Changing Markets: The Decisive Shift Toward Rental

Affordability has long been considered in the context of home ownership. But as rental supply has fallen behind demand, there’s increasingly been discussion around affordable rental and its critical role in helping address scarcity challenges. This shift to rental has been a long time coming. In the Emerging Trends in Real Estate^® 2018 report, we predicted rising affordability concerns in Toronto and Vancouver would lead to the rise of what we called then the “permanent-renter lifestyle.” Six years later, we’re in the midst of a national affordable rental crisis.

The past year saw a collapse in the Canadian condo market, which has long served as a source of future rental stock. Rising costs in the past few years led many condo developers to reduce unit sizes to make project numbers work. This has resulted in an oversupply of small units that, in many cases, don’t serve the needs of the changing rental community, increasingly made up of families, new immigrants, and students.

Demand for rental units beyond the one-bedroom continues to increase across the country. Even with changing federal policies designed to limit the number of nonpermanent residents and international students, immigration will likely continue to drive rental demand. Increasing unemployment rates, especially among younger demographics, will also likely have a significant effect on demand for rental.

With investors moving away from the condo market, capital and development activity have shifted decisively to purpose-built rental and mixed use. And as investor capital shifts toward rental, institutional investors—including pension funds, foreign buyers, REITs, and family offices—are also focusing on growing the rental pool. 

Purpose-built rental starts are on the rise, and the recent trend of declining rents provides evidence of this surge. According to the Canada Mortgage and Housing Corporation’s (CMHC’s) 2025 Mid-Year Rental Market Update, in the first quarter of 2025, advertised rents in Toronto, Vancouver, Calgary, and Halifax declined between 2 and 8 percent compared to the same period a year earlier. 

This softening is leading some in the industry to ask if the rental market could become oversupplied. As one interviewee pointed out when asked about which asset classes will outperform in 2026: “Multifamily is attractive, but it could face absorption challenges.” However, while this surge has moderated rent growth and even led to declines in some luxury segments, mid-market and family-sized units remain in short supply, and structural underbuilding persists.

For institutional investors, family offices, and global capital looking for scalable, impact-driven opportunities, the Canadian purpose-built rental market isn’t just a defensive play—it’s a growth engine for the next decade.

Significant policy changes are also supporting this shift to a rental economy. In the last year, federal, provincial, and municipal governments have introduced policies designed to incentivize the building of rental units and improve housing affordability.

The CMHC is, in many respects, leading the way. Developers and financial backers are increasingly relying on support from the CMHC to enable large-scale rental construction. A growing number of these projects are linked to affordability programs that incentivize the creation of energy-efficient, accessible, and affordable housing units. In its 2025 Mid-Year Rental Market Update, the CMHC notes that since 2017, over 200,000 purpose-built rental apartment units have been funded through its multi-unit mortgage loan insurance products and the Apartment Construction Loan Program.

Through its National Housing Co-Investment Fund and Affordable Housing Fund, the CMHC has also been providing significant support for nonprofit housing providers. Programs such as these are enabling nonprofits to develop affordable housing that’s both energy efficient and community focused. With the support of these initiatives, many nonprofits are achieving greater levels of affordability than private developers.

In its platform released in March 2025, the now-elected federal Liberal party included plans to reintroduce the tax credit for multi-unit residential buildings (MURBs), first implemented in 1974, and ended in 1981. MURBs are low- and high-rise apartment complexes, condos, and townhouses designed to house multiple families or individuals. 

The idea behind incentivizing MURBs is to shift condo investors toward rental development by offering tax incentives, low-interest loans and grants, streamlined approval processes, and changes to zoning and land-use policies. This approach also encourages professional management of rental units, which could be attractive to investors. Many interviewees felt a refreshed version of this policy could represent a significant step toward improving affordability by helping meet demand in urban areas, stabilizing rents and using land more efficiently.

In April 2024, the federal government announced certain rental housing projects would be exempt from the new excessive interest and financing expenses limitation (EIFEL) rules, allowing developers to deduct a greater portion of their interest expenses. Several interviewees expected that in the 2025 federal budget, these exemptions would be broadened to include a wider range of purpose-built rental and affordable housing projects, providing additional after-tax profitability for leveraged developments.

