Why the Rental Apartment Boom is a Good Thing for Condo Investors
In this solo episode, Andrew la Fleur presents an oral essay on why the rental apartment boom we are seeing in Toronto is a good thing for individual condo investors. There are 5 forces at play that when taken into account indicate a bright future for the condo market.
Hi and welcome back to the show. Today is going to be another special episode that we do once in a while where it’s just me speaking to you, the condo investor. I’m going to be giving you an oral essay on a subject that is in the news a lot right now and that a lot of my clients and condominium investors are asking me about so I thought this would be a good time to summarize some of my thoughts, put them in one place, and get them out there to you.
The subject here was inspired this time by a recent headline in the Financial Post and I will include a link to this article. If you go to the show notes for this episode you can find it at TrueCondos.com/episode41. If you go there you will see the article I’m talking about in the Financial Post, the headline was “Apartment Boom Builds in Toronto: A sign more are giving up on home ownership.” The headline speaks for itself in terms of what the article is about. It’s talking about the fact that a lot of rental buildings are now being built or proposed to be built in Toronto. Typically these sites were actually condominium sites, a couple of them, which were bought completely out by pension funds or other institutional investors and they’re now, instead of becoming condos, they’re becoming rental buildings.
A lot of people are asking me “Andrew, what do you think of this trend?” “Is this a good thing, a bad thing for the condo market?” “Should we be worried?” “What do we need to know?” I wanted to talk about that today and there’s actually five major forces that I see at play. All these signs point to the fact that the rental apartment boom that we’re seeing is very good news for condo investors and I’m going to tell you why in this short oral essay.
The first factor that we’re seeing, as I mentioned already, is that more sites that would normally have been condo sites are now becoming apartment sites. What’s happening here is institutional investors, pension funds, groups with hundreds of millions of dollars to invest are looking for stable, long term returns. Where do you put all this money if you have this money? It’s a good problem to have, I suppose. They’re looking at the rental apartment market, the high rise market, in Toronto and they’re seeing the returns that individual investors are getting just by buying condos and renting them out and they’re quite impressed by them.
The fact is that nobody is selling any rental buildings. The existing rental buildings are just not being sold. You can’t go out and just buy a forty story rental tower. They’re just very, very rarely ever sold and trading hands. The returns are very good, the money is very steady and predictable so why would you ever sell if you owned one of these things? It’s just not happening. They have to build these building themselves. They’re also taking advantage of today’s very low interest rates. Where they can lock in their construction financing today and build for the future and take advantage of cheap money. We’re seeing less supply of condos coming onto the market because of this. More rental apartments equals less condominium apartments. That is a good thing for condo investors. If you’re buying today in a market where there’s going to be fewer condos in the future, new condos in the future, then that’s a good thing. Prices would, in that case, go up if supply is going down.
The second factor that we’re seeing is that, tied to the first, is that we’re seeing less new condo projects coming onto the market. Very interesting, no one is really talking about this yet, but you will be hearing about this, I guarantee, more and more as the year plays out and as the media, of course, is always a few months behind what’s actually happening in the market, the media is. As they catch on to what is happening they will start to write about the fact that very few new condominium projects are launching in Toronto, particularly in the downtown core. Actually over the past five months we’ve only seen one new project start selling, South of Boar, the downtown core, South of Boar. Actually this new project was Design House on College and Spadina there, and it was a very small project with just a hundred and sixteen units.
This is really unprecedented. In all my time in the condominium market, coming up nearly on ten years now, I’ve never seen a period stretch this long without any new product introduced into the market, any new projects. We’ve seen some re-launches, we’ve seen second phases of existing projects and things, a couple here and there, but in terms of new projects there’s only been one South of Boar which is really unprecedented. It’s very clear that 2015 will be a very different year from 2014 and 2013 in terms of new product being introduced to the market. Again, this lower supply that we’re seeing introduced now will play out in three to four years to come when the stuff that’s sold today is starting to be complete in three, four years we will see a shortage of condos available on the market. Again, that is going to be a good thing for you if you are a condo investor buying pre-construction today, buying into an environment where three, four years from now there’s going to be far less supply coming online. That’s going to drive prices up, once again. So that’s the second factor. The first two factors are related to low supply.
The third factor is that prices and rents are still increasing despite record number of completions. So, yes, it’s true that in a few years time there’s going to be a record low number of completions. Right now, over the past twelve months, we’ve experienced record high completions. That’s because the condominium market peeked around 2011, 2012 and all of those projects we’re now seeing completed today. Late 2014, early 2015, record number of new condos have come on stream and yet rents still are going up, again not huge amounts but they are still going up around one percent in the core. Prices as Treb has been reporting, resale prices continue to go up about three to five percent. These are both very encouraging signs for the individual condo investor but also to the institutional investor who looks at this and says “In a time where we’re seeing record number of completions coming online, this was the so called ‘Armageddon’ or ‘condomageddon’ or whatever scenario that’s been playing out where the whole market was supposed to go to crap and fall apart, it’s not happening at all. In fact rents and prices continue to go up even in the face of record number of completions.” Institutional investors are seeing this as a very positive sign for the future for them if they are looking at building a three hundred or four hundred unit apartment building that’s going to be completed a few years from now.
The fourth force that we’re seeing is that home prices continue to soar out of reach. We’ve heard this time and time again prices of low rise homes in the city of Toronto in particular continue to just get out of reach. The average price of a detached home is now over a million dollars. That’s just for an average house, that’s not for a great house, that’s just for an average house. Very few people can actually afford to purchase a home in Toronto, a house.
Actually the only people who can afford to buy a house are people who are already in the market. People who have been in the market for at least four or five years already and who have substantial equity built up in their current property, be it a house or a condo. They’re carrying that equity over into these million dollar homes which are now the average home in Toronto. These are not first time buyers. First time buyers are priced out of the … ninety five percent of first time buyers are priced out of home ownership in Toronto. Institutional investors see this as another key reason to get into the rental housing business now because there’s going to be more and more people “giving up on home ownership,” as the article put it, in the years to come and these people will become long term renters. Just like other major cities in the world you can expect that home ownership rate in Toronto will slowly decrease over the next twenty years. Individual investors are going to reap the benefits as well because prices and rents for condos will continue to grow as long as supply is held in check. We already discussed that, it looks like it definitely is going to be held in check.
The fifth factor at play here, and the final one, is that millennials prefer renting and this was something that the article talked about as well. Millennials and singles prefer renting and this is something that’s also driving the rental apartment boom. Millennials prefer renting partly because it’s all they can afford, they can’t afford to get into ownership right now, and also partly because it allows them to be more transient and more mobile. Mobility is the new currency of millennials. They love to be able to move to different neighborhoods every year or as they see fit. They can get a new job, they can try a new city, they prefer travel and experiences over cars and white picket fences of the previous generation.
It’s all about a very different lifestyle for the millennial generation and renting fits into that lifestyle very very nicely. Eventually these people will grow up and they will buy houses but it’s going to be much, much later than the previous generations have. First they’re going to rent for a long time and then they’re probably going to buy a condo because they’re not going to be able to afford a house. They’re going to live in that condo for much longer than previous generations have lived in condos because again, they won’t be able to afford to move up to a house. Eventually they will, probably after say, 5 years in the condo, they’ll get into a house but before the pattern we’d see was rent for as short of a period as possible and then get into that condo as soon as you scrape together enough money to do so. Live in that condo for two to three years, take those profits and equity and then move up into a house. But again, we’re seeing a very different pattern moving forward with the millennials. They’re preference for renting and the fact that they will be renting longer and longer than previous generations is a very good thing for the institutional investor who’s looking at getting into the market as well as the individual investor who’s looking at buying an individual condo unit today and wondering how it’s going to perform over the next five to ten years.
Just to recap again, the five major forces, one is that more and more sites are becoming rental apartment sites instead of condominium sites, that’s less supply. The second is that less and less new condo projects are being introduced to the market. Partly because these sites are becoming rental apartments but partly because there are just fewer and fewer sites available as the city is being built out. That’s another story of lower supply and higher prices in the future for condos. The third is that prices and rents are continuing to increase today even in the face of record number of completions. The fourth thing is that home prices continue to soar out of reach and people just cannot afford to get into low rise housing so they will be renting and living and buying high rise properties more and more. And finally millennials just prefer renting. It’s a lifestyle component, it’s a social trend, it’s something that we’re seeing on a wide scale, not just in Toronto but across North America and many cities around the world. This is a big big trend that we’re seeing.
There you have it. Those are the five factors and reasons at play why the rental apartment boom that we’re seeing is actually very good news for the individual condo investor today, who is buying today, and looking to the future.
There you have it. I hope you enjoyed this little mini-episode, this oral essay on the subject of the rental apartment boom. For the show notes on this episode and the link to the article that inspired me to do this piece in particular you can go to truecondos.com/episode41 and you’ll find all the show notes there. Thank you again for listening. If you have any questions you can always email me Andrew@truecondos.com. You can find me on Twitter @AndrewlaFleur. You can find me on Facebook just search for me, Andrew la Fleur. You can also call or text me directly at 416-371-2333. Thanks very much for listening and have a great week.
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