Condo Rentals Down 10%, Should Investors Be Worried?
Urbanation just released their “UrbanRental Report” for the second quarter of 2016. The big news is that rentals are actually down 10% this quarter, the first time rentals have dropped since they began tracking the market in 2011. Should condo investors be worried? Find out on this episode.
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| Andrew : | The stats are in for the second quarter for the Toronto condo rental market and condo rentals are down 10% over last year. Should you be worried as a condo investor? Find out next on today’s episode. |
| Speaker 1: | Welcome to the true condos podcast with Andrew La Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto. |
| Andrew : | Welcome back to the show, once again it’s Andrew La Fleur here with the true condos podcast. Before we jump into today’s topic which is the second quarter rental numbers, wanted to just share our view that I recently got over on iTunes for the podcast, and it’s from Steve Benjamin’s title is Excellent, he says, “I bought my first home a little over a month ago and a lot of what I know about the Toronto real estate, about Toronto real estate is from this podcast. Andrew was great and his guests are always on point. If you want to actually learn something about real estate investing this is the podcast for you.” |
| Thank you very much Steve for the kind words and if you would like to leave a review for the show it’d be greatly appreciated, it really helps get the word out, about the show. You can just go head on over to iTunes and leave a review for the true condos podcast and that would be great. Let’s jump into the content for today’s episode which again as I said an intro. The headline which you may be seeing or reading soon or already depending on when you’re listening to this podcast is that the condo rental market is down 10% in the second quarter over last year. | |
| Now, the question is, should you be worried as a condo investor, is that something to be concerned about? I’m here to tell you no, the answer is, it’s nothing to be concerned about at all and I’m going to give you 3 reasons why you don’t need to be worried about the fact that the condo rental market is down 10%. First of all, the first reason is that, and again these numbers and stats I should preface are from Urbanation and Urbanation has just released their rental report for the second quarter, always excited to get new reports from Urbanation on the latest stats and data from the market. | |
| The report says that the number of rental condos, condos that have rented out in the second quarter are down by 10% compared to the second quarter of 2015. The first thing to recognize is the difference between sales and prices. Often they’re very different things, the number of sales and the actual prices. Often you’ll see headlines in the media and this is something that I see time and time again, and I’ll be honest, I basically use the same tactic in the title of this podcast to get your attention, and when the media does this all the time. They talk about sales are down, but what they’re not necessarily saying is prices are down. | |
| They’re just saying, the number of properties that transacted in a particular given period of time are down. Those are two very different things. Yes, the number of units that leased out are down 10% from around 8,200 units in the second quarter last year, to about 7,400 units this year. That’s down 10% but rental prices, the actual prices of those units is up 5.2% so rental prices are up 5.2% but most likely you’re not going to see that in the headline, “Rental prices up 5.2%.” | |
| It’s a much more clickable and intriguing and interesting headline if you say that something bad is happening and we see these all the time in the media, not just with real estate but in every facet of the news, if it bleeds, it leads they say. Bad news is good news for the news industry so to speak, and so just again, except for every seasoned or new condo investor when you’re looking at the headlines and you’re trying to understand what’s happening in the market. | |
| It’s very important to know that basic difference between sales and prices because you’ll often see this time, and time, and time again is they’ll use that terminology of, sales are down or sales are up conversely, but really what’s a much more important statistic in a very different statistic is prices. What are prices doing and that’s really much more valuable than number of sales in general. The first point to the reason why you do not need to be worried about the fact that rentals are down 10% is that prices are up. | |
| Prices are up 5.2%, rental prices continue to climb, this continues to be the story. In the first quarter they were up I believe I want to say it was … Let me check my notes, I think it was about 6.8% now, 5.2%. Rental increase has continued to be well above historical averages of basically inflationary rates of around 2%. Anything above 2% as an investor you are thrilled with for rental increases and you’re talking about 5/6/7% that is very exciting times for you the landlord to be leasing out units in a market like it is right now. | |
| The rents are up, average monthly rental just for interest’s sake, in the GTA is now 1,943 a month or $2.61 per square foot for all condos in the GTA for the second quarter. That’s the first point. The second point is that, yes rental transactions are down 10% but the total number of listings available is down 15%, so the supply of units available for rent was down greater than the … The decrease was greater in the supply side than it was on the demand side indicating the market is actually still trending upwards again. | |
| You had 15% less units available for rent but the actual leases, units rent leased out only went down by 10%. What is driving that is primarily that the number of new unit registration, so the number of new inventory, buildings finished in the second quarter and being added to the stock, because as we all know, when a new building finishes a lot of those units are purchased by investors and will be put on the rental market for lease. The number of new unit registrations is down this quarter 39% versus the second quarter last year. | |
| New unit completion is down 39%, again this is a theme we’ve been talking about a lot in the podcast especially in the downtown core, we’re seeing less and less supply being added to the pipeline. This is going to continue to drive rents up in the future, continue to drive prices of condos up in the future. No, we are not in a situation where we’ve reached peak condo or anything like that and there is never going to be another condo built but land is becoming harder and harder to come by and development process is becoming longer and longer for developers, there’s more and more red tape, and more and more development charges and things like that. | |
| The expectation of landowners that are selling land for development is higher and higher so all these things are contributing to less buildings being completed. Another big thing of course was 2015 was the record year for new condo completions, so we saw you were coming off of a high, high year last year of new inventory being added to the overall market and so we’re coming off of that high as well. All these things are contributing to the fact that less units were rented out in the second quarter. | |