At the municipal level, several jurisdictions have introduced or expanded development charge relief in the last couple of years. For example, in 2024, the City of Toronto established a new purpose-built rental housing incentives stream that provides indefinite deferral of the municipal portion of development charges on projects that meet affordability criteria. In January 2025, the City of Mississauga passed a motion to reform development charges for eligible rental projects.

There are also innovative programs being developed by Canadian banks to support rental construction. One bank interviewee is leading an initiative where the government contributes capital to a fund managed by the bank. This fund is designed to provide low-cost loans to developers, with CMHC incentives layered in to support affordability. The structure helps developers maintain their margins and supplies affordable housing. This model is already being piloted and involves partnerships with nonprofits that have development expertise. 

While these policy measures and programs are important, there was widespread feeling among interviewees that these are not enough—especially as more rental stock comes online in the next few years. One interviewee put it bluntly: “The government is the big problem right now. They’re too dependent on development charges. . . . No one can define ‘affordability’. . . . Government needs to help reduce the cost of development.”

Accelerating Approvals and Streamlining Processes

One recurring idea put forth by interviewees is acceleration of timelines to get approvals, because, as one interviewee put it, “Time is money.” There are signs of progress on this front across the country, but more needs to be done to simplify, clarify, and consolidate city-building rules to improve the end-to-end development approvals process and streamline housing delivery.

The City of Vancouver, for example, recently updated its development approvals process by rolling out standardized zoning district schedules for low-, mid-, and high-rise apartment buildings. If approved, this initiative would allow many property owners to bypass individual rezoning applications and move straight to the development permit application. The goal is to cut processing time and related costs, while accelerating housing delivery in well-connected, walkable communities near transit.

Innovative Infrastructure Financing: Municipal Utility Districts

Several interviewees recommended leveraging municipal utility districts (MUDs) to raise bond-like vehicles for infrastructure funding. If municipalities were to accept municipal agreement bonds in lieu of lines of credit, this would eliminate significant upfront infrastructure costs from the price of homes, making projects more affordable. Repayment could be structured through utility charges, property taxes, or special assessments over 20 to 30 years. This approach would require no new government spending and would free up capital, with the benefit of not passing these costs on to homebuyers upfront.

HST Relief and Rebates on New Homes

While this idea is not new, several interviewees highlighted the importance of lifting or rebating the provincial portion of the harmonized sales tax (HST) on the purchase of newly constructed or substantially renovated homes. For example, buyers of new homes in Ontario can receive a rebate of up to $24,000 on the provincial portion of the HST. If governments were to remove or rebate the provincial sales tax on new or substantially renovated homes for a defined period, increased economic activity and liquidity for consumers would likely follow.

Broad-based Corporate Tax Cuts

Broad-based corporate tax cuts to enhance Canada’s competitiveness and attract both domestic and foreign capital were also recommended by interviewees. Lowering the overall corporate tax rate would likely make Canada a more attractive destination for investment, including in the real estate and housing sectors. This could encourage both local and international developers and investors to deploy capital in Canadian housing projects, increasing supply and supporting affordability.

1031-like Exchanges

Interviewees also suggested the introduction of a Canadian equivalent to the U.S. 1031 exchange, which allows for the deferral of capital gains taxes when proceeds from the sale of real property are reinvested in similar property. This would likely incentivize reinvestment in housing and real estate, keeping capital circulating in the sector and supporting ongoing development.

With all this attention on rental, several interviewees questioned what this will mean for the apartment service environment. Leading companies are already using smart building systems, customer relationship management (CRM), and digital platforms to improve operational efficiency and enhance the tenant experience. As more rental properties come on stream, developers will need to consider improved digital services for apartment management. These could include turnover, repairs, security and ancillary services such as pet care and concierge.

In turn, this growing focus on the rental market is bringing sustainability into sharper focus for some. As one interviewee explained, energy efficiency investments in apartment buildings can directly lead to higher net operating income and improved cash flow—positively affecting a project’s credit quality.

There are also larger strategic changes to be aware of as part of the broader move away from single-family home ownership. Emerging models such as co-ownership, rent-to-own, and digital lease platforms are becoming more popular and could become increasingly so in the context of youth unemployment and an aging demographic. For example, one of this year’s interviewees facilitates shared ownership through downpayment assistance. Another interviewee was keen on the potential for adapting low-rise housing for elderly care through shared models. In the coming years, tax and policy changes will be needed to support these new models and make sure they’re not disincentivized.