Introduction: The “1.7%” Vacancy Rate
Are vacancy rates really 1.7%?
That’s the reported rate by CMHC – the Canada Mortgage Housing Corporation – as of the end of February, 2015.
This is a very important question, because many people have invested large sums of money into condo units in the hopes of renting it out.
The more I delved into this issue, the murkier it became.
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The “Official” Stats on Vacancy Rates
CMHC is the official government arm for housing. According to their website, “CMHC helps Canadians meet their housing needs. As Canada’s authority on housing, we contribute to the stability of the housing market and financial system, provide support for Canadians in housing need, and offer objective housing research and advice to Canadian governments, consumers and the housing industry.”
The words, “objective housing research” sticks out to me.
People innately trust the information that comes from them. They’re supposed to be looking out for Canadian homeowners.
The official number for vacancy rates in the Toronto area was 1.7% as of the end of February, 2015.
1.7%, that’s great! I’m sure that’s what many people thought, especially those considering investing in the rental market.
But what does this number mean?
Okay, the 1.7% represents the percentage of units in “Privately Initiated Apartment Structures of Three Units and Over”, or in other words, the “Purpose-Built Rental Market”.
Simply put, they’re talking about apartment buildings that are all for rent. Usually this means one landlord for the entire building or structure.
This excludes condos that have a mix of owners and tenants. Condos that were built NOT specifically for rentals.
So in other words, the 1.7% figure has absolutely NO relation to the real vacancy rate for condos that are for rent.
This was my first real light on this whole issue with vacancy rates.
Who builds apartments specifically for rent nowadays? We’ve heard in the news of some pension funds starting to look at building purpose-built rental apartments. But for the last 20 years or so, there’s been no activity on that front.
And those older, purpose-built rental apartments are often more affordable, which would explain why the vacancy rates in those structures is lower.
But what about the condo rental market?
Is there any accurate figure on that?
“So in other words, the 1.7% figure has absolutely NO relation to the real vacancy rate for condos that are for rent.”
How the Media Uses the Vacancy Rate Statistics
The media takes those figures from CMHC and throws them out as fact. There’s no explanation or context for what those numbers really mean.
Implications for Condo Investors
I want to focus on the hottest area of Toronto real estate for the past few years: condominiums.
It’s no secret that much of the condo boom was fuelled by investors hoping to cash in on the rising tide of real estate.
What’s troublesome is that many developers use this vacancy rate figure to entice people to buy condos. They use this figure to convince investors that a condo is a great investment, as they’ll find renters with ease.
Is this really the case?
What’s the REAL Vacancy Rate for Condo Rentals?
I wanted to cut through the clutter of information and get some real data.
Unfortunately, this data is very hard to come by.
I wonder if there’s some sort of conspiracy to hide this data. But more realistically, I can see the difficulty in getting accurate data.
Here’s what’s real, though:
The 1.7% vacancy rate is the percentage of units in purpose-built rental structures (with 3 units or more) that are vacant at that time.
This doesn’t mean the percentage of such units that are available for rent. That figure is higher, near the 3% mark.
So far, so good.
But for condo owners, that data is pretty much useless.
What condo owners need to know is :among condo units being put out for rent, what percentage of those units are vacant?
It would seem to be common sense that this is the figure that potential condo investors should be looking at.
And this is a figure that is seldom, if ever, publicized.
The best thing I could find was the Condo Owner’s Survey by CMHC. They surveyed people in Vancouver and Toronto in 2013, and published the results in 2014. I wish they had conducted an extensive survey of JUST the Toronto market, because for my purposes, the Vancouver market doesn’t really matter.
But I’ll give a BIG assumption that the two markets are fairly similar.
The results are revealing:
Among all the condo owners surveyed, 17% of them owned at least one secondary unit. I’ll call them the condo investors.
Let’s jump right to the “vacancy rate”.
Among these condo investors, the percentage of units that were vacant was an astounding 6.9%.
Here’s an even starker figure:
Among units that had been purchased 3 years or less ago, 10.1% of them were vacant.
Whoa, wait a sec. What’s going on here?
What that statistic tells us is that among newer condos, the percentage of those units that were vacant is 10.1%.
And this is data from August and September of 2013, before the record number of condo completions came onto the market in 2014. With all of those units coming onto the market, my guess is that this vacancy rate is much higher now. The only way it wouldn’t be if is there was a big influx of new renters coming into the market. I just don’t think there are THAT many more people looking for units than two years ago.
“What that statistic tells us is that among newer condos, the percentage of those units that were vacant is 10.1%.”
What’s Happening on the Ground?
I wanted to get a better sense of what the reality on the ground is.
Is it really the case that at least 1 in 10 new condo units that are put up for rent are vacant?
I came across a lady named Rachelle Berube. She’s a property manager and the main author of the website landlordrescue.ca.
