As pension funds and other big investors seek new, reliable income streams, purpose-build rental reaches levels not observed in two decades.
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But everything new property entering the marketplace originates 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 developing a situation that, up to now, was uncommon – 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 percent, from 2.8 per cent a year earlier. That rate reflects vacancy in buildings with 3 or more units, but doesn’t include condominium apartments which 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 viewed as 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 general rental market.
Developers are also finding methods to make construction of rental buildings profitable. Purpose-built apartments were 35 percent of apartment construction within the period studied, a portion that includes condominium units rented. The percentage hasn’t been that high since the early 1990s.
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Altus noted that 2015 was record year for apartment transactions within the Gta, as $1.7 billion price of existing units traded hands. Which 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 which has reasonably strong demand to it and rents are still rising. The economics of that imply that those who wish to purchase new purpose-built (rental properties) to possess 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 requesting rental stock.
They’ve sucked away tenants in the crappy inventory that smells like cabbage.
“They don’t just want to enter and out, he explained. “A lot of pension funds don’t just want to get condominiums because you help make your money and you have to reinvest it. We would like reliable ongoing income stream and apartments are simply that.”
The realty company discovered that, across the country, landlords increased the rent they charge by typically 2.9 per cent over the last Twelve months, most of which might be a lagging effect of rents not answering increased supply at this time.
“A large part from it, and it’s a number blended across the country, however, you have different rent control regimes,” said Norman, noting in certain markets, like Toronto, whenever a renter leaves the landlord can set the rental rate in a new and higher rate.
Brad Lamb, a Toronto developer, said rental apartments make sense for a decade however, many developers are looking for quicker profit so they can reinvest the cash.
“You need far more equity (to rent construction). You need to put bigger guarantees and you can’t get the money out as quickly,” said Lamb, adding that the apartment clients are well suited for affluent people and pension funds happy with a good six per cent return on their own money.
Lamb asserted, while vacancy minute rates are slowly rising, he thinks the impact is mainly on older structures because tenants will appear to condominium units or new purpose-built instead of old-stock apartments built-in the 1960s and 1970s.
“They’ve sucked away tenants from the crappy inventory that smells like cabbage,” Lamb said.
Derek Lobo, leader of SVN Rock Advisors Inc., said the vacancy uptick in Alberta is really expected given the sluggish economy within the province brought on by lower oil prices, but demand for apartments is still strong elsewhere he explained.
“Construction is meeting a lot of the suppressed demand in the marketplace,” said Lobo, adding that low interests rates make it affordable to construct and finance new apartment rental buildings.
gmarr@nationalpost.com
Twitter.com/dustywallet
