Reopening Outlook: How Will The Toronto Real Estate Rental Market Look Like After COVID-19?
Introduction
Normally, Toronto is a busy, vibrant city: it’s Canada’s hub for finance, tech, healthcare, entertainment and home to world class universities. But COVID has forced all of us to be locked up at home. Instead of working in offices, we’re now working from home. The entertainment industry is temporarily shut down. Universities closed their doors and moved online. So the vibrant city that we all love has been gone for over a year. The result is that many people have decided they don’t need to live in core Toronto, at least temporarily, so this has taken a huge hit on the rental market over the last year.
Fortunately, things won’t stay closed forever. Right now, 75% of Ontarians have gotten their first vaccine dose and almost 25% got their second dose, so we’re hopeful that things will recover soon. A simple educated guess will tell us that once entertainment, schools, and offices reopen, renters will start coming back and the rental market in Toronto will make a rebound. But the big question is, will things go back to exactly how it was like before or did COVID cause any permanent changes to the Toronto market for good?
In this video, let’s give our Toronto rental market a closer look:
- Who are our renters?
- How have their behaviours changed during COVID?
- What will they do once things start to recover?
Toronto Rental Market Pre-COVID
Let’s rewind and go back to the start of 2020 before COVID hit the world hard. Toronto rental properties were looking great. Rents increased 6.8% from 2019 to 2020, vacancies were close to 0%, Toronto’s population was expected to grow by another 139,000 people and rentals.ca predicted that rents were going to jump another 7% in 2020. Toronto’s rental market has been going great. So, who are all these people who have been renting in Toronto? Let’s split the rental group into 5 distinct segments.
- Student renters are here for university. Students typically have a tighter budget and a lot of them like to live together as friends and choose more affordable options like a whole house with a few rooms.
- White collar workers: bankers, lawyers, consultants, techies and many of their offices are downtown. Now once they get off work, their entertainment was also primarily downtown. We’re talking ballgames, bars, restaurants, clubs, concerts, events – so it just made total sense to rent in the core, close to work and close to play and they primarily rented condos because nicer