Sustainable multi-family real estate (residential property with more than one housing unit) is gaining traction as an investment option in Canada, but hurdles remain.

Through a sustainability lens, it makes sense. According to the United Nations, the construction and operation of buildings contributed 37 percent of global greenhouse gas (GHG) emissions in 2022.¹

The financial calculus is more nuanced, although industry participants interviewed by The Analyst suggest a supportive framework is slowly falling into place.

Anecdotally, industry participants report that, after years of incorporating sustainability in other real estate segments like office and industrial, institutional investors are showing interest in sustainable multi-family property such as condominiums and apartment buildings. 

Partly, it’s a response to demands for more sustainable investment practices from stakeholders like pension beneficiaries and regulators. 

To some degree, it also reflects increasing evidence that unsustainable real estate assets could become stranded during an institutional investor’s typically long holding period due to climate change’s impact on the insurability of and demand for those properties. 

Today, it’s also a matter of scarce capital. Private market fundraising—not just for real estate deals—has been difficult for a couple of years due to tight liquidity and the fact that many institutional investors have already reached maximum exposure to private assets. In that situation, sustainability becomes a differentiator for institutions allocating scarce capital. 

“When you think of a real estate project as a capital market asset, you want it to be attractive to the widest possible pool of buyers, partners, and financiers when it enters the market,” says Stephen Job, Vice President at apartment developer Tenblock. “We have to anticipate where the capital markets will be ten years from now. All the trends indicate there will be more environmental and policy reasons to have resilient sustainable assets.”

Tenant preferences are instructive

In Canada’s challenging rental market—where affordability and availability remain key concerns—sustainability is not yet a top priority for most residents when choosing a unit. However, interest is growing. According to a 2024 survey of more than 20,000 Canadian multi-family building tenants, 39 percent expressed willingness to pay more for a unit with net-zero carbon emissions. While 87 percent indicated they wouldn’t pay more than 2 percent of their rent for this feature, the data provides insight into resident expectations and potential future trends.²

The survey offers direction to developers on where to focus their sustainability efforts. For example, 2023 results revealed that 60 percent of tenants would accept temporary inconvenience to allow for renovations that reduce a property’s carbon footprint. This aligns with where the industry’s sustainability efforts are already focused.        

In Canada, a significant portion of the multi-family housing stock is between 50 and 70 years old, presenting a prime opportunity for energy-efficient retrofits. Using concessional financing and other government incentives, targeted upgrades—such as replacing outdated heating systems and improving insulation—can cut over 90 percent of a building’s GHG emissions while delivering a net internal rate of return (IRR) of 6 to 12 percent for investors who buy, retrofit, and resell, says Pierre-Laurent Macridis, Manager, Private Investment Research at Rally Assets, an impact investment management firm. 

In robust multi-residential markets like Toronto, Montreal, and Vancouver, investors who hold on to the retrofitted property as an operating asset with the intention of capitalizing on expanding valuation multiples can see net IRR potential ranging from 10 to 16 percent, Macridis continues. 

Macridis says greenfield projects (those starting from scratch without prior development) remain less attractive than deep retrofits of older-stock housing because, for many investors, the perceived higher upfront costs and risks of a completely new sustainable build may offset any operating gains.

In Canada’s challenging rental market—where afford ability and availability remain key concerns—sustainability is not yet a top priority for most residents when choosing a unit.”

Sustainable incentives?

In recent years, governments have offered a growing range of incentives for sustainable real estate, whether brownfield (projects on previously developed land) or greenfield. One of the most popular is the “MLI Select” concessional loan insurance offering of Canada Mortgage and Housing Corporation (CMHC). The financing is available for both existing properties and new construction, with eligibility based on the energy efficiency, accessibility, and affordability of a project. 

Accompanying the incentive carrot is the stick, as municipalities add sustainability requirements in building codes, often requiring retrofitting of non-compliant buildings. 

Such regulatory moves reflect growing social license, or community support, for sustainable real estate. Sustainable projects may see expedited municipal permitting processes that otherwise can take so long that they render original project cost assumptions obsolete.  

On the other hand, there is pushback that such sustainability regulations add to the difficulty in meeting already-challenged affordable housing construction targets.

But at least one company says that’s a false choice. Heartwood Trust raises equity capital for multi-residential projects designed to be climate resilient in a way that’s scalable. In their projects, they set quantitative targets for the carbon neutrality of both construction and operation that are expected to drive financial returns.  

“If it’s done intelligently, it makes a better investment,” says Heartwood’s co-founder, architect David Constable. “The lower operating costs can more than offset the upfront cost if it’s done in a data-driven way.”

 Heartwood invests in buildings designed for projected 2050 climate conditions to avoid the risk of a costly retrofit or deteriorating structural resilience. The resilient design is core to the intended investment appeal of the projects, says Tim Blair, also a co-founder. And the cost savings from better energy efficiency can be passed on to tenants. You have an asset that’s ready for the 2050 climate. That really creates value for your investors and your tenants over the long term.”  

Job says the biggest hurdle facing more widespread development of sustainable multi-family real estate is taxes and development charges—something only governments can change. There’s no shortage of equity capital looking to build and own sustainable apartment buildings in great locations in Toronto and beyond,” he says. “You just can’t get past the fact that revenues still aren’t high enough to clear that cost hurdle.

Job acknowledges the federal, provincial, and municipal governments are beginning to recognize this and take steps that are making some projects at the margin viable. But more needs to be done.

 “We’re close,” he says. “There seems to be alignment between the three levels of government, but policy still hasn’t come as far as the talking points and speeches.”

2 simplydbs. 2024 Canadian Multi-Residential Satisfaction Study. Accessed January 23, 2025. https://simplydbs.com/cmrs