2BR and 3BR apartments need cross-subsidy
Data from Hani Lammam of Cressey
Inside The Cost-Profit Analysis Of Three-Bedroom Units In Metro Vancouver. Howard Chai, Storeys, October 2024.
The city of Vancouver requires that market rental projects have a minimum of 35% apartments with two or more bedrooms. Strata projects must have a minimum of 25% apartments with two bedrooms, and a minimum of 10% apartments with three bedrooms. Family Room Policy.
The problem is, the 3BR and even 2BR apartments end up being cross-subsidized by the studio and 1BR apartments. This raises the floor for rents on studio and 1BR apartments.
"The real problem, though, is not that we don't make money off of the three-bedroom units, it's that we have to drive the revenue [higher] on the one-bedroom units in order to subsidize the three-bedroom units," Hani Lammam explains. "It's not good enough not to make money on it. In order for me to be able to finance the project, I have to average out a return across all of it, so what really happens is the one-beds are subsidizing the three-beds. That's really what happens."
Why don’t market rents for 3BR and 2BR apartments reflect the cost to build them?
Yes, $4,000 a month for an apartment in Vancouver may be an achievable price, but that becomes less true if families have options to rent a townhouse in Surrey or Langley for around the same price.
"Once you get to a certain rent or purchase price, as a buyer, I have options," said Lammam. "The one-bedroom or even two-bedroom apartment appeals to that young, upstart new family, but the moment that family grows, it's hard to stay in an apartment, and I don't think it's the ideal. I don't think a family wishes they can live in an apartment, I think they wish they can live in a house."
As asking rents decline, fewer rental projects are viable
Of course the other headwind here is that asking rents are declining. The February 2025 report from rentals.ca says that the asking monthly rent for a 1BR in the city of Vancouver is $2522. For a 2BR, it’s $3433.
To keep building rental housing as rents decline, we need to reduce costs.