Toronto real estate developer Fitzrovia launches $1-billion fund to build up city’s rental stock

On the edge of one of the country’s most expensive neighbourhoods, Fitzrovia Real Estate Inc. has launched a 49-storey apartment tower meant to showcase the role rental properties can play in solving the housing shortage that plagues major Canadian cities.

Fitzrovia, which says it is focused on the rental market, recently made its first investment using a new $1.1-billion fund backed by pension plans to acquire the rights to redevelop a 24-storey office building on midtown Toronto’s St. Clair Avenue West, next to what real estate agents describe as the city’s “exclusive” Forest Hill community.

“We plan to provide homes for downsizers and young families, who are underserved in the rental market,” said Adrian Rocca, founder and chief executive officer of Fitzrovia, in an interview last week. Many of the new building’s 600 units will be two-bedroom and three-bedroom apartments. The developer plans more projects on a similar scale with its recently raised Fitzrovia DevCore Fund LP.

Fitzrovia, backed by several of the country’s largest pension plans, owns a $9-billion portfolio of eight apartment buildings and 15 projects in various stages of development. Holdings include high-end rentals, student housing and renovated older apartments in downtown Toronto.

The building on St. Clair Avenue West is owned by a German family and is occupied by the Ontario Ministry of the Environment. The lease expires next year and the provincial ministry does not plan to renew.

Fitzrovia negotiated a 100-year lease on the property, a “renting to build rentals” contract that Mr. Rocca said is relatively common in Europe but rare in developments in Canadian cities. Fitzrovia requires variances from municipal zoning laws to tear down the office tower and build a taller apartment building, something the city has already approved on nearby arteries such as Yonge Street.

To attract parents with young kids and former owners of Forest Hill mansions, Fitzrovia’s project includes a rooftop pool, a virtual health care facility run by the Cleveland Clinic, an in-house preschool called the Bloomsbury Academy, an indoor basketball court and a dedicated dog spa.

Fitzrovia is breaking ground at a time when rental and condominium development in Toronto has stalled, in part due to last year’s spike in interest rates and rising construction costs. Not a single developer broke ground on a new rental building in central Toronto in the three months ended Sept. 30, according to data from Canada Mortgage and Housing Corp.

In the first three quarters of the year, builders began work on 922 rental units, down 76 per cent from the same period last year, according to the data.

For condos, which are individually owned, starts are down 53 per cent in the first three quarters of the year compared to the same period in 2023, with 7,200 units being developed, according to condo research firm Urbanation. In a report last month, Urbanation president Shaun Hildebrand said: ”Completions for both condos and rentals will begin to fall dramatically in the coming years given the latest trends for construction starts.”

Fitzrovia is one of several developers reworking Toronto office buildings for homeowners. In anticipation of increasing housing demand and a continued glut of space for white-collar workers, H&R Real Estate Investment Trust HR-UN-T recently refiled plans for two towers, cutting space for offices to make room for more condos.

H&R added 349 condo units to a planned development at 145 Wellington St. W. in downtown Toronto, bringing the building to 861 units while eliminating 12 floors of office space. The REIT also added 350 units to plans for an 836-unit property at 55 Yonge St., at the expense of offices.

Fitzrovia’s support from large pension plans reflects a shift to residential real estate investments by all major fund managers, according to a CIBC Capital Markets study published on Friday.

Over the past decade – a period that includes the COVID-19 pandemic – pension plans increased their investments in residential real estate (such as apartment buildings) and industrial properties (such as warehouses) while trimming exposure to shopping malls and office buildings, CIBC said.

Investments in residential properties rose to 18 per cent of a typical fund’s real estate holdings in 2023 from 11 per cent in 2013, while industrial real estate investments jumped to 25 per cent of property holdings from 7 per cent a decade earlier. Investments in office properties fell to 23 per cent from 37 per cent of holdings 10 years ago. Overall, pension plan commitments to real estate remained constant over the decade, at around 13 per cent of assets.

The federal government has made rental development a top priority in its quest to create more affordable housing. It cut the federal sales tax on all rental construction projects that begin by 2030 and are completed by 2035.

Fitzrovia is one of many real estate developers lobbying the city of Toronto, the province of Ontario and the federal government to reduce development charges and other government fees.

Development charges, which the city levies on developers to help cover costs of providing infrastructure to new buildings, have been on the rise. This year, Toronto increased the rate by 24 per cent for rental bachelor and one-bedroom apartments. Development charges now account for about 9 per cent of total development costs, Mr. Rocca said, up from 7 per cent in 2019.

As of June, Toronto’s development charge for a rental bachelor or one-bedroom unit is $33,497 compared with $26,978 previously, according to the city’s website. For a rental two-bedroom, the current charge is $48,299 up from $38,899.

Under the federal government’s apartment building program, developers are eligible for loans with cheap interest rates if at least 20 per cent of their new units meet the government-approved definition of affordability.

CMHC’s definition of affordability is units that can be rented for less than 30 per cent of median household income of all families in the city where they are being built. In Toronto, that amount is $99,540, according to Statistics Canada.