Purpose-Built Rentals: Why Are They On The Rise?

Purpose-built rentals are properties designed and constructed from the ground up specifically for the rental market. Unlike properties acquired and then adapted for rental use, these buildings are created with features and layouts intended to meet the needs of long-term tenants. They also offer several potential benefits for investors who seek to balance risk and return. 

Over the past decade, starts for this type of housing has quadrupled. They are particularly popular in urban centers like Toronto, Vancouver, and Calgary, driven by factors such as population growth, declining homeownership affordability, and supportive government policies.

Tenant Appeal and Market Demand

The rental market has experienced a shift in demand over recent years, partly due to changing economic conditions and demographic trends. Purpose-built rentals have contributed to a gradual shift in how rental properties are viewed. Renters today may prefer newly constructed homes that offer a range of amenities and a modern living environment. This move towards renting as an active preference, not simply an alternative when unable to buy, is a key contributor to purpose-built rentals being on the rise.

This preference is particularly evident among younger demographics who might prioritize flexible living arrangements over traditional homeownership, and enjoy the greater sense of community that purpose-built rentals can provide. Some choose to continue renting, although owning a property would be possible. There is also a trend for high-net-worth professionals to enjoy the convenience of renting luxury apartments for convenience and flexibility, especially if needing to be fairly mobile. While there is no single formula to capture all tenant preferences, investors can benefit from understanding that properties tailored for rental use may have a competitive edge in markets where tenant quality and lease duration are important factors.

Tailored Design for Rental Use

A key aspect of purpose-built rentals is that their design is optimized for rental occupancy rather than owner occupancy. Developers can incorporate layouts, modern finishes, and amenities that appeal to tenants and general appeal. For instance, the inclusion of energy-efficient systems, open floor plans, and community spaces can enhance tenant comfort. By integrating these features during construction, investors may reduce the need for extensive renovations later on. In contrast, properties that are repurposed for rental use might not fully address the preferences of the modern renter, who increasingly values updated facilities and convenience.

Stable Income Through Long-Term Leases

One of the primary benefits of purpose-built rentals is the potential for more stable rental income. Because these properties are designed to attract tenants who seek long-term housing, offering features and amenities most in demand, lease durations tend to be longer than those typically seen in older rental properties. Longer leases can reduce the frequency of tenant turnover, which in turn minimizes vacancy periods and the associated costs of re-leasing. While market conditions always play a role, data suggest that rental properties built with the tenant in mind tend to exhibit more predictable cash flows, an important factor for investors aiming for steady returns.

Scalability and Portfolio Diversification

Investors seeking to build or diversify a real estate portfolio might find purpose-built rentals appealing due to their scalability. Constructing multiple units within the same development can simplify management and allow for more uniform operational practices. This consistency can be beneficial when applying economies of scale, especially in terms of property management and maintenance. In addition, by focusing on purpose-built rentals, investors can diversify their portfolios within the rental sector. This diversification may offer a measure of protection against market volatility, as a portfolio of well-managed rental properties can deliver steady income even when other asset classes face uncertainty.

Market Considerations and Limitations

It is important to note that while purpose-built rentals offer several potential benefits, they are not without challenges. The initial capital required for new construction is typically higher than that needed for acquiring and renovating an existing property. Additionally, construction projects can be subject to delays, regulatory changes, and fluctuations in building costs. Furthermore, the performance of any rental property is influenced by local market conditions, such as employment trends, population growth, and regional economic factors. Investors must therefore conduct thorough market analysis and due diligence to ensure that a purpose-built rental project aligns with broader investment goals and local housing demand.

A Balanced View of the Investment Landscape

Purpose-built rentals represent a thoughtful approach to addressing the needs of today’s rental market. Their design and construction are aimed at achieving longer leases, lower maintenance costs, and efficient management.  Purpose-built rentals offer benefits that can enhance an investor’s portfolio, but they require careful planning and consideration of market dynamics. Real estate investors should weigh the potential advantages against the risks and upfront costs involved in new construction projects.