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 shaun@urbanation.ca

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.

 



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.



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 orvgriffiths@vicbarmarketing.com

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.

Toronto Condo Market by the Numbers

An Infographic of our Q1-2014 Results

How Many Condo Completions Should We Expect?

There has been speculation reported through the media recently that upwards of 70,000 condo units will come to completion by the end of 2015. This, it is suggested, will cause too much supply for prices to remain stable.

As Urbanation has the data to refute such projections, we felt compelled to weigh in with some hard facts.

 

Fact #1: There isn’t even 70,000 units currently under construction.

According to Urbanation, a total of 58,659 condo apartment units were under construction as of the end of 2013 in the Toronto CMA. This is consistent with statistics reported by CMHC (53,545 units) — who record starts a bit later in the process once the foundation is poured.

While there have been previous instances of completions over a two year span exceeding the number of units under construction at the beginning of the period, it has never been by a wide margin and is not expected to happen over the next two years.

Firstly, projects are getting larger and staying under construction for a longer period time — the average is more than two years. Secondly, the 24,130 units in pre-construction at the end of 2013 were collectively 60% sold — below the five year average and typical minimums required by lenders to advance construction loans — meaning starts are being delayed.

 

Fact #2: Scheduled occupancy dates have become an unreliable measure.

Developers have the best intentions of delivering completed units according to schedule. But, as the chart below shows, many can’t. Over the past few years there has been a growing disparity between scheduled and actual completions as development timelines have become stretched. Many factors are at play, including increasing project scale, resource constraints, building complexities and weather. Based on recent patterns and the progress made to date for projects scheduled to complete this year, Urbanation expects approximately 19,000 completions in 2014.

 

 

Fact #3: Higher completions don’t necessarily mean weaker market conditions.

Urbanation's more realistic expectations for completions this year and next (totaling roughly 40,000 units) won't, on their own, cause prices to decline. If you expect demand to remain stable, you should also expect market conditions to remain balanced and supportive of current prices levels.

Also consider the market's starting point. As shown the chart below, the sales-to-listings ratio ended the year in the upper end of the boundary characterized by balanced market conditions, which led prices to grow by over 5% year-over-year. Note that this occurred despite a record level of completions for the market in 2013. In order for the sales-to-listings ratio to fall into a 'buyer's market', listings would need to grow by more than 30% — twice the growth in expected completions.

Also note that when the sales-to-listings ratio declined in late 2012/early 2013 to the lower boundary of a balanced market and prices experienced marginal declines, it was caused by slower sales as a result of the introduction of tighter mortgage policy — not rising listings. In fact, listings followed the demand trend and helped keep the market stable.

 

 

We certainly aren't dismissing the fact the completions will be higher in the years ahead. We recognize that it creates certain vulnerabilities for the market should demand unexpectedly fall. However, we also don't believe it should be used as the main basis for projecting a decline in condo prices.