Globe and Mail – Patient Investors will Hang In
September 28, 2024
ELVIRA CORDILEONE
MARKET PULSE
Good news for renters is bad news for condo owners who bought their units as investment properties a couple of years ago.
A report by Altus Group, an independent real estate consultancy, says vacancy rates are inching up and rents are slightly down in central Toronto in the last six months because of the completion of new condo buildings that delivered thousands of new rental units into the market.
In central Toronto, the vacancy rate jumped 17 per cent to 3.74 per cent since September, 2002, according to the report. Rents dropped 2.5 per cent, bringing the average rent to $1,245 a month from $1,278. (Overall, rents in the GTA climbed 2.5 per cent, an average of $26 a month.)
That’s great news for tenants who want to be centrally located. But it’s not so good for investors who bought condos from plans back when rental apartments were in short supply and rents were climbing, said Gerry DiLeo, a principal of Rental Lifestyle Group, a residential property management firm.
DiLeo says today’s market has been complicated by several factors. During the last few years, Toronto experienced the largest housing boom in its history. (Between 2000 and 2003 almost 25,000 units were built in the GTA, said Jeanhy Shim, senior researcher with N. Barry Lyon Consultants, a firm that follows the condo market.)
At the same time, DiLeo said investors disenchanted with the stock market began to gobble up real estate. Investors, many of them based in Asia, Germany and Israel, bought as many as 40 per cent of the units that came on the market.
Concurrently, interest rates fell, and a “massive” number of renters, then paying premium rents because apartments were scarce, also jumped into home ownership, DiLeo explained.
As the units they bought in 2000 were completed, investors put them on the rental market. And thousands of older apartments were added to rental pot as entry-level buyers moved out and into their new condos.
There are more to condos come. Many of the units that were sold in 2001 and 2002 are still under construction. Shim said another 32,000 new units would likely be completed in the GTA by 2006. At least 30 per cent of them are likely to be investor-owned, although the number can be as high as 50 per cent depending on the type of project and its location.
“Some investors will bail, but the patient investor will weather the storm. The ones that are getting nervous are those that could barely afford (the units) when they bought from plans,” said DiLeo.
A year ago, DiLeo said an unfurnished luxury condo could fetch $3 a square foot a month in rent, plus utility costs. The average rental now for a new condo averages $2 to $2.50 a square foot. But he said prime suites rent (and sell) faster and command better rents than a typical unit.
However, Bill Fish, a partner in Altus, suggested the current rental market is in a balanced position with supply meeting demand.
“I think it’s good for everyone and it makes for a more stable investment,” said Fish. “Tenants have choice and landlords have to be competitive.”
But Fish warned that vacancy levels are likely to be higher in condo buildings, and said condo investors may have a tough time competing with large property management operations for tenants. The firms that manage thousands of rental units have the marketing expertise and the budgets to attract and keep tenants, Fish said.
How long will this oversupply last?
DiLeo said it depends on how many of the projects pre-selling now will actually be built. The greater the number of new developments that reach their sales thresholds and go ahead, the longer it will take for the market to absorb the additional rental units.
“The serious investor knows the market inevitably slows. It’s just a matter of catching up,” said DiLeo. “In the long run it looks good.”