Friday, March 13, 2015

Wondering how the Recent Spike in Condo Completions will affect the Market? You don't have to.

CMHC’s data on completions lags actual occupancies.

Recent CMHC data released on condominium apartment completions in the Toronto CMA is turning heads, reporting that close to 14,000 units were finished in the first two months of the year — with 10,000 in January alone. 

According to the CMHC data, completions so far in 2015 have already exceeded the total for all of 2014. In fact, the data would indicate that within a few months, completions will have already broken the annual record of 17,878 units set in 2011.

But is this really what’s going on? It depends on your definition of a ‘completion’. 

CMHC records completions as occurring after more than 90% of a building is completed, including all of the final finishes for all the units, common areas and outdoor grounds. Urbanation records completions once occupancy begins. As completions represent a key supply indicator in the GTA condo market, Urbanation feels it’s crucial to tally the data as soon as units can be considered built inventory. Contemporaneous reporting of completions alongside resale and rental listings allows for better analysis of supply pressures -- an ever-present question in local condo market.

Two good examples are the Aura and L-Tower projects, both of which weren't 90% finished as of February, but occupancy was well underway and units had already been put on the market. 

The completions happened last year

As the chart below shows, there has been a growing divergence between the CMHC and Urbanation totals over the past couple years. Given the difference in timing, this is to be expected in absolute terms as completions have trended higher. However, a substantial difference was recorded for 2014. While the Urbanation data showed a record number of completions (20,809 units), the CMHC completion totals fell back last year to 13,258 units.  The 7,500-plus unit gap suggested a large backlog of projects waiting for final touches had accumulated. And this gap didn’t suddenly emerge at the end of the year — it was present throughout most of 2014.

While Urbanation has yet to compile Q1 completions numbers, our preliminary assessment points to a total nowhere near CMHC’s figures for January and February, supporting the notion these ‘completions’ occurred last year. Effectively, these latest data points from CMHC are ‘old news’.

In this context, looking at the data over the past 12 months is more appropriate. The CMHC data, at 25,791 units to February 2015, shows compensation for the shortfall against the Urbanation data in 2014.

In the end, why is it so important to closely monitor completions as they occur? For a couple key reasons.


First, rising completions can mean a reduced inventory of projects under construction if starts can’t keep an equivalent pace (which has been the case over the past year). According to the Building Industry and Land Development Association, each construction crane represents the creation of about 500 jobs. Assuming an average project size of roughly 250 units, the 13,200 fewer units under construction in February compared to a year ago equates to 27,000 lost jobs. If accurate, that's about 1% of the Toronto CMA employment base, raising concerns that at least some temporary impact on demand would materialize until construction starts picked up (which we expect they will given the large number of units in pre-construction qualifying for financing).

A Measure of Supply

Second, calculating the number of completed units over a period time helps provide a measure of the total inflow of new supply against new demand. Household formation rates have averaged roughly 35,000 households per year over the 2001 to 2011 period. So if condo completions are running at 25,000 units and other forms of housing completions are reported at 17,000 units over the past 12 months, it may potentially indicate some oversupply developing.

While there is no way of precisely calculating total housing demand outside of the Census data reported every five years, we can test the current degree of oversupply in the market by looking to a few key variables: the level of completed and unabsorbed units, the ratio of resale transactions to listings, vacancy rates and rent growth.

Standing Inventory

According to the CMHC data, the number of completed and unsold condo apartments jumped to 1,758 units in February, nearly double its level from a year ago and the highest level since the early 1990s when the condo market, along with the rest of the housing market, last crashed.

This number is important to monitor, but it also needs context. Of particular note, is that the percentage of units absorbed at completion was 92% in January and 96% in February (in line with the 10-year average of 94%) — meaning each project, on average, that comes to completion still has just a handful of unsold units, which limits disruptions to the market. And the units may not even be offered for sale — the developer could be content with holding onto them for sale at a later date and renting them out (if a unit is rented, it is not necessarily counted as being absorbed). 

Also, the current level of inventory doesn’t mean what it used to. Over the past 10 years, the resale market has doubled in size  — so now the 1,800 units represent about a half percentage point of total built units and about 12% of the total resale and rental listings on the MLS during the fourth quarter. And demand for condos is also on the rise. Resale transactions reached a record high in 2014 and the market is tightening. 


