The rental housing market is heating up again – a worrying sign for affordability

Activity is heating up in rental housing markets across Canada, a troubling sign for affordability in cities with a chronic shortage of available units.

For years before COVID-19, markets from Vancouver to Prince Edward Island suffered from an unrelenting mix of weak rental construction, raging demand and rising rates. Bidding wars were not uncommon, echoing the buyer’s market.

The pandemic offered a slight reprieve in many cities as vacancies climbed and asking rates fell, owing partly to a drastic slowdown in population growth as immigration waned.

But the reprieve is proving short-lived. The average monthly rent for units listed on Rentals.ca was $1,721 in June, an increase of 2.7 per cent from April, though still lower than before COVID-19. Rents rose 2.5 per cent in May, the largest 12-month gain since early 2020, according to inflation data from Statistics Canada. During the six months prior, the average annual gain was just 0.8 per cent.

The coming months should see strong demand, as the country is poised for an influx of new immigrants, part of the federal government’s push to make up lost ground. And with universities set to resume in-person classes, more students are signing leases.

In effect, many cities are hurtling back to tight market conditions with meagre vacancies, putting a strain on tenants’ finances.

“We’re having an affordability crisis across the country, but especially in large urban centres,” said Ricardo Tranjan, a political economist at the Canadian Centre for Policy Alternatives.

In the country’s largest rental market, dynamics are shifting.

The average rent for available purpose-built rental units in the Greater Toronto Area was $2,289 in the second quarter, down 5 per cent from a year earlier, but up 1.9 per cent from the first quarter, according to real estate consulting firm Urbanation, which focuses on apartments completed since 2005. It was the first rent increase since the start of the pandemic.

In the condo market – a major source of Toronto’s rental supply – activity is hotter than ever. Over the past four quarters, there were 50,000 condo lease transactions in the region, up 58 per cent from the previous peak. Leasing is particularly strong in the downtown core.

“The [urban] exodus story is completely overblown,” said Shaun Hildebrand, president at Urbanation. “Now that things are reopening again, everybody’s coming back in.”

The GTA is on track to have vacancy rates and rents back to prepandemic levels by early next year, Mr. Hildebrand said. “Units are starting to lease in multiple-offer situations again. Rents are rising very quickly. There’s been a very dramatic reduction in available supply, just in the last several weeks. And the market is becoming very competitive.”

To lure new tenants in the pandemic, Canada’s major landlords ramped up their use of incentives, such as one month’s free rent, gift cards and signing bonuses. This allowed them to recruit tenants without lowering rates.

The use of incentives is still prevalent in the GTA. But in some other places, it’s waning. Boardwalk Real Estate Investment Trust said in May that it was pulling back on incentives in Saskatchewan, and was nearing that point in Alberta, owing to higher occupancy.

“As we head into our strong summer rental season, the occupancy and revenue trend for all our markets is positive,” chief executive officer Sam Kolias told analysts on a call.

The demand side should continue to strengthen. Immigration levels have perked up in recent months, and the federal Liberals aim to admit more than 1.2 million permanent residents between 2021 and 2023, ensuring a steady flow of new renters for years to come.

Given tight conditions and favourable demographics, Canadian apartment buildings have become an increasingly attractive asset class, sought after by global players in billion-dollar acquisitions. Development is quickly growing, too: Around 60,000 purpose-built units were completed last year, the highest since at least 1990, according to the Canada Mortgage and Housing Corp.

The trouble is that supply isn’t growing nearly enough, industry executives say.

“We’re calling for increased immigration numbers – unprecedented, never-seen-before immigration numbers – going forward. So the fundamentals are just incredible,” Mark Kenney, CEO of Canadian Apartment Properties REIT, told analysts on a May earnings call.

“Without meaningful housing policy to accelerate the development of rental, I think that we’re going to find ourselves in this supply-constrained environment,” he added.

The pandemic didn’t necessarily bring relief to many renters, the CCPA’s Mr. Tranjan noted. Most tenants stayed in their units, and likely saw their rents hold steady or rise slightly. And while asking rates often fell, a tenant’s new unit might still be pricier than before.

“To call it a renter’s market was a long, long stretch, and fairly inaccurate,” he said.

For renters, the other option is home ownership. But on that front, affordability has deteriorated. Fuelled by rock-bottom interest rates, buyers have purchased homes in record quantities and driven up prices. The average national sales price was around $680,000 in June, a 26-per-cent gain from a year earlier. Six-figure price increases have not only taken hold in major markets, but in bedroom communities and rural areas.

