In Canada, especially in heated real estate markets such as Vancouver and Toronto, pundits are looking at the rush of condominium construction and wondering if this will be bad for the real estate market.
Thus far, however, the condominium market has defied expectations and continues to grow. One reason is that while some of the demand for new condominium units might be real estate speculation, it’s not an investment that just sits there and does nothing.
The populations of Canada’s major cities continue to grow, and these people need somewhere to live. This demand has generated a shadow rental market within these condominium buildings that has given condominium speculators sufficient income to make their mortgage payments.
This in turn has led pundits to wonder if the shadow rental market is sucking demand from the purpose-built rental apartment market. I would argue this is clearly not the case. Already you are seeing new buildings going up that are expressly purpose-built.
Moreover, the shadow rental market isn’t taking anything away from the purpose-built rental market. Instead, the shadow market is acting as an incubator for the purpose-built one.
The rise of the lifestyle renter
When looking at the purpose-built rental apartment market, it’s important to note there are two types of renter: the shelter renter and the lifestyle renter.
Shelter renters rent strictly based on need. They need a place to live and can’t afford mortgage payments. They settle for a place in a location they can afford. This is too often seen as the stereotypical renter.
Especially in recent years, we’ve seen an increasing number of lifestyle renters who rent by choice. These renters can afford to buy a home or a condominium and make mortgage payments. He or she, however, doesn’t choose to for a variety of reasons.
Perhaps they want to save their down payment for other things. Or perhaps they don’t want to be tied down to a particular address.
Lifestyle renters have the disposable income to choose where they live, and they’re increasingly choosing not to live in large homes out in the suburbs, but in smaller apartments surrounded by downtown amenities.
As there has been a lack of rental product in Canadian cities, these lifestyle renters who want modern buildings and top-of-the-line amenities wind up entering the condominium rental market, directly fuelling the condominium boom.
The risk of no tenure
Lifestyle renters who choose to rent inside condominium buildings do so at their own risk. They’re moving into buildings that have no tenure as rental buildings.
If, all of a sudden, the owner of the unit decides he wants to sell the unit and the new buyer wants to live there rather than handle tenants, the tenants have no protection.
In purpose-built rental apartment buildings, all units are built to be rented. The whole building is handled by one manager who is responsible for upkeep and security. That manager is responsible for applying credit checks and looking into previous landlord history, et cetera.
You know your neighbours have been screened, just as you have. In rented condominium units, there’s no single manager doing the same credit checks. You don’t have that same consistency or clear responsibility.
On the management side, condominium rentals don’t stay in the marketplace forever. Rental apartments function much better for managers when there’s a whole building to manage, thanks to economies of scale. With condo owners renting out a single unit, if it’s empty for one month, you’re 8.5 per cent vacant, and that’s a hard gap to swallow.
Condominium owners are always in a precarious position when it comes to renting. Cash flow can be tough, and managing just one or two units is difficult.
I believe condominium rental units won’t stay in the rental pool for more than a few years. They’re too difficult to manage as individual units and don’t have the cash flow for investors. I also believe the condo rental marketplace is full of lifestyle renters who would much rather live in a purpose-built rental building if one was available.
They want the protection and consistency the condominium rental market cannot provide.
A lot of pent-up demand
This pent-up demand is one reason why a number of condominium developers have shifted their developments towards purpose-built rental. Just as Tim Hortons was the incubator that got Canadians into drinking coffee, new purpose-built rental apartments are the Starbucks that will come along and offer a better product with more choices for lifestyle renters.
So the rental condominium market is far from a threat to purpose-built rentals. Indeed, they’re shaping up the market and increasing lifestyle renters’ expectations for quality.
And once developers see that lifestyle renters are willing to pay for their quality and demand for choice, they will move to meet that demand.
Derek Lobo is the founder and CEO of SVN Rock Advisors Inc., a real estate brokerage with over 30 years of experience in helping investors make the most out of buying, selling, and renovating purpose-built apartment buildings. Learn more about SVN Rock Advisors Inc., Brokerage on their website at www.SVNRock.ca.