Buy or Build?

Understanding Apartment Building Values in the Canadian Market

As the Canadian real estate market fluctuates, apartment investors face a fundamental question: is it better to buy an existing building or build a new one? The answer isn’t always simple, but it usually comes down to one concept that’s ever-present, comparing what you’re paying to what it would cost to build the same thing today. That comparison, your purchase price versus replacement cost, is one of the most reliable measures of value and safety in multifamily investing. In Canada, where construction costs, land prices, and municipal fees have soared, this benchmark has become even more important.

Buying an apartment building below its replacement cost means you’re acquiring something that can’t be easily duplicated at your price. That gap, the margin between what you pay and what it would cost to rebuild, represents your margin of safety. It’s the investor’s buffer against market volatility, interest rate shocks, or slower rent growth. When you buy right, you own an income-producing asset supported by the physical reality of construction economics. When you overpay, you’re speculating on appreciation and market sentiment. Understanding that distinction is what separates sound investors from speculators.

The Canadian Cost Reality

Construction costs in Canada have escalated sharply in recent years. Between rising material prices, labour shortages, and regulatory delays, the cost to build new apartments now rivals some of the most expensive markets in North America. According to data from Altus Group and CMHC, the average cost to build a new rental apartment in major Canadian cities ranges from roughly $350 to $650 per square foot. That translates to around $400,000 to $700,000 per unit, depending on the size, height, and finish of the building.

Those numbers also don’t include land, which in major metros like Vancouver or Toronto can add another $100,000 to $200,000 per door, nor do they include soft costs like architectural design, permits, legal fees, financing, and taxes during construction. Together, soft costs can add 20 to 30 percent to your total budget. Add it all up, and a 50-unit mid-rise building could easily cost between $20 million and $30 million to complete in cities such as Toronto, Vancouver, or Ottawa. Even in mid-sized markets like Calgary, Edmonton, or Halifax, total development costs often exceed $400,000 per unit. That’s the new baseline. And it’s what every investor should keep in mind when looking at the asking price of existing buildings.

Why Compare Purchase Price to Construction Cost

The replacement cost of a building sets an anchor for its economic value. If you can buy an apartment complex for substantially less than it would cost to rebuild, you’ve essentially bought wholesale. The property’s income stream is underpinned by the fact that no one could build competing supply at the same cost and still make a profit. Imagine two buildings in Hamilton, Ontario. One is a 1970s concrete mid-rise selling for $300,000 per door. The other is a hypothetical new development that would cost $450,000 per door to build today. That $150,000-per-unit gap represents a 33 percent discount to replacement cost.

Even if rents stagnate for a few years, you’re unlikely to face new competition at that level. Any developer would need higher rents to justify new construction, meaning your existing property has a built-in competitive advantage. On the other hand, if you’re buying for the same or more than replacement cost, you’re effectively paying “new-build pricing” for an older asset with shorter remaining life and higher maintenance costs. Unless the property offers strong redevelopment potential or clear rent growth opportunities, that usually signals poor value.

Market Examples Across Canada

In Toronto, purpose-built rental construction costs are among the highest in the country. It’s not unusual for all-in development costs to exceed $600,000 per door once you include land, soft costs, and municipal charges. Older stabilized buildings from the 1960s or 1970s often trade between $400,000 and $450,000 per door. That difference, roughly 25 to 30 percent, represents a meaningful margin of safety. If cap rates move up (see section on investment terms), or if financing conditions tighten, your investment still rests on a solid foundation: you own something that can’t be replicated for the same price.

In Calgary, the spread is narrower. Construction costs for new mid-rise rentals typically range from $350,000 to $450,000 per unit, and Class A assets often sell in the $375,000 to $425,000 range. The decision here is more nuanced. When the buy-versus-build spread is tight, investors need to pay closer attention to rental growth potential, available land, and absorption rates. If it’s easy to add new supply, older buildings can lose pricing power. In smaller Ontario or Prairie markets, the story looks different again. It’s still possible to buy apartment buildings for $200,000 to $250,000 per door, while replacement costs might be around $400,000. That wide gap makes these markets appealing to value-focused investors. Even if rent growth is slower, the downside protection is much greater. You’re not relying on speculation or compression in cap rates, you’re buying below intrinsic value.