In the fourth quarter of 2014, the ratio of sales-to-listings reached 50%, the threshold between a balanced and seller’s market. This led prices to grow at a 4% annual rate at the end of the year, which should continue to climb in early 2015 due to current conditions. Resale listings growth has been very limited, particularly in light of the high volume of completions. Urbanation calculated that less than 3% of units completed and registered in 2014 turned over in the resale market, versus 24% of which that were rented out on MLS.

Vacancy Rates and Rent Growth

Similar to the resale market, Urbanation collects data on the ratio of condos leased and listed for rent. However, there hasn't been enough variability in the data and a long enough time series to draw conclusions on its power for assessing market conditions. 

CMHC reports vacancy rates for condo rentals once a year, capturing snapshots of the condo rental market each fall. The latest data for 2014 showed that vacancy rates declined from the year prior to 1.3%, despite huge increases in new rental supply over the previous two years to the tune of 27,000 units, equal to 42% growth in the universe.

While certainly an encouraging statistic, the data may not be telling the whole story. The survey only covers units officially registered as of June of each year, meaning most of the record completions last year were missed. 

Perhaps a more accurate reading of current condo rental market conditions can be found in measurements of rent growth per sq. ft. Urbanation's calculations show that annual rental appreciation slowed to 0.8% in 2014 from an annual of average of 4.4% in 2011 to 2013. This is believed to be the first indication that the condo rental market is exhibiting more balanced conditions than suggested by the lagged CMHC data.


Look back to 2014 data for answers on how the recent surge in CMHC condo completions has affected the GTA condo market, because that's when they actually occurred. The clearest signal has emerged from within the rental market by way of reduced rent growth — but this just one indication of some modest supply pressure in an otherwise strong overall market.

It is critical to keep a close eye on completions and market conditions for condos in 2015. According to Urbanation's database of projects in development, over 27,000 units are scheduled for occupancy this year. Knowing when and how exactly how this unfolds will provide accurate market readings and allow for a better understanding of current conditions and help formulate expectations about the future. 

Thursday, November 27, 2014

New Purpose-built vs. Condo Rents: A per Sq. Ft. Comparison

By Fabienne Chan, Research Analyst

In addition to our quarterly reports on the new, resale and rental condominium apartment markets, Urbanation is actively engaged in site-specific market studies across the country. Interestingly, the majority of our consulting work has been focused on the market opportunity to construct new purpose-built rentals.

Whether it’s the fact that rental demand is at a 25-year high (at least), that condo rents have grown by about 20% over the past five years, that vacancy rates are ultra-low, the availability of low interest loans and tax incentives to build new rentals, or the perhaps the diversification of developers away from condos, attention has shifted sharply to the purpose-built arena.

With condos representing 99% of new rental supply in the GTA, our ability to provide accurate market valuation assessments has benefited tremendously by drawing information from the UrbanRental database — our proprietary database of condo rental market data by project.

In the course of conducting our research we have come across several instances where new purpose-built projects have been achieving higher per sq. ft. rents than comparable condo projects. For this blog post, we decided to zero in on some examples within the City of Toronto.

Five recently completed rental apartments were selected: One32 (2013), Motion (2012), WestQ (2012), Minto Roehampton (2007), and Jazz (2006). Using the UrbanRental database, we identified condo projects that were (i) within a 500 metre radius of the site, (ii) built within the last 10 years, and (iii) were of a comparable scale as the rental buildings selected.

One obvious impediment in making rent comparisons between purpose-built and condo projects was the difference in sample size — condo transactions were plentiful in the year-to-date 2014 while rental information for purpose-builds was relatively scare due to low unit availabilities. The data used to represent rental projects for this study were obtained via their websites or through the property management offices. 

The map below shows the location of the purpose-built rental projects examined represented by blue markers and their surrounding comparable condos by red markers.