She was featured in an article in Maclean’s called “The Vacant Truth About Rental Condos”.
In it, she took the reporter on a physical journey to the rental market in new condos.
She also went into more detail on vacancy rates in a blog article.
Here’s Rachelle on how she first came to investigate this topic:
RACHELLE: Okay so generally, like the first thing that got me investigating this was an annoyance of course. I was working at you know my kid’s event and I was posting ads.
RACHELLE: And there was a guy who’s a property developer and he’s like what are you doing? And he says you must have a great easy job. I know that properties, I’ve been told that there is only 1% vacancy, must be easy right? And I was like, actually who said that? Because that is not right and I’ve gone through the news a little bit and I was like, this is foolish. And because I was a little bit annoyed I thought I’ve got to really look into that. Who keeps saying this? And what is the source of this number? And so that’s how I ended up doing a bit of research…
And truth be told, it was that Maclean’s article, and subsequently her blog posts, that got me really intrigued about this topic. I really began asking myself: “have we all been taken for a ride?”
I asked her about what things look like on the ground in her job, as she tries to rent out units for her clients:
RACHELLE: And so now what I find with the new condos is it’s getting higher and higher and that is troublesome. I see it taking longer and longer to absorb the markets. Here’s the issue, in 2014 over 100,000 units were completed. And apparently, I don’t know if this is the true number, I just read it in the Star, 487 new buildings are underway. Condo projects are registered, so my question is, if I have a great condo let’s say for example, 12 York Street, which is one of the ones I reference. Let’s give some addresses, 12 York, 8 Mercer, 33 Singer Court, Emerald City Apartments. So in reference that would be 12 York Street, the other one is Leslie and Sheppard.
“And so now what I find with the new condos is it’s getting higher and higher and that is troublesome. I see it taking longer and longer to absorb the markets. “
RACHELLE: So two in the financial district and one in Don Mills and Sheppard and the other at Leslie and Sheppard. And what I find there is for example, I rented one that was a one plus den, at 33 Singer Court. Beautiful building, very nice, they put up a new building and there are 28 one plus den condos that are available when I’m renting mine. Because they built a new building and that’s how many they have. Another example of that is 12 York, I went there with Jason Kirby and door after door, the floor I was on had one occupied out of 11.
RACHELLE: I rented mine, then there are nine available and you can tell no one had been in this suite for days. And that suite has been available for 2 or 3 months.
A New Trend: Earlier Interim Occupancies
As I spoke with Rachelle, I discovered another interesting if not unsettling trend: that of earlier interim occupancies.
In case you were wondering, an interim occupancy is the period of time when a purchaser of a unit is allowed to move into the unit, but the condo building as a whole is not yet registered. It basically means that the condo is built enough to move in, but it’s not finished yet. A condo building must be registered in order for you to take legal title to the unit. In other words, you’re not the legal owner until the building is registered.
So an interim occupancy means that you can live in the unit, or rent it out, without actually owning the property yet.
You pay an interim occupancy fee to the developer, which is basically like rent.
What’s interesting to note about the Condo Owner’s Survey by CMHC I spoke about earlier, is that the data there is presumably for completed condos.
If you add all the interim occupancy units that are up for rent, I bet the vacancy rates shoot up.
Rachelle has observed a trend of earlier interim occupancy dates.
RACHELLE: Yes. And things have transitioned in the condo market. You mentioned the interim occupancy phase. In the level of finish in the interim occupancy phase, that has changed a lot. 8 Mercer, the most unfinished building I’ve ever rented anything in. The security guard was sitting at a desk. And they are on the 6th floor and people are moving into this. So even for this, this is very unfinished. And then not far from your office, we have World on Yonge which I also rented which was very finished. So there is difference in the level of finish. One is going to be harder to rent then the other, that’s the first thing.
RACHELLE: So we are getting our condos a lot earlier and the other thing is, originally, traditionally through the years – investors were not able to lease out their units during the interim occupancy phase. And this is a new thing basically to the market, for the longest time you were not allowed. So the condos would just sit there empty for months and now. I’m not sure; I think they are still working on 12 York. So now it’s just a free for all, once you hit the interim occupancy phase, boom you are good to go. But it’s still finishes in floors. I seem to remember and I mean it might not be accurate in a way because I wasn’t really thinking too much about it.
“So we are getting our condos a lot earlier and the other thing is, originally, traditionally through the years – investors were not able to lease out their units during the interim occupancy phase. And this is a new thing basically to the market, for the longest time you were not allowed.”
RACHELLE: The buildings would come on more finished and they would be much more ready. I don’t know if that makes any sense. So the unit is ready and the outside is ready, these are places without wallpaper or flooring, or in some cases 150 Liberty Street, no elevators. They had like four elevators and two of them were not installed.
SIMON: So you are saying they would be more finished before they would open up units and now they are opening them up earlier. While they are less finished.
