They say the recent softening will be short lived.
Visa caps not the sole culprit
The drop in occupancy and, subsequently, rental rate growth in markets such as Kitchener, Waterloo, Guelph and London often is linked to the recent caps put on international student visas. But there is one arguably more impactful factor at play: the high number of recent condominium deliveries flooding the market with rental stock.
“Certainly there has been some rent pressure in that space,” Michael Tsourounis, chief investment officer at Hazelview Investments, told Green Street News.
“It has been more targeted towards the higher end of the rental universe, so brand new product that’s delivering today, as we’ve had a number of new purpose-built rentals — which is still very a small component of the actual amount of supply that’s been added into the market — and a lot of condo deliveries roughly around the same time which are being rented out by owners/investors.”
Development, however, has slowed significantly in the past few years, with very few multifamily projects breaking ground in 2024. This is setting the stage for supply constraints in the coming years.
“Canada is fundamentally undersupplied in housing, with a 390,000-bed shortfall in [purpose-built student accommodations],” Aly Damji, managing partner of real estate at Forum Asset Management, told Green Street News. “Compounding the issue, only approximately 26,000 additional beds are currently in the national development pipeline — a figure far too small to meet the growing demand.”
As such, the ongoing softening is not as concerning for investors as some headlines may report. Hazelview operates rental apartment buildings near several post-secondary schools in Canada but hasn’t seen vacancy rates come anywhere close to a worrisome level.
“Our vacancy in Canada has historically stayed well below 5% for decades,” Tsourounis said. “When we look at the U.S., occupancy rates have gone down to 94%, 92%, high 80%, and even in those markets they still build new supply, so I think that just shows how tight the Canadian market was.”
Tsourounis added that it’s important to contextualize demand in Canadian markets relative to supply, noting that “it was so imbalanced that even when you pull demand back, you still have a pretty healthy relationship.”
At Forum, Canada’s largest provider of purpose-built student accommodations, its student-housing portfolio is 98% occupied for the 2024-2025 school year. The firm doesn’t expect those numbers to change meaningfully anytime soon.
“Guelph, as an example, had a first-year residence wait list of over 1,300 students, with the student-housing situation being described by CTV News as ‘ The Hunger Games,‘ ” Damji said. “Out-of-province enrollment increased 19.3% at U of G, and domestic first-year enrollment increased 47.9%.”
Strong domestic demand
The message is clear: Market fundamentals remain strong in student-centric markets. And domestic student enrollment is a large part of that.
“We are not dependent, from a student-housing standpoint, on international students,” said Jonathan Turnbull, head of Canada for investment-management firm Harrison Street during a recent Bonard student-housing webinar.
“Eighty percent to 85% of the residents in our properties are domestic students. Given the manner by which the domestic students go to universities — they don’t just go to the local town; they actually go abroad provincially and within the province — we have this strong base of domestic student population that could offset some potential international disruption.”
This, however, largely applies to markets with proximity to universities rather than colleges, the latter of which rely much more heavily on international student enrollment.
“We think there’s still too much volatility amongst the colleges, so we’re very much believers in [targeting] the larger universities, which have a more consistent growth pattern of underlying enrollment and better sustainability during difficult times,” Turnbull said.
Damji agreed, noting that Forum’s investment strategy has safeguarded against this.
“Forum has strategically developed and purchased PBSA assets in close proximity to some of Canada’s top public universities,” he said. “This strategy has provided meaningful insulation to the impacts of the international study permit cap, which has primarily affected private institutions and colleges.”
Rental rate improvement is coming
Markets all across Canada have seen rental rate growth slow in recent months. But stable demand and a pending supply cliff are setting the stage for healthy gains.
Turnbull predicts 5% to 7% rent growth for the year, and Damji expects prices to continue to rise in the near future. But Tsourounis said he expects to see the upward pressure on prices really kick in around 2027 and 2028, when the lack of construction starts in 2023 and 2024 finally is felt.
As for what investments the operators are looking to make in the future, Tsourounis says southern Ontario and a few other markets remain targets.
“Student markets such as London, Windsor, we have a great portfolio there, as well as Montréal, Ottawa, Edmonton, Calgary and Halifax, in addition to the greater golden horseshoe — all those markets we continue to see good longterm fundamentals in them so I think we’ll continue to invest in those markets,” he said.
Buildings with both multi-bed units for students to share and studios or one bedrooms for students who prefer more privacy are key to serving the full market spectrum, Damji and Tsourounis said.
But Damji notes that, “going forward, un-amenitized and poorly located PBSA assets will be disproportionately impacted by the study permit cap.
“These assets are typically owned by mom-and-pop landlords versus institutional investors,” he said, putting institutional investors in an even more advantageous position.