Vacancy rate in Toronto keeps recovering from a previous hike, meaning certain changes for renters and investors
If you’re considering moving to Toronto or already rent a place here, a vacancy rate is a very important gauge for you. The report by Urbanation says the vacancy rate in Toronto reached its peak in the first quarter of 2021.
At that moment, the vacancy rate of purpose-built rental apartments in Toronto rose to 6.4%, marking the largest number since the Canada Mortgage and Housing Corporation started collecting the data back in 1971.
It looks like the numbers have been stabilizing since that moment, but they still remain relatively high compared to the pre-pandemic level. So what does a change in vacancy trends mean for renters and investors?
According to the latest report by Urbanation, the vacancy rate of purpose-built rental units in Toronto was about 3% in the third quarter. It’s less than half of the peak we’ve seen at the beginning of the year, and the recent result is considered “balanced”.
During the pandemic, many people decided to leave the big city and move away from the GTA or surrounding areas. Moreover, there was a sharp decline in the number of students and new immigrants which had a significant influence on rentals. Today, people are returning, and we can see this change in numbers.
There’s a connection between average rents in Toronto and the vacancy rate. As the latter goes up, rents start falling. When vacancy peaked in Q1, rents were down by almost 10% on a year-over-year basis.
The reason is that as more units are vacant, the harder it gets for property owners to find renters, so they reduce the rent in attempt to attract tenants. It also explains why rental incentives become more common, as vacancy grows. Rental incentives were also up, when vacancy rates rose at the beginning of 2021, but now they are not as common.
Urbanation’s report shows that now rents have risen by 1.8% annually, marking the first year-over-year gain since the beginning of the pandemic. The average rent in Toronto reached $2,389 (or $3.30 per square foot).
Condo rent showed an even larger increase of 8.2% from the previous quarter and a 3.8% gain from a year ago. The number of signed condo leases rose by 6% annually, while a quarterly condo leases to listings ratio went up to 82%.
Vacancy rates are affected by two main factors: supply and demand. As a rule, the city of Toronto has quite a tight supply in the rental market, and during the months before the pandemic, vacancy rates were going down sharply.
Nevertheless, supply remained the same during the pandemic, as rental construction activity slowed, and a huge share of demand was restrained.
One of the reasons Toronto faced a lower demand was the pandemic making the city less attractive for living. People had to stay at home, so the advantages of living in a large city were limited, while the health concerns of being surrounded by so many people increased. Toronto showed the highest COVID case numbers in the entire province. As a result, many people moved out of the city.
Moreover, remote work allowed many to relocate, and a usually high amount of students and immigrants entering the city each year was also down, reducing the renting population.
And of course, many people simply lost their jobs and couldn’t afford living on Toronto anymore.
Today, the situation is different. A large share of the population is vaccinated and restrictions have been lifted. People are coming back to work in the city, students return to in-class learning, more immigrants are coming, and unemployment rate is going down. Over the next few years, the rental supply may be not enough for the growing demand.
As a rule, the vacancy rate in Toronto is extremely low. CMHC report says the rate was below 2% for almost ten years before the COVID pandemic.
So what does a lower vacancy mean for renters and investors? Well, for renters, it’s a tricky thing. In case you’ve been in the city all along, your time to negotiate a new lease will be over very soon. Lower rent, and rental incentives were most common when the vacancy rate was up, and now rent is going to rise.
Meanwhile, lower vacancy is goof for investors, as they can raise the rent and find tenants easily, which is especially good as Toronto plans to introduce a vacancy tax. As a result, investors will have to pay if they can’t find a renter for their property. In addition to it, the tax may reduce the vacancy rate if it works the way it should.