“The rental market is going to become increasingly more important as ownership affordability continues to erode,” Mr. Hildebrand said. “That’s just going to shut out more first-time homebuyers in the future and put further pressure on the rental market.”

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Are condos a good investment in Toronto?

Condo prices in the Greater Toronto Area are on an upsurge, rising 44% since the 2017 housing peak, driven by the segment’s relative accessibility compared to other property types, recent data from tech-enabled brokerage Properly has revealed.

“This past year, condo sales were hit the hardest by the pandemic,” said Anshul Ruparell, co-founder and chief executive officer of Properly. “While sales are now back up to pre-pandemic levels, it’s relieving for condo owners to know that their investments have appreciated significantly over time. Moving forward, it’s forecasted that solid growth in condo sales will continue as pandemic restrictions ease.”

For perspective, the historical average condo appreciation rate in Toronto before the coronavirus outbreak was between 4% and 5% annually.

A separate analysis by Zoocasa, meanwhile, found that month-over-month price growth was strongest in the 905 area, with Simcoe County (56%), Durham Region (46%), and Halton Region (26%) posting the largest gains. Average condo prices in the city of Toronto stood at $716,976 in May, representing a 17% jump from the previous month.

Zoocasa attributed the increase in condo values to Canada’s march towards a full economic reopening and May’s 170% annual spike in sales activity.

“As vaccines roll out and pandemic restrictions ease, it’s clear buyers are once again interested in high-density living at the heart of it all,” the real estate and brokerage website said.

Why are Toronto condo investments a good idea?
This price surge, along with a combination of the abovementioned factors, is what makes condo investments, particularly in the 416 area, sensible in an “economical point of view,” according to Toronto-based real estate agent Pierre Capaterian.

“When it comes to investing in Toronto real estate, the condo market is where the biggest gains are. Toronto condo prices have gone up an average of 13% per year since 2015,” he wrote in a blog post. “With Toronto’s average 10-year historical growth rate of 5% a year and the most recent years averaging over 10% a year, investing in the Toronto condo market in 2021 means you’ll get in at today’s rates.”

Capaterian added that Toronto has become an “evolving world-class city,” joining the likes of New York, San Francisco, and London, but with property values still way below those cities.

He then laid down three reasons why it is a good idea to invest in Toronto condos:

1. Equity gains
Access to high equity gains is among the biggest reasons why Toronto is a prime location for condo investment, according to Capaterian. He cited the Toronto Regional Real Estate Board’s (TRREB) February 2021 data, which showed condo prices in the 416 area rising by 52% since 2015.

“To put that in perspective, if you had purchased a condo in 2015 for $400,000, you would have made over $200,000 (or $50,000 per year) just by living there,” Capaterian wrote, adding that while investing in Toronto real estate “can be very fruitful, it requires a ‘proper investment strategy’.”

2. Stable rental demand
While the pandemic has dampened rental demand in the city, Capaterian believes that the impact is temporary and the demand for rentals remains stable.

“With college students returning to school and immigration expected to reach record-breaking levels, we anticipate stable but increasing demand for rental inventory,” he wrote. He added that major developments, such as the East Harbour, and the growing number of high-profile tech companies “choosing to set up shop” in Toronto will push up demand further.

“Pair that with Toronto’s record high rental rates – one-bedroom condos currently rent for about $2,225 per month – and your tenant can help pay down your mortgage,” he wrote.

3. Stringent lending practices
Toronto’s delinquency rate – mortgage left unpaid of 60 days or more – is also considerably low, according to Capaterian. In the past year, the figure has dropped to 0.56%, indicating how property buyers in the city are “well-funded.” He added that the government’s recent raising of the stress test threshold can help ensure that buyers “are not overleveraged to the point where changes in rates or the market causes them to have to dump their assets and take a loss.”

What are the keys to finding the best condo investment?

“It’s not about buying one thing; it’s about buying the right thing,” Capaterian wrote. He listed several signs that a condo is a good investment, including:

  • Units that are priced below what other properties in the area are trading for
  • Units located in gentrifying neighbourhoods where prices are low but are on the rise
  • Future developments or transit infrastructure that will add value in the years to come
  • Resale condos that are known to perform well in the market

Capaterian also emphasized the importance of buying strategically.