Four out of the five purpose-built projects surveyed had higher per sq. ft. rents than their surrounding condo projects. Within the four projects, premiums ranged from 1.4% or $0.04 psf (Jazz) to 7.2% or $0.20 psf (Minto Roehampton). Differences in unit sizes played some part in the purpose-built premium (smaller units tend to generate higher psf rents), with suites at Minto Roehampton roughly 130 sf smaller than leased condos in the area. Slight variations in location, buildings age, suite layouts and finishes, project amenities, and floor heights of the units surveyed may also explain some of the gap. However, across the four projects these differences appear to mostly balance out and the average premium for purpose-built units was 4.4% or $0.12 psf.

When including Motion, which posted lower psf rents than its condo comparables (mostly due to having a larger range of suite sizes), the average premium across the five projects falls to 1.7% or $0.05 psf. 

In the end, the results indicate that there does appear to be at least some premium achieved by purpose-built rentals over competing condo supply. All else being equal, renters tend to favour a professionally managed and secure source of housing. Of course values in new purpose-built projects can also receive a boost due to their scarcity. 

The findings are encouraging for rental operators who will continue to face competition from a high volume of investor-owned condos coming to completion in the next few years. However, beyond 2017, condo supply growth will slow considerably due to fewer project launches over the past two years. This further supports the case for considering purpose-built development today.

For more information on this research or to inquire about Urbanation’s UrbanRental reports and consulting services, please contact Shaun Hildebrand at (416) 922-2200 or

Thursday, October 16, 2014

Rental Condominiums are Not Just for Downtowners

By Pauline Lierman, Director of Market Research

The focus on the sheer numbers of condominiums rented—a record 22,302 units over the four quarters up to Q3-2014—is often on the rapidly growing downtown areas of the “416”, mostly in the neighbourhoods stretching east and west of Yonge Street. Indeed, 78% of all rentals in the past year have been in the amalgamated City of Toronto, 47% which were within the former City's boundaries.
But what about the suburbs, aka the “905”? The 22% of rentals in the Toronto CMA that occurred in the 905 Region since Q4-2013 represents a total of 4,838 rented units. For market areas still very much associated with single family household living, this total is not inconsequential. 905 rental growth is accelerating at a pace stronger than in either area. Four quarter rental activity in Q3-2014 in the 905 region was 24% higher than the previous four quarter period. In contrast, the 416 rate was 16%. As the chart shows below, condominium rentals in the 905 region grew at a higher rate annually than in the 416 and the entire CMA in the third quarter.

The momentum behind the growing share of 905 rentals relates to its burgeoning supply. New units from condo completions were added at a faster rate in the 905 than in the 416 over the last four quarters. While the overwhelming number of new units are still found in the 416, the area’s share of new rental units in the Toronto CMA fell from 80% to 70% between the current and previous four quarter periods. Consequently, the share of new rental units in the Toronto CMA in the 905 leaped from 20% to 30%. Higher supply tends to translate into an increase in rented units, and as the following chart shows, the share of rental transactions in newly registered building in the Toronto CMA has been rising in the 905, reaching 48% in Q3-2014. Over the past 12 months, newly registered rental units in 905 buildings comprised 34% off all new rentals, up from 15% in the prior 12-month period.

The trend toward more 905 condo rental activity can be expected to continue into 2015. New condominium sales surged in the 905 in 2011 and 2012 in a wide distribution of areas, from Markham City Centre to near the Vaughan Metropolitan Centre, Mississauga City Centre, along Richmond Hill’s Yonge Street corridor to as far west as Burlington and Milton, which will result in many new buildings. Occupied but not yet registered units increased 17% in the 905 region from a year ago, with 2,192 new condominium units nearing their final closing. With rental rates on average hovering around $2.00 psf in the main 905 market areas, all this new inventory will likely have an inflationary effect on this small and growing market.


