A couple weeks ago, we talked about the buyers and sellers who are still active during this market downturn.
The active buyers are mainly end users.
And the active sellers are mainly investors who want to offload.
Overall, the sales market is very quiet.
But there’s one market segment that is extremely strong during this downturn.
The rental market.
How much is the average condo rent in the GTA right now?
What’s the percentage rent increase over the past 2 years?
2023 is a record year for condo completions, how many investors are still holding onto their units in this high interest rate environment?
What unit type, from studio to 3 bedroom, gives the best rental return?
We are going to answer all these questions in this episode.
If you like this kind of episode, make sure you subscribe, hit the bell and watch on for the answers!
#1 The Rent Growth
Let’s take a look at the average rent first.
It is calculated based on an average condo size of 695 square feet.
How much was the rent back in 2014?
$1,788.
It kept going up and peaked at $2,421 in 2019.
Then came the pandemic and the rent dropped back to $2,122.
Coming out of the pandemic, rent has been increasing at a rate faster than ever.
From 2021 to 22, the rent increase was 19%.
From 22 to 23, another 11% increase.
So the rent increase has been a whopping 32% over the past 2 years.
We have been seeing double digit rent inflation for 7 straight quarters already.
The average rent now is $4.03 per square foot.
So far, there is no sign of rent inflation slowing down because more and more people are looking to rent.
They want to avoid ownership at the moment because of the high interest rates.
You see, there are more and more people coming in and they need a place to live, either own or rent.
At the moment, a cold ownership market is translating to a red hot rental market.
#2 Investors Sell-Off
According to data in early 2020, before the pandemic, around 36% of the condos in Toronto were owned by investors.
With all the construction delays during the pandemic, 2023 becomes a record year for condo completions.
But it is also the worst year for an investor to have a condo closing because of the record high interest rate.
In many cases, even the high rent is not enough to cover all the monthly payments.
So investors are in a negative cash flow position.
Here’s an interesting data point.
There were 17,542 newly registered condo units from June last year to June this year.
How many units were leased through the MLS system?
6,403 units.
That means at least 36.5% of the new units are owned by investors.
There may be other units that are leased outside of the MLS system and are not included in the calculation.
So the majority of investors are still holding onto their units.
Indeed, this aligns with the exclusive data I shared in this video.
Only 2% of our landlords are trying to sell their rental units.
#3 Unit Type with Best Rental Return
We said earlier that the annual rent increase was 11% in Q2 this year.
And it was calculated based on an average unit size of 695 square feet.
What’s the annual rent growth for studio units under 400 square feet?
15.1%, with average rent at $2,121.
What about 400 to 499 square foot units?
That would be either studios or small one bedroom units.
The annual rent increase was 14%, with average rent up at $2,309.
What about big units that are over 1,000 square feet?
Only 10.2% increase to an average of $3,991.
You see, the smaller the unit, the bigger the rent growth.
Studio units are also the fastest to get leased out because of the price point.
Let me share a typical investor story with you.
Near the end of 2019, our client bought a 361 square foot studio unit at Yonge & Wellesley for $453,000.
He started with a rent of $1,800.
Then it went down big time to only $1,375 deep in the pandemic.
It climbed back up to $1,950 in 2022.
The tenant left and we put up the unit for rent the first week of August, so just a couple weeks ago.
One day on the market and we got 2 offers.
One at $2,300 and the other at $2,400, both one year upfront.
Yup, that’s how competitive the summer rental market is in downtown Toronto.
The annual rent increase for this studio unit is almost 19%.
Even if the owner is carrying a 65% mortgage at 6.5% mortgage rate, the rent is still more than enough to cover the $2,000 monthly mortgage payment.
The value of the unit appreciated around 17% based on the most recent sold data.
That’s not bad considering we are undergoing a market crash.
So the owner has no intention to sell at all.
Here’s the thing.
Investors with tighter budgets would have invested in studios and small one bedroom units.
With the huge rent increases in small units, the amount of money an investor may have to chip in each month would be very limited, if at all any.
Investors with bigger units are typically more wealthy, that’s why they have the big units.
So most of them are fine chipping in a few hundred dollars a month for a year or two.
You see, that’s why we don’t see massive investor sell-offs in the market.
If you find this rental market update interesting, you gotta subscribe and hit the bell now because we will have many more episodes with data and analysis like this one.