Growth in condo rental stock is not the
reason for the high vacancy rates being experienced in the
purposed built apartment sector. In fact, the sector has
been on a general declining trend since 1996. Between 1996
and 2003, total rental condos in the Toronto CMA declined
by some 6,679 units.
The sector as a percentage of the total Condo market has
also been declining. For the same period 1996 to 2003 the
percentage of rental condos fell from 32.1% to 19.1%.
Please
see graph below.
Data Source: CMHC
The Competing Ground
DALA's survey of the Toronto condo rental market revealed
the following relative to its purposed built counterpart:
o Larger proportion of newer stock
o Better amenities
o Higher Rent per sq ft.
o Higher unit preservation values, reflecting better maintained
apartments
The Segment of the purposed built sector most impacted
by competition from the condo rental sector is that of
newer apartments in the higher end of the market. Here
there is convergence in amenities provided, type of lifestyle
catered for and target audience.
Vacancy rates have been the highest in these apartments
as well. The Altus report revealed average vacancy rates
of 5.35% in 2004 for grade A apartments. Even though vacancy
rates are much lower in the condo rental sector, they
have been increasing. Vacancy rates increased from 0.4%
in 2002 to 1.6% in 2003 in the GTA.
This means condo apartments are staying empty for longer
periods. Owners of this sector unlike the purpose built
sector tend to be small investors who are unable to spread
losses in rental revenue over larger portfolios. They
are more dependent on monthly rentals to meet monthly
mortgage and maintenance commitments.
Uneven Playing Ground
There is also the notion of competing on uneven playing
ground. In Toronto where the competition is most keen
for convenience and elegant lifestyle apartment living,
the tax rate applicable to the purposed built sector is
2.84 times greater than it is for homeowners or condo
investors renting their apartments. This represents a
substantial differential in cost and associated margin,
resulting in the condo sector having more leverage in
this regard, for lowering the rental price in-order to
get the apartment rented.
Impact on the Market
While rental prices are slipping in both sectors in an
attempt to deal with the vacancy issue, there is a greater
readiness to decrease prices in the condo rental sector.
Prospects are therefore being lured towards condo rentals
by price reductions and the reputation that goes with
condos for better-maintained buildings. The result is
price decreases in the condo rental sector and pressure
for further decreases in the purposed built sector in
order to compete.
One game card that is often not used in the purposed built
sector is security of tenure. In condos, renters may not
be guaranteed tenure for more than a year. With purposed
built apartments, renters can live there for as long as
they want, given they are good tenants.
The forecast is that vacancy rates will continue to increase
into 2005 and the competition will continue to increase
between both sectors. Property owners when competing with
the condo rental market must be aware of the main competing
factors and market the benefits that supply that lifestyle.
Owners should also train their leasing staff to make the
prospect aware of the security of tenure that comes with
purpose built apartment living versus condo rental.
Derek Lobo is a leading Apartment Leasing
Consultant across North America:
E-mail: dlobo@dala-inc.com