RACHELLE: So nothing is done in the halls and I still see more finished buildings. Like for example, I just rented some on Sherway Gardens in Etobicoke, that developer was through Menkes. And those were quite finished.
RACHELLE: And it was like normal people could live there. But certainly, it’s not very attractive to new tenants to have to walk through an entire construction site and track dirt into your place every single day and all those fancy condo amenities, that you’re supposedly pay the big condo dollars for are not ready and are not going to be ready for a year maybe two years or God knows how long. And the rental process as someone who is actively marketing these to people, it makes it very difficult. And so I became concerned, I just noticed that 12 York was so vacant because they were fixing the windows and all these notices for a week before were all sitting on the doors. And we actually went down and checked all the floors; we went down to the 30th floor before we started seeing a significant amount of units that were occupied.
RACHELLE: And we were having, at the 30th floor we were starting to get 3 or 4 units per floor and we were on 52, so 22 floors of pretty much empty.
Impact on Condo Investors
We spoke about what this could mean for condo investors who purchased their units a few years ago during the heyday of condo preconstruction sales.
RACHELLE: I don’t know, for me when I look at the future, I think like 487 completions on new condo buildings is a lot coming forward. And I think that we need to start talking about the vacancy rate and the actual vacancy rate and being very concerned about that vacancy rate. And the reason now is that we are hearing a lot of these buildings are 40-60 even 80% investor owned.
RACHELLE: Who’s going to rent these units? Like if I’m saying, and we are having trouble with absorption. It’s like this condo comes on the market and it sits there with like 50 vacancies for months and months. The owners are like having a bidding war for tenants. It’s like the lowest price wins because they just want it rented. And so at the end of the day it’s depressing all the prices in all the buildings around them. It’s not like it just sits there by itself. No, it’s in an environment so it’s like providing competition for already finished condos. And here’s the thing, the poor investor is the guy who’s the prey in this story. The developer got his money, the tenants are getting a very competitive rent for what they are getting.
” Who’s going to rent these units? Like if I’m saying, and we are having trouble with absorption. It’s like this condo comes on the market and it sits there with like 50 vacancies for months and months.”
RACHELLE: Albeit that’s still a decent chunk of money. But the investor is not making any money.
If what Rachelle is saying is true, I worry about what might happen to all these investors.
According to the CMHC Condo Owner’s Survey, three quarters, or 75% of condo investors owned just one secondary condo unit. This means that most condo investors aren’t super rich or wealthy. They’re normal people with decent jobs who have saved up some money and are trying to make their dollars work hard.
If they can’t make money on condos, what is to befall the condo investor, and subsequently the condo market?
SIMON: Who do you think these investors are?
RACHELLE: That’s a good question. In my experience, I find that a lot of them are just people who are trying to you know improve their life and make a good decision. Use some of their money to make more money and build their equity. And unfortunately I had a situation, and a lot of the numbers don’t work in these condos and that’s a lot of the problem. That’s the issue, without the capital increase, there is no point to owning a condo.
” In my experience, I find that a lot of them are just people who are trying to you know improve their life and make a good decision. Use some of their money to make more money and build their equity. And unfortunately I had a situation, and a lot of the numbers don’t work in these condos and that’s a lot of the problem.”
RACHELLE: And that’s just the raw facts because most of these owners by the time they pay their insurance, their maintenance fees, their mortgage, property tax and they have to go in and buy blinds and all this kind of stupid little things. Lights, they don’t even put lights in condos any more.
SIMON: So you’re saying there is little or nothing left over.
RACHELLE: Nothing actually.
Is that the case?
Something smells a little fishy and feels unsettling here.
I still see all these realtors pushing condo sales. In many ways, I really sympathize with them. I run my own practice, and clients are my lifeblood.
The same goes with realtors. They only make money when they make a sale. So it’s natural for them to drink the condo kool-aid.
But my mission is to figure out what’s really going on in the housing market. And so I can’t ignore the facts.
I’m not at the condo sites day in and day out. I don’t have a daily grasp of what’s really happening in the condo rental market.
But if what Rachelle has shared is true, it’s a sobering perspective.
It’s given me some focus for future episodes to come. Because the condo market has been such a big part of the Toronto housing market, I’m going to zone in on condos and the condo market for the next series of episodes.
Because I think ultimately what happens in the condo market will affect what happens in the broader housing market as well.
I’d like to thank Rachelle Berube for sharing her candid insights. You can learn more about her on her website at www.landlordrescue.ca. You can tell from this episode that she’s not afraid to speak her mind.
And that’s what I hope to continue doing here: to speak the truth as I find it.
Thank you for listening to this episode of the Toronto Housing Market Insider. Please subscribe to this podcast in iTunes, or go to our website at www.parkandjung.com and sign up to our email list to receive each episode in your inbox.
It was a pleasure bringing you this episode. I’m Simon Park, and this was the Toronto Housing Market Insider.