“Don’t be misguided by condo developments that seem juicy because they’re along the waterfront,” he wrote. “You’re looking for condos with the best margins and they can be found both in the resale condo market as well as the pre-construction market.”

 

He also noted the value of working with an experienced real estate agent, adding “when it comes to the resale market, having an agent who knows which buildings and floor plans yield the better ROI [is an advantage]. With regards to pre-construction, you need an agent who has platinum access to projects throughout the city. This gives you preferential access to the best floor plans and the lowest pricing available.”

 

Capaterian added that the best condos in Toronto often never reach the open market as seasoned agents and their clients snap them up during the platinum phases. This is the reason why working with an agent who has deep knowledge of the developments in the city is a must in securing the best investment property.

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Resubmission Proposes Residential Additions to East Harbour Plan

Recent documents submitted to the City of Toronto have revealed the latest plans for East Harbour, a massive development on the site of the former Unilever Soap Factory where the Don River meets Lake Shore Boulevard. The most striking change from previous versions is the addition of nine residential towers to the mix, which would bring approximately 4,300 units to an area otherwise dedicated to employment.

That change has ruffled some feathers. The former industrial site sits within one of 29 “provincially significant employment zones” in Ontario, and its current zoning does not allow for residential uses. Employment zones are intended to protect important centres of employment from encroachment by other uses which might represent more lucrative development opportunities.

 

The prior master-plan, put together before previous owners First Gulf sold the land to Cadillac Fairview, was—along with an extensive public realm—exclusively employment-focused. That plan was approved by City Council in Summer 2018.

It is not clear yet whether the Province of Ontario will use a Minister’s Zoning Ordinance (MZO) to bypass municipal zoning rules, as they have recently—and controversially—done for other nearby developments. What is clear is that they are prepared to work with Cadillac Fairview to build a “complete community” with “a diverse range of commercial space, residential space, retail, food, cultural uses, and outdoor space”—something that will likely require Provincial involvement in some capacity.

And indeed, the most recent plan by Adamson Associates Architects and OJB Landscape Architecture includes all of those things. There are now planned to be a total of eighteen towers, with heights ranging from 75m to 214m, and encompassing 926,000 m² of commercial space, 302,000 m² of residential space, and 15,000 m² of open space—including an additional 4,700 m² of parkland over previous plans.

This massive programme would be split into four quadrants delineated by the site’s two major axes: an extension of Broadview Avenue running north-south, and a new street called East Harbour Boulevard running east-west. Density would be concentrated in the two northern quadrants, with height stepping down towards the south and the east.

 

Each quadrant would be developed as its own phase, bringing the total number of planned phases up from three to four.

Quadrant 1, in the north-west corner and closest to the planned East Harbour transit hub, is planned to include the district’s signature office building and open space. East Harbour Plaza—formerly Soap Factory Plaza—would connect the transit hub to the rest of the site, and is envisioned as a focal point for the new neighbourhood.

Quadrant 2 would feature a similarly tall (214m) office tower, as well as another “transit plaza.” A pedestrian network would connect this northern area to both the residential towers on the site’s periphery as well as the neighbourhood’s southern half.

 

Quadrants 3 and 4 would each feature office towers on Broadview, with residential towers behind.

 

In addition to the privately-owned public plazas scattered across the four quadrants, three parks are also planned for the neighbourhood. East Harbour Park, planned as a destination on the west side of the site closest to the Don River, remains substantially unchanged from the previous master plan, but it has now been joined by two new parks: a Community Park and a Neighbourhood Park. Planned for the eastern, more residential side of the new neighbourhood, these parks are intended to serve the local community more specifically.

 

All of the new parkland, as distinct from the plazas mentioned earlier, would be conveyed to the City, becoming publicly-owned.

One more significant change to the plan is conspicuous by its absence; the Soap Factory building, which would have been a centrepiece of the previous master plan, is no longer planned to be preserved.

It should be emphasized that details will undoubtedly continue to change as the planning process continues. In several key ways the current plan is hardly recognizable from the master plan approved three years ago. Whether it will more closely resemble what is eventually built remains to be seen. Whatever the end result, there is little doubt that East Harbour will have an incredible impact on Toronto’s East End, and the city as a whole.

You can learn more from our Database file for the project, linked below. If you’d like to, you can join in on the conversation in the associated Project Forum thread, or leave a comment in the space provided on this page.

 

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