Monday, September 29, 2014

Linking Condo Activity with the Stock Market

Much of the business section in recent weeks and months has been devoted to columns questioning the sustainability of stock market index levels. The S&P/TSX Composite Index closed the second quarter at its highest level ever, up 25% year-over-year, with the value at the end of the fourth week of September 10% higher than at the beginning of the year.
Some explanations offered for the recent run-up include stronger oil prices, surging bank stocks and industrials, discounts in relation to U.S. stocks, improving economic growth and central bank commitments to hold interest rates low for an extended period of time.
While most financial industry analysts see this recent rally as being in its final days and recommend portfolio adjustments to gear up for disappointing market returns in the future, the prospect for a significant correction remains uncertain. Robert Shiller, the Nobel Prize-winning Yale economist, has compared today’s market valuations to peaks in 1929, 1999 and 2007. However, many believe that the market is in store for a series of minor corrections, to be followed up by more buying as perceived ‘value’ grows against a backdrop of improving economic fundamentals.
So why are stock market movements important for the condo market?
While new condo sales have followed the general path of many economic variables over the past 10 years with various degrees of correlation, their fairly close relationship to the stock market is worth paying at least some attention to.
Over the past five years in particular, new condo sales have shown a strengthening, albeit still moderate, correlation to stock market values with a one quarter lag. While this may seem counterintuitive as condo investing is often thought of as a substitute for financial investments, it can suggest that condo buyers use financial gains to invest in condos, or buy units because they feel wealthier thanks to their rising financial portfolio. The same relationship occurs on the downside, where buyers feel more cautious as financial values slide. Whatever the reasons, more research on this topic would be welcomed. (As a side note, condo sales have shown a lower correlation to REIT index values).
The chart below shows that when new condo sales volumes in the Toronto CMA and stock market growth pull away from each other, they tend to tend converge in subsequent quarters. Sales often overcompensate when catching up, which is shown to be followed by a more drastic change in course for the market (as seen in 2012-2013). Recently, new condo sales have been rebounding alongside the run-up in stock market values. However, sales remain well below their recent peak in 2011 while the stock market is reaching new highs.

The questions then become: will condo sales continue to benefit from the ‘catching up’ phenomenon previously observed and, if there is a stock market correction of any magnitude, what impact will there be on the new condo market? The problem with answering these questions is that our historical point of view is limited as the new condo market is still growing off a relatively small base from 10 years ago.  While Urbanation has been tracking the market for over 30 years, there lacks a sufficient volume of activity within the time series to conduct a more proper statistical analysis.

Nonetheless, we can tell from recent trends that the stock market now appears to be one of many indicators to look at when assessing condo sales trends. Whether the stock market ‘treads water’ or experiences an outright rout, repercussions for the new condo market can be expected. This suggests that paying attention to financial industry analysts may be (almost) as important as paying attention to condo industry analysts.

Tuesday, September 23, 2014

Urbanation and Marsh have Merged

TORONTO, Sept. 17, 2014 - Two of the Greater Toronto Area's most respected real estate market research and analysis companies, Urbanation and the Marsh Report, have merged to offer enhanced services and the most comprehensive data available to their clients.
Urbanation, the GTA's foremost authority on condominium research and data, monitors activity in projects that are proposed, in development or have been built, to generate key market metrics such as total sales, listings, unsold inventory, and average prices and rents per square foot.  Urbanation publishes two quarterly reports: theCondominium Market Survey, considered the "industry bible" for stakeholders in the highrise condominium industry, and Urban Rental.
Urbanation has acquired a 50 per cent stake in the Marsh Report, started in 1989 by John Marsh and purchased in 2008 by Yvonne Whyte and John Davies. It is the best source of data and interpretation for major sales in the GTA and produces two quarterly reports:  one that lists land sales in the GTA and one that lists the sale of commercial and institutional buildings. Its subscribers include real estate investment firms, financial institutions, real estate brokers, appraisers and government departments.
"Urbanation has the best market research and analysis of the residential condo and rental market in Toronto," saysEve Lewis, principal/co-founder of Urbanation Inc. and principal and president of the leading condo marketing firm, MarketVision Real Estate Corp. "The Marsh Report has a spectacular reputation, a long history and a lot of market knowledge. It seemed like a perfect complement to Urbanation."
"We have availed each other's services for some time and I always felt it would be a good fit because of the type of research we do," added Marsh Report principal Yvonne Whyte.
Ms. Whyte and Ms. Lewis said by joining forces, Urbanation and the Marsh Report will offer customers complete and seamless market research and tracking, from the time when a parcel of land is initially purchased through to complete development and completion of a site.
Ms. Lewis, who has become involved in retail and office building leasing since she took over her late husband's company, Woodcliffe Landmark Properties, three and a half years ago, could see the appeal for existing and new customers in packaging Urbanation and the Marsh Report services together.
"As we move forward, with apartment buildings and other aspect classes, it (the merger) allows us a lot of synergies and efficiencies and a broader depth of service to our clients, and information they wouldn't normally be able to source," said Ms. Whyte.
"The reports will be the only ones of their kind on the market. Urbanation has made significant investments in computer software to bring more value to clients and will be looking to provide that to the Marsh Report," said Ms. Lewis.
"Together, we have a better platform and a synergy to undertake enhanced services," said Ms. Whyte. 
For interview opportunities with Eve Lewis, please contact Vicbar Marketing at 416-510-0073

