For those looking to live in the city of Toronto, or those owning rental properties, the vacancy rate can be a very important figure to pay attention to. According to Urbanation, which releases regular reports on the GTA rental market, the vacancy rate in Toronto peaked in Q1 of 2021.
At that point, the vacancy rate of purpose-built rental apartments in the city reached 6.4%. This was a record high for the city since data on rental apartment markets began to be collected by the Canada Mortgage and Housing Corporation in 1971.
Since then, it seems that the rate of vacancies has begun to stabilize, though it’s still at a relatively elevated level compared to the pre-pandemic urban rental market. What exactly does a change in vacancies mean for renters and investors and where are trends pointing for 2022?
Current vacancy rates in the city of Toronto
Vacancies falling since the start of the year
Currently, the vacancy rate of purpose-built rental units in the city of Toronto is around 3%, according to the most recent Q3 report from Urbanation. That's less than half of the high seen earlier in the year and a level that they consider to be "balanced".
In the midst of the pandemic, many people moved away from the city to settle further in the GTA or surrounding areas. In addition, there was a major decrease in post-secondary students as well as newly settled immigrants which had a major effect on rentals. Now people are starting to return and the numbers reflect that.
Average monthly rents moving up
It has been observed that there is a relationship between average rents in Toronto and the rate of vacancies. As vacancy in the rental market rises, rents tend to go down. As vacancy peaked in the first quarter, rents fell almost 10% compared to a year earlier.
This can be explained by the idea that as more units remain vacant, property owners have more competition to find renters, so rent moves down as each property owner fights to stand out. This is also why rental incentives increase as vacancy does. Rental incentives also peaked along with vacancy rates early in 2021, but are now becoming less common.
According to Urbanation, rents have now increased by 1.8% year over year, the first annual increase observed since the start of the pandemic. As stated in their most recent statistic, the average rent in Toronto was $2,389 (or $3.30 on a per square foot basis). This seems to reflect the lowering of vacancy in the city of Toronto, however, they also cite relatively higher-priced new developments as driving this figure up. Adjust to remove these expensive new developments, rents were in fact down 1.8% since Q3 2020.
Condo rents up even more
The price of condo rentals saw an even larger increase than the general rent price. Rents in the condo market saw an 8.2% quarterly increase and a 3.8% increase since the same period last year. In addition, lease activity was up. The number of leases signed for condo units was up 6% from last year, and the quarterly condo leases to listings ratio were up to 82%, helped by lower total condo rental listings.
What is driving vacancy rates?
Vacancy rates are driven by two major elements. The first is the supply of available units and the other is the number of renters looking for a place to stay. The city of Toronto actually has a pretty tight supply in the rental segment, and in the months before the pandemic, vacancy rates were trending downward as a result.
However, during the pandemic, supply remained largely the same as rental construction activity slowed, and a great amount of demand was suppressed.
Migration out of cities during lockdown
One reason why demand was lowered was the fact that pandemic conditions made the city much less enjoyable to live in. While being forced to stay at home, the benefits of living in a large city were limited, and the health concerns of being around so many people were high. Toronto unsurprisingly had the highest COVID case numbers in the province. These factors caused many to move elsewhere.
Post-secondary students and immigrant population limited
In addition, work-from-home allowed many to consider relocating beyond the city. Also as mentioned above, the usual high amount of students and immigrants coming to the city every year was very much reduced, taking a large chunk out of the renting population.
Finally, there were simply many people who lost their jobs and were no longer able to afford their lives in the city.
Now, things are turning around. The population is largely vaccinated and restrictions are being lifted. People are returning to work in the city. In-class learning is beginning again, more immigrants are arriving, and unemployment is on the decline. In the coming years, the rental stock may very well struggle to keep up with demand.
What is the normal vacancy rate for Toronto?
The vacancy rate in Toronto is usually very low. According to CMHC data, the rate remained below 2% for almost ten years leading up to the COVID pandemic.
Will vacancies continue to go down?
Indications are that vacancy rates will continue to go down in Toronto. Based on the factors listed above, the population of the city is set to increase into 2022 and beyond, and the rental market should see pressure once again. Urbanation says that the stage is set for the Toronto rental market to return to its pre-COVID levels "in short order."
What does this mean for renters and investors?
For renters, lower vacancy is a mixed bag. If you remained in the city all along, the time to negotiate a new lease will soon be gone. Lower rent, and rental incentives such as free rent, peaked along with vacancy at the start of the year, and things will now start getting more expensive.
If you are one of the renters who left the city and now want to return, things will seem pretty similar to how they were when you left. You may still be able to get a month of free rent – but not for long.
For investors, lower vacancy is a good thing as you can charge higher average rents as well as have an easier time finding tenants to fill your properties. This is particularly good news as Toronto is set to implement its vacancy tax, which could mean a high cost for you if you are unable to rent your units. This tax, in addition, may serve to lower vacancies even further if it has its intended effect.