| Another interesting stat, is the lease to listings ratio is at an all time high of 84% breaking the previous record in terms of Urbanation’s tracking of 79% smashing the record 84%, so the lease to listings is the number of leases to the number of available listings so 84% in a given quarter, 84% of all the listings available were leased out in that quarter. Very, very strong landlord’s market. If we’re talking about instead of leases, we’re talking about the resale market, if you have an 84% sales to listings ratio that is unprecedented, insanely high seller’s market. | |
| We’re not at that level in the GTA right now for sales even though we’re at record sales pace right now. The rental market in that sense is harder than the resale market, so very strong landlord’s market. There’s the first two points, rental prices are up 5.2% and the second point is that total listings are down 10%, and the third point why you don’t need to be worried about the fact that rentals are down 10% this quarter is that renters are starting to switch back into becoming buyers. | |
| Not en masse yet but there is definitely seems to be a trend towards renters saying, “You know what? Rents have climbed a lot in the last couple of years, now buying interest rates are extremely low.” Buying is starting to look more and more attractive. The cost of renting versus buying is very narrow right now so a lot of renters are saying, “You know what, instead of paying this increased rent by 6/7% I am just going to buy something.” | |
| That is what we’re starting to see, we are starting to see renters moving back in and becoming buyers and these things go in waves, as we talk a lot about the condo market moves in waves. On the sales side as well as on the rental side and so rents increase significantly for a year or so then a lot of those buyers say, “Forget it, I’m not renting I’m going to over to buying,” and he goes back and the rental prices will slow down for a couple of years and then it goes back and forth, and back and forth like that. It’s typically the kind of patterns that we will see in the rental. | |
| All that to say again that yes, rentals are down 10% but it’s absolutely nothing to be worried about. If you see headlines indicating the opposite, you tell them what you heard here and you set them straight that this is definitely not a case of the rental market in any kind of trajectory change or slowdown of any kind. It’s quite the opposite, sales, the big one is that the lease to listings ratio is at an all time high of 84% and that really tells us the trajectory, the direction of the market is definitely strong landlord’s market and trending even stronger. | |
| That’s the key insight from today, other insights which I pulled from the rental report, which I found interesting, number one was the average unit size is starting to creep upwards. For a number of years the average unit size was getting smaller and smaller as a lot of the newer buildings contained a lot of smaller and smaller suites. Now, we’re starting to see the unit size actually creeping upward. This quarter average unit size rented out was 741 square feet versus 734 square feet a year before. | |
| That would be an interesting trend to keep our eyes on to see in fact, again, the 2-bedroom and the 3-bedroom units are becoming more and more popular, higher and higher in demand as families in particular are priced out of the low rise housing market and are increasingly turning to condos to live in for on the rental side and also on the sales side. | |
| The second interesting insight that I pulled from the report is that condos, condo rental prices have risen faster than rental prices for purpose built rental buildings. Again, there is a lot of chatter about, as there are more and more purpose rental built buildings coming into the market, is that going to negatively affect condominium, individual condominium investors? How is that affecting the supply and demand balance and will tenants prefer to be in purpose built rental buildings over condominium buildings. | |
| Is the party over for condo investors as the institutions sort of take over the space. We’re certainly not seeing any of that happening at all, and again, if you look at what I said, the condo rental prices are increasing at a faster rate than the purpose built rental prices which are a lot more flat in their trajectory and now the two are nearly in the city of Toronto, forget about the GTA but just the city of Toronto the 416. The two rental rates are now nearly identical after having a bigger gap between them a year ago. That’s something interesting there. | |
| The third point is that the average days on the market is down huge from last year. Last year the average days in the market for the typical condo that was rented out was 24, this year this quarter, the second quarter it’s 17, it’s down 7 days a full week. A lot of people are asking me all the time, “You know, if I buy this condo as an investment Andrew, am I going to be able to rent it out? Will somebody actually move into this unit or is it just going to sit empty?” | |
| Again, your condo is not going to sit empty, it’s definitely going to be rented out, the market is very, very strong, demand is much greater than supply. Again, another great stat to look at is the average days on the market is only 17 days across the entire GTA of course in the hot markets downtown and on the subway lines, and in the sea is much lower than that. A condo is renting out for, in 7 days or less is very, very common in the downtown core, and it just again speaks to the huge demand that there is for rentals in the city right now. | |
| Then finally the last interesting point that I wanted to share with you is that the lease to listings ratio, we talked about that of being at an all time high of 84% for the overall market, while the lease to listings ratio for newly registered buildings in the second quarter itself, so buildings that finished and those units only in those buildings that finished are brand new in the second quarter. The lease to listings ratio is 94%, and the average rent for those buildings is $2.80 per square foot across the entire GTA, so creeping up closer and closer to $3 a square foot as an average for the entire GTA, and 94% lease to listings ratio for a brand new building. | |
| Again, goes to the question of, when people are buying preconstruction condos for investments and they’re asking me, “Yeah but am I going to really be able to rent this out, like what if everybody in the buildings all trying to rent at the same time?? Again you have a major advantage over the market when you buy preconstruction, because when your building finishes it is a brand new building and everybody loves to live in a brand new building. | |
| That’s again evidenced by the fact that the lease to listings ratio for brand new buildings is 94% versus the overall market of 84%. Again, if you have any concerns about that, don’t be worried at all. I had this conversation with somebody just a couple days ago, and you are not going to have any problems whatsoever renting out your condo especially if you’re listening to this podcast. | |
| If you are listening to the advice on truecondos.com and hopefully if you are one of our clients then you are getting the absolute best in expert advice in the industry and you are buying in the best located buildings, and best priced buildings which are going to give you great returns and great cash flow for many years to come. That is today’s episode I hope you enjoyed that, talking about the rental market and Urbanation’s second quarter results, so until next time I hope you have a great week, happy investing and enjoy this weather. Bye for now. | |
| Speaker 1: | Thanks for listening to the true condos podcast. Remember your positive review is make a big difference to the show, to learn more about condo investing become a true condo subscriber by visiting truecondos.com |