Friday, June 13, 2014

Condos Aren’t to Blame for "High Rents"

A recent OECD report on Canada (reported in a Globe and Mail article) suggested that the condominium market has played a big role in creating a shortage of affordable rental housing.
It argues that because developers favour building condos over rentals (for a number of reasons), the growth of condos has crowded out new rental construction. And, because investors are buying new condos and renting them out, their units are raising rents to levels beyond the reach of average renters.
But is the condo market really to blame?
They certainly have become the dominant form of new rental supply in the GTA. As the table below shows, condos have accounted for 99% of the net change in the total rental apartment stock over the past five years. Over one quarter of all condos are now used as rental. But while the supply of condo rentals has seen remarkable growth of 80% since 2008, they represent 25% of all apartment rentals – meaning traditional rentals still represent three quarters of the market. This share is consistent for the City of Toronto.

As shown in the chart below, the average rent for purpose-built rental units in Toronto is considerably less than condo rental apartments ($1,035 vs. $1,576 for one bedrooms and $1,225 vs. $1,835 for two bedrooms). A couple key factors are that the stock of purpose-built rentals is mostly outdated, and most are subject to rent control – rents for sitting tenants can only rise by provincial guideline amounts (2.5% in 2013 and 0.8% for 2014).
But notice that rents in purpose-built units constructed since 1990 (rent control doesn’t apply to buildings built after 1991) are very close to condo rentals — a difference of $111 for one bedrooms and $144 for two bedrooms. In fact, there are many examples of new purpose-built rentals charging above nearby condo rentals.
Ultimately, when including condos in the measurement of average rents for all apartments in Toronto, the level rises by just $97 (see chart below). In other words, when excluding condos from the equation, average rents for apartments in Toronto are 8% lower.
So it can be said that condos have played some role in raising overall rent levels in the market, but certainly can’t be blamed for creating a shortage of what is defined as ‘affordable’ rental housing. Why? Because it can’t be said that rents would necessarily be lower if the growth in condo development was replaced by purpose-built rental construction.  Investor-owned condos, which have been declining in size, are actually attributed to slowing growth in rents — average condo rents were down 1.7% year-over-year in Q1 according to our latest UrbanRental Report (although still up year-over-year on a rent per square foot basis).
If a housing segment is to blame for crowding out purpose-built rental construction, then look towards the low-rise market. Population density, provincial growth policy and land availability in the GTA have dramatically shifted development away from low-rise homes, leading all development to gravitate towards high rise and creating greater competition for multi-residential land. High-rise is now the dominant form of construction, representing over half of all housing starts in each of the past four years compared to a 30% share 10 years ago.
The lack of low-rise supply has played a major role in pushing up housing prices in the GTA and impacting ownership affordability. As shown in the chart below, when excluding condos, average resale prices have grown by 84% over the past 10 years. By comparison, condo values have appreciated by 63%. As a result, the gap between the average price of condos and their alternatives has grown to a record $233,000, which is more than twice the gap from 10 years ago.
It can be argued that if it weren’t for the growth we’ve seen for condos, we would be facing a much bigger housing affordability issue. Not only would rents be likely close to or just as high as they are now, prices for entry-level homeownership would be out of reach for first-time buyers, spiralling towards even lower rental vacancy rates and an even greater shortage of ‘affordable’ rental units.