Replacement cost is more than a number, it’s an indicator of market balance. When sale prices fall below replacement cost, it signals that investors can buy existing assets for less than what it would cost to build new. This often discourages new construction, tightening supply and eventually supporting rent and price growth. When sale prices rise well above replacement cost, it’s a sign that markets may be overheated. Developers rush to build, supply increases, and returns can compress. In that sense, replacement cost acts as a natural stabilizer in the real estate cycle. It helps investors answer a simple but critical question: am I paying for real value, or am I paying for momentum?

The Real Costs of Building in Canada

While new construction offers control, efficiency, and design flexibility, it also comes with serious challenges in the Canadian context. First, there’s time. Entitlement, zoning, and permitting can stretch over two to three years in many municipalities. Then there’s the actual construction period, which can take another 18 to 24 months. During that time, developers face financing risk, material cost inflation, and uncertainty about where interest rates and rents will be when the project is finished. Second, there’s cost volatility. Lumber, steel, and concrete have all seen price spikes in recent years. Labour shortages and unionized trades further add to costs. Even a small overrun can erase profit margins. Third, there’s the complexity of financing. Construction loans typically cover 70 to 80 percent of cost and carry variable interest rates, so you’re exposed to fluctuations throughout the build. Carrying land, paying consultants, and navigating delays all add to the burden. Building new certainly has its place, especially for developers with deep expertise and strong local relationships, but for most investors, the buy-versus-build analysis often tips toward acquisition.

The Case for Buying Existing vs Building New

When you buy an existing building below replacement cost, you’re capturing built-in value from day one. You also get immediate cash flow and a stabilized tenant base. You can reposition the property through upgrades, better management, or energy retrofits at a fraction of the cost of new construction. For example, suppose you acquire an older 40-unit property in Ottawa for $10 million, or $250,000 per door, while replacement cost sits around $450,000 per door. You spend $2 million on renovations, upgrading kitchens, common areas, and mechanical systems, bringing your total investment to $12 million, or $300,000 per unit. You now own an asset that’s functionally equivalent to a new building, but at a 33 percent discount to what it would cost to build. That spread represents your safety net and your upside. Even if the market softens, your basis is low enough that you can weather turbulence while still earning strong cash flow.

There are situations where building new makes sense. Developers who can secure well-located land at a favorable price, access CMHC-insured construction financing, and deliver high-efficiency units at scale can create long-term value. New construction can also provide tax advantages, lower maintenance costs, and premium rents. But the risk profile is different. Your return is back-weighted, you invest large amounts of capital before generating income. The key is understanding that building is a business model, not just an investment. You’re in the business of creating product, not just owning it. That distinction matters.

At the core of every successful real estate investment is the idea of a margin of safety, the difference between what something is worth and what you pay for it. It’s a principle borrowed from value investing, but it applies just as strongly to real estate. In practical terms, the margin of safety is the gap between your purchase price and the cost to replace the building. The larger that gap, the safer your investment. If you can buy a building for $350,000 per unit when it costs $500,000 to build new, you have a $150,000-per-door cushion. That cushion protects you if rents decline, expenses rise, or cap rates expand. You can hold the asset, refinance it, or sell it with confidence knowing you own below replacement value. Investors who buy without a margin of safety are betting on perfect conditions, endless rent growth, stable interest rates, and low vacancies. Those bets work until they don’t. Investors who insist on buying below replacement cost aren’t betting; they’re investing.

Putting in All Together: A Simple, Durable Investment Policy

Whether you’re investing in multifamily buildings in Toronto, mid-sized markets like Halifax, or smaller cities in Alberta and Saskatchewan, the buy-versus-build analysis should always be part of your process. It’s not just a rule of thumb, it’s a discipline. If you can buy with a meaningful margin of safety between what you pay and what it would cost to build, you’ve reduced risk and increased your long-term return potential. You’ve positioned yourself on the right side of construction economics. In a market where development costs continue to climb, buying well below replacement cost is not just a smart move, it’s one of the few timeless strategies left in real estate investing. The buildings may change, the interest rates may fluctuate, and the headlines may come and go, but one truth remains: value is built on cost. When you buy for less than it costs to build, you’re investing in something that makes sense, in any market, and in any cycle.