It’s no secret that investing in an income property, especially in a market like the City of Toronto, can be lucrative. However, as with many other kinds of investments, there are several factors that will influence how successful a return you will generate: time being one and market conditions being another.
The case to own a rental property in Toronto is there. There's an aging population whom favour the freedom of rental living after years of home ownership, a steady stream of immigrants and corporate relocations making Toronto their home, and those who have been sidelined by Toronto's skyrocketing property prices. If you ask the pundits, there's the belief there will be a steady supply of tenants to meet rental demand.
However, the success of investing in income properties for the past three decades has been influenced as much by the lack of supply as the growth in demand. You see, prior to the 1980s, the construction of rental highrise housing was common in Toronto. You only have to look up the Yonge Street corridor (near Wellesley, St. Clair, Davisville and Eglinton) to see many examples of these monolithic apartment blocks, along with neighbourhoods like St. James Town and Parkdale. However, over the past three decades the building of new rental accommodations diminished, while the condominium as a new form of ownership was embraced, beginning in the 1980s and subsequently exploding exponentially since (Here's a brief history of condominiums in Toronto in a past post called The Face Of Toronto Condo Living). With no new rental housing stock being constructed, and the older rental buildings falling into disrepair (in part because of the introduction of rent controls), investors recognized the opportunity that condominiums purchased for investment could fill the demand for rental accommodations. Outside of the real estate crash of 1989-1995 when values dropped upwards of 35% and slaughtered a booming condominium market rife with speculation – these investments have mostly served investors well.
However, recent data suggests that there is a shift in what is being constructed, with numerous new rental buildings going up as new condo building construction begins to wane. This is something property investors should take notice of. Why the shift? First, given the demand for rental properties solidly exists with vacancy rates remaining low and rents inching higher, on average, the financial proformas support the creation of new rental highrise housing. Second, we now live in an economic climate where companies – like those that manage pension plans or Real Estate Investment Trusts (REITS) – have large pools of capital available to invest in real estate and – as we've been seeing with the volatility in the stock market, have the potential to generate better returns with less risk. Third, lenders are more receptive to financing rental buildings today and – in some instances – these new buildings are often being developed with the potential of converting them to condominiums in the future.
There is no denying this new trend towards rental construction. This recent article from the Toronto Star called “First Builder Of Condos In Toronto Now Looks To Rental,” discusses how market trend-setting development company the Rockport Group has made the shift from condominium development to rental building development.
Some stats to ponder: according to research firm Urbanation, current and proposed construction of rental buildings has increased 75 percent over the last decade. These and other statistics are covered in this Globe and Mail article called, “Toronto, Vancouver Experiencing Rental Renaissance As Appetite For Condos Wane.”
This article also touches on a very salient point. As the rental inventory begins to seep into the market, despite the fact that the numbers of renters to absorb the stock, overall it is going to mean that renters will have more choice. And having more choice may present challenges for the property investor who owns the ubiquitous box-in-the-sky condominium. Renting in a managed building lets the renter retain a certain measure of control that they may not necessarily have from a privately owned condominium. Even though the layouts, finishes and amenities may be similar, renting from a corporation means that they don’t have to worry about their landlord’s plans to sell their unit, potentially turning them out on the street. By the same token, when a tenant decides to move on, it can be a little tidier with a professionally managed company, in that the tenant simply has to hand in their notice at the appropriate time and that’s it. Plus, when a unit deficiency presents itself, like a broken faucet, the tenant doesn't have to track down the landlord – who may be out of town – and instead just contact the onsite rental superintendent to get the repair done lickety-split.
As renting is emerging as a lifestyle choice for many, rather than a transitionary housing move, either as you make your way on, up, down or off the property ladder, then this kind of long term rental potential may be just the peace of mind that the renter pool is looking for. While many investors have great landlord/tenant relationships, there always exists the potential for discord, because of the privatized nature of the relationship, something that isn’t on the table if you are renting from a managed building.
As the article points out too, renters have indicated that they are willing to pay a premium to live in a managed rental building.
Here is another article from the National Post, called “For Rent In Toronto: Swank New Apartments (And — Surprise! — They’re Not Investors’ Condo Units)” that touches on the notion that “rental is here to stay.” In this article, the concept of purpose-built building is discussed, where developers have learned that renters like many of the amenities that are available in luxury or higher end condominium buildings, but also like the security of tenure with a professionally managed building. Developers are keenly recognizing that this is where the opportunity currently resides. This article underscores that by talking about some developers who have switched their projects part way through construction from condominium developments to rental buildings.
Furthermore, the economics of the marketplace seemingly support this market shift, cementing the likelihood that the trajectory will carry on. In this Globe and Mail article called “Lenders Favouring Rentals Over Condo Construction, Survey Shows” the point is made that commercial lenders are planning to shift their financing focus towards construction of rental buildings over condo buildings. Institutional investors are also showing greater interest in the rental building market, by way of REITs (Real Estate Investment Trust). With fundamentals like these in place from the bottom up, one has to acknowledge the change in market gears.
Urbaneer has long contended that if any vulnerabilities persist in the Toronto property market, that is the condominium segment that is largely responsible (most recently, check out our observations and prognostication in Part One of urbaneer’s Winter Forecast.) With this shift in market trend, that still holds true, but with a bit of a twist.
For the property investor, considering purchasing a condominium as a rental property, the market trends have placed a new set of dynamics forward- and according to all signs will continue an upward swing. It’s still about supply and demand- and about setting yourself out from the competition, which is about to get more intense.
We’ve always advised our clients that, when purchasing a condominium, it is best to favour the unique (think thoughtful layout, quality finishes and prime location with amenities at your disposal) in order to preserve and grow asset value in terms of resale- which is of course part of investment (click here to read urbaneer’s recent post on how to increase your condo’s value in “Dear urbaneer. How Do I Boost The Value Of My Condominium”.)
But in addition to preserving the value with an eye to resale, landlords will need to position themselves attractively to lure long term renters – and with the flux of available rental stock likely to rise, with amenities and lifestyle qualities specifically constructed to appeal to a niche market base, it is even more important to position yourself competitively to generate the income as your tenure as landlord. Click here to read our discussion about how to secure quality tenants in “Dear urbaneer: How Do I Find And Keep Good Tenants?”. Unique properties will figure into this as well.
Are you considering property investment? With years of experience in reading and interpreting market trends on behalf of our clients, as well as a sound knowledge of the necessary proponents to make property investment successful, we are here to help!
~ Steven and the urbaneer team
earn you trust, then your business
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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