Can micro-units solve Canada's housing crisis?

As several major metropolitan areas in Canada face growing housing shortages, the demand for rental apartments is at an all-time high.

In Vancouver, the cost of owning a house or condominium rose by 60 percent over the past three years, according to the Real Estate Board of Greater Vancouver – while residents’ incomes have remained fairly flat. This discrepancy makes Vancouver the third least affordable place to buy a home in the world, according to a 2018 study by Demographia – and it’s why the city’s rental market is so hot.

Vacancy rates in core neighborhoods are at less than one percent as of August 2018, with some at capacity, says David Venance of JLL’s Capital Markets Multifamily team in Vancouver.

But investors and developers have identified a potential solution, and an opportunity, amidst the crisis: smaller apartment units.

“Less square footage means more units, which means more of a dent in the housing crisis – and more of return on investment for building owners,” Venance says.

Ranging from 300 to 400 square feet, these so-called “micro-units”, complete with fold-down beds, fold-down tables, and creative storage options, are growing in popularity in Vancouver. Reliance Properties’ Hudson apartments in downtown Vancouver, which has studio layouts ranging between 250 and 380 square feet, have been met with high demand.

For-sale properties are also trending smaller, and seeing high demand. “Micro condo” developments are selling out during presale in Downtown Vancouver, Venance says. And nearly half of baby boomers in British Columbia plan to downsize the property they own by buying a condo or townhouse, according to a Royal LePage survey of Canadians born between 1946 and 1964.

“Living in Vancouver, you only need a 300-square-foot home, because you have a three million-square-foot backyard,” he says.

An influx of foreign capital – particularly from China — willing to pay top dollar has further exacerbated the housing crisis in Vancouver.

While city data shows that foreign buyers only own about five percent of the housing stock in the Vancouver metropolitan area, the numbers are several times as high for new condominiums, according to an analysis by Simon Fraser University.

Vancouver’s government has recently instituted new taxes and measures aimed at disincentivizing foreign buyers. Some municipalities are going as far as to remove the possibility of sales entirely, zoning areas solely for rentals to ensure apartment supply does not dwindle further. In May 2018, British Columbia enacted legislation to give municipalities the power to zone properties for rental-only developments with Burnaby becoming the first city to enact it.

Some think even more needs to be done, including re-zoning land to allow for denser high-rise buildings. The majority of land in Vancouver is zoned single-family, making approvals for micro units tricky.

But the rewards could be high. Projects of this type are likely to lease quickly and hold very low vacancies – as long as they are located in walkable neighborhoods with excellent transit options, Venance says. In particular, apartments in trendy locations designed to attract millennials who eat out a lot, spend time outside, and want easy commutes to their workplaces, will do well. Most millennials can’t afford to buy a home in or near Vancouver – but that doesn’t stop them from moving there.

“People are still moving in—they expect a million more residents by 2041,” Venance said.

In Toronto, a constrained housing market has also tightened the rental market.

“We’re sitting at one percent vacancy in the GTA,” says Michael Betsalel of JLL’s Capital Markets team.

Land costs in Toronto are often prohibitive for developers who can build for less in other Canadian markets or in the United States. This makes new developments of micro unit complexes harder than in other cities. Instead, owners of existing multifamily buildings have started adding density on former green spaces or parking structures.

“The majority of new, purpose-built rental supply is being constructed on existing rental sites, where a big grassy yard, tennis court or a large exterior parking lot can be utilized for additional density,” Betsalel says. “It’s essentially free land, the infrastructure is there – build another tower.”