Balance, briefly, in the rental market

Vacancy rate falls in 3rd quarter, but will probably return to pre-pandemic squeeze in 2022

Blink and you’ll miss it.

The vacancy rate of the Toronto region’s purpose-built rental market is in seldom-seen balanced territory of about three per cent, as the sector races to pandemic recovery.

But the president of developmenttracking market-research firm Urbanation predicts the vacancy rate will likely return to the squeezed pre-pandemic level of about 1.0 to 1.5 per cent within the first half of next year.

Shaun Hildebrand said Toronto has

only seen a balanced rental market a couple of times in the previous 16 years — brief intervals around 2009 and 2005.

Urbanation’s latest numbers, however, found purpose-built apartments — that is, units in buildings created to serve as long-term rental accommodation — had about a three per cent vacancy rate in the Toronto region in the third quarter of this year. That is down from 6.4 per cent in the first quarter and 5.1 per cent in the second quarter. (The rental market is generally considered to be in equilibrium at around three per cent.)

Downtown, vacancies fell to 3.8 per cent from a first-quarter high of nine per cent, according to Urbanation.

The rental sector’s swift recovery from the pandemic suggests the market was more undersupplied than previously thought, said Hildebrand.

“Aside from vacancy rates being higher than where they were pre-pandemic, everything else is pretty much back to where it was pre-COVID. That only took about a year to happen, which is remarkable,” he said.

“The average ratio of units being leased versus the number of units being listed for rent, the average time on market, absorptions that we’re seeing within the new purpose-built rental market — they’ve all pretty much returned to preCOVID highs,” said Hildebrand.

Rents have risen as vacancies shrank in the third quarter. In buildings completed after 2005, rents rose 3.8 per cent between the second and third quarter to an average of $2,389 — a 1.7 per cent year-over-year rise that was the first annual increase since the start of the pandemic.

Much of that annualized growth, however, was due to the higher costs of renting in recently completed buildings. In older buildings, rents actually fell 1.8 per cent year-over-year in the third quarter — but that compares to a much steeper 7.3-per-cent annual decline in the first quarter.

The number of buildings offering free rent incentives to tenants also fell in the last quarter to 57 per cent of buildings, compared to 88 per cent in the second quarter.

As the condo market tightened, rents in the region also rose 8.2 per cent on average in that sector — to $2,304 on average, a 3.8 per cent year-overyear increase. In the City of Toronto, average rents were up 6.2 per cent year-over-year to $2,405, though that remains 6.9 per cent below pre-COVID levels.

The premium paid for a downtown rental had fallen to 15 per cent prior to the pandemic. Although it has now risen to 25 per cent, that remains below the 37 per cent premium tenants were paying in the third quarter of 2018 for the privilege of living downtown.

Hildebrand said, “It will be interesting to see if the perceived value premium of downtown living returns and, if so, how long does it take.”

“Even before COVID, the premium shrunk a bit. Renters started to re-evaluate the premium for downtown because of how high it stretched and we saw the demand filter into less expensive apartments.”

Rents in the 905 communities around Toronto are 1.6 per cent higher than the peak in the third quarter of 2019.