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Invest in condos? With purpose-built rental unable to keep up with high rental demand, low inventory is driving up rental income for condo owners

For the condo-owner who sees their unit as an investment, there hasn’t been a better time to be a landlord. Rents continue to dramatically increase due to a number of key factors:

  • low inventory
  • not enough purpose-built rentals
  • not enough condo owners willing to rent
  • some potential buyers of condos are renting temporarily, as they save for their downpayments — increasing demand for rentals.

Toronto’s purpose-built rental vacancy rate has continued to drop this year, currently sitting at a nationwide low of 1 per cent. While some industry players have suggested that condo rentals could help meet the rental demand that purpose-built isn’t satisfying, one expert says that’s not going to happen anytime soon.

“The trouble for the market, we’re learning, is that condos are unable to close the gap between today’s level of rental demand and the amount of new purpose-built supply, despite representing 94 per cent of the net increase in rental units over the past decade in the GTA,” writes Urbanation senior VP Shaun Hildebrand, in a recent note.

 

New projects, both condos and purpose-built for rentals, may not be able to fulfil demand for rental units — putting pressure on rents to increase even further.

 

A mere 8,485 units were added to the Toronto rental market in 2017, an increase that is 44 per cent lower than 2016’s 15,288 unit growth. Hildebrand says there has been a serious lack of expansion when it comes to the city’s condo rental supply.

“The 5,908-unit net increase in condo rental supply was down 59 per cent from last year — a dramatic pullback for a market that has relied on an annual increase of around 14,000 condo rentals since 2013,” he writes.

More Torontonians are renting than ever before, with rental household formation in the GTA reaching 18,178 per year between 2011 and 2016, almost double the rate observed between 2005 and 2011. That leaves a gap between rental demand and supply of 10,000 units in 2016.

“This excess will carry forward and accumulate, creating large shadow demand that will continue to weigh on the market in coming years if supply doesn’t ramp up,” writes Hildebrand.

Currently, only 5 per cent of Toronto’s purpose-built rental stock was built in the last 37 years. According to Hildebrand, despite a record high level of condo development, it seems unlikely that there will be enough condo rentals to meet demand in the coming years.

“Already, we are seeing that the share of units used as rentals is levelling out,” he writes. “The 32.7 per cent of units used as rentals was basically unchanged from 2016… The share of newly completed condos that were used as rentals declined to 48 per cent in 2017 from 50 per cent in 2016.”

This stagnation could be a case of condo investors choosing to resell their units at a profit, instead of renting them out. In 2016, 36 per cent of newly completed condo units were rented out — in 2017, that number dropped to 35 per cent. Meanwhile, the share of resold units has risen, reaching a five-year high of 4.6 per cent.

“The shift from investor holding to investor selling was largely motivated by the quick acceleration in resale prices attracting more pre-construction buyers to realize huge gains made during the development period,” writes Hildebrand.

He says the demand in the GTA is a call for more purpose-built rental construction, writing that there is “much more runway room left.”

A report from Urbanation and the Federation of Rental-Housing Providers of Ontario found that, in order to meet projected demand, developers would have to build 6,250 purpose-built rental units a year for the next ten years.

“If you take the number of vacant purpose-built units and add in the inventory under construction, total current and future available supply is less than 10,000 units,” Hildebrand writes. “That’s equal to 0.5 units for every renter wanting to form a household today in the GTA. Rental construction needs to at least double.”

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