Rental Rebound Bodes Well for Pre-Construction Condo Sales
This article was written by Barbara Lawlor, CEO of Baker Real Estate Incorporated.
You could be forgiven if Newton’s Third Law of Motion isn’t the first thing that comes to mind when you think about the rental market and its twin, the condominium market. Back in 1686, Sir Isaac decreed that for every action, there is an equal or opposite reaction. And while he wasn’t addressing the 21st Century real estate rental market, he could have been.
In that symbiotic relationship between rental demand and the condo market, the Newtonian effect is apparent. After a sharp negative correction in 2020 and even the first months of this year, a powerful positive force is now kicking into effect.
Here’s why that’s happening.
A great number of pre-construction condos are purchased by investors who buy them with the intent of renting them out. This is a function of the limited new construction of purpose-built rental buildings in many cities, and in Toronto in particular. That means the recent rental market slump had a swift and drastic impact on condo sales.
By way of context, think way back to the earliest and darkest days of the pandemic. In the immediate aftermath of the lockdown and before vaccines started to roll out, many pundits declared that urban life was dead and could not be revived. With their own fears confirmed, people left major cities like Toronto in significant numbers and re-located.
With offices and other workplaces closed for the foreseeable future, people bought suburban houses that could more generously accommodate both family and workspace. This also filled the collective psychological need to live in a more controlled environment and to have more distance from others. Meanwhile, others drifted home to live with their parents and to save some money. The more apocalyptically-minded fled the cities because they were told would never, ever be habitable again given the chronic, future risks of infection.
At the same time, borders closed on international students and tourists taking a big bite out of both the long- and short-term rental markets. All of these elements converged, leading to an excess of supply, a sudden drop in demand, and an inevitable decline in rental rates. Between the peak in the fall of 2019 and the tough of early 2021, rents in Toronto fell by a whopping 21%.
The Newtonian reaction to these actions may not be of equal force, at least not at first glance. But they are quickly gaining momentum.
In May, as more people were vaccinated and Canadians looked to the progress made in the US and the UK, the urban return began in earnest. According to the National Rent Report from Rentals.ca, Toronto market rents increased 1.6%, month over month in June. Extrapolated across the next year when borders, offices, schools – and let’s not forget patios – are slated to re-open, it quickly adds up to a significant increase.
On top of that resurgent demand, consider the long-awaited arrival of immigrants to Canada – many of whom historically remain in the Greater Toronto Area. Over the next five years, about two million new Canadians will be welcomed – levels not seen since 1913. About 60% of those people are included under Economic Class Programs, which expedites their landed immigrant status because they already meet the criteria as future employers or employees.
Although these individuals typically rent in large urban areas for their first four to six years in Canada, those rentals are often, yes, condo units. And when they move from rentals, they become condo purchasers. It’s also worth noting that for urban millennials, as rents and house prices increase, pre-construction condos remain an important first rung on the property-ownership ladder.
As supply and demand re-calibrate over the next few months, there’s little question that both rentals and pre-construction condo sales are set to rebound.
Statistics and Data Provided By the Baker Insights Group (BIG).
This article was produced in partnership with STOREYS Custom Studio.