Residential rental market picks up steam

Investor demand driving supply of new units

As pension funds and other big investors seek new, reliable income streams, purpose- build rental is at levels not seen in two decades.

But all that new property entering the market has come at a price: Vacancy rates have risen to levels not seen in nearly 17 years as builders ramp up the supply of new units.

A report out Tuesday from Toronto- based Altus Group says the rental push is creating a situation that, until recently, was unheard of — soft rental markets where some landlords are feeling pressed to fill their buildings.

Nationally, the vacancy rate as of October 2015 was up to 3.3 per cent, from 2.8 per cent a year earlier. That rate reflects vacancy in buildings with three or more units, but does not include condominium apartments that are rented out.

“It ’s basically Calgary which is throwing most of the market off,” said Peter Norman, chief economist with Toronto- based Altus Group, which considers anything above a 2.5 per cent vacancy rate a soft market.

Altus looked at 34 markets across Canada and says only four can be considered tight markets, which have a vacancy rate of below 1.5 per cent — a proportion Norman says is hardly “catastrophic” in the context of the overall rental market.

Developers are also finding ways to make construction of rental buildings profitable. Purpose- built apartments were 35 per cent of apartment construction over the period studied, a percentage that includes condominium units rented. The percentage hasn’t been that high since the early 1990s.

Altus noted that 2015 was record year for apartment transactions in the Greater Toronto Area, as $ 1.7 billion worth of existing units traded hands. That was up from $ 1.1 billion a year earlier.

With buying costs continuing to rise for existing rental apartments, some investors are looking to developers to construct them new buildings.

“There is a market that has reasonably strong demand to it and rents are still rising. The economics of that mean that those who want to invest in new purpose- built ( rental properties) to own and retain them, see an opportunity,” Norman said.

Paul Finkbeiner, of GWL Realty Advisors which manages 286 properties across the country, said clients are coming to them asking for rental stock.

“They don’t just want to get in and out, he said. “A lot of pension funds don’t just want to get condominiums because you make your money and then you have to reinvest it. We want reliable ongoing income stream and apartments are just that.”

The real estate company found that, across the count r y, l andlords i ncreased the rent they charge by an average of 2.9 per cent over the last 12 months, some of which could be a lagging effect of rents not responding to increased supply just yet.

“A large part of it, and it’s a number blended across the country, but you have different rent- control regimes,” said Norman, noting in some markets, like Toronto, when a renter leaves the landlord can set the rental rate at a new and higher rate.

Brad Lamb, a Toronto developer, said rental apart- ments have made sense for a decade but some developers are looking for quicker profit so they can reinvest the money.

“You need far more equity (for rental construction). You have to put bigger guarantees and you can’t get your money out as quickly,” said Lamb, adding that the apartment business is well suited for affluent people and pension funds happy with a solid six per cent return on their money.

Lamb said that, while vacancy rates are slowly rising, he thinks the impact is mostly on older structures because tenants will look to condominium units or new purpose-built instead of oldstock apartments built in the 1960s and 1970s.

“They’ve sucked away tenants from the crappy inventory that smells like cabbage,” Lamb said.

Derek Lobo, chief executive of SVN Rock Advisors Inc., said the vacancy uptick in Alberta is pretty much expected given the sluggish economy in the province brought on by lower oil prices, but demand for apartments is still strong elsewhere he said.

“Construction is meeting a lot of the pent up demand in the marketplace,” said Lobo, adding that low interests rates have made it affordable to construct and finance a new apartment rental buildings.