The evolution of the $4.4 trillion single-family rental (SFR) sector in the United States serves as a case study to demonstrate how conversions of individually owned single-family homes (SFH) to institutionally owned rental units can provide a dual benefit to renters and investors alike. This strategy creates quality rental housing options for tenants and can generate predictable, recurring cash flows for investor-owners. With time and investment, this sector has the potential to evolve into a professionally managed, institutionally owned commercial real estate (CRE) asset class within the larger rental housing spectrum in Canada as it has in the United States.
This report will demonstrate SFR’s market potential as an asset class within the broader housing CRE sector in the province of Ontario, Canada’s most populous region. This report focuses on 34 markets of various sizes and characteristics in Ontario; however, this SFR strategy may be applied to other regions in Canada and is certainly worth exploring given the housing shortage across Canada and the rising price of single-family homes across the nation.
Therefore, the premise is that a new SFR asset class can 1) provide a solution to the systemic shortage of housing, 2) create a desirable opportunity for an investment strategy in targeted markets.
The benefits of and rationale behind an SFR strategy in the Canadian (Ontario) market include:
- ADDRESSING HOUSING SHORTAGE – Converting, renovating, and densifying single-family home residential
properties as an expedited solution to provide quality housing in a market that has experienced a
chronic shortage. Ontario’s More Homes Built Faster Act passed in October 2022, which is projected
to stimulate housing production by reducing regulatory barriers, making the next two years a
favorable period for entering housing development in Canada.
- IMMIGRATION AS DEMAND ACCELERATOR – Canada is expected to experience the greatest percent
increase in immigration across G7 countries, providing a multiyear driver for heightened rental
demand in an already severely supply-constrained market. In 2022, Canada’s population grew by one
million, largely driven by immigration. Immigration is projected to accelerate due to Canada’s
Immigration Levels Plan for 2023-2025, passed in Q4 2022. This plan aims to welcome roughly 1.5M
more immigrants in the next two years.
- TAILWINDS FOR RENTAL HOUSING DEMAND – Recent increases in interest rates globally have reduced
homeownership by increasing the cost of capital, thereby increasing demand for rentals. These
higher borrowing costs have outweighed the impact of decreasing home prices for would-be
homebuyers. This has stalled home buying in Ontario, however, home prices which had seen
unprecedented growth in the last 5 years, remain out of reach for many Canadians, especially in and
around major municipalities.
- ESG APPROACH – Working with existing housing stock fits an Environmental, Social & Governance (ESG)
mission by bypassing the carbon footprint of new construction while providing housing at more
affordable rental rates than are financially feasible with new construction.
- PROOF OF CONCEPT – The SFR business model has been tried, tested, and proven in the U.S. SFR market
and investors in growing markets such as Ontario can reap the benefits of being early movers or
fast followers, as demonstrated by the early adopters in the U.S. during the last real estate
- INVESTOR RETURNS – Scattered SFR rentals trade at higher spreads than BTR (Build-to-Rent) or conventional, purpose-built multifamily rental developments. Layering on a densification strategy to the acquisition-and-rehabilitation of residential properties via Accessory Dwelling Units (ADU) or substantial renovations can enhance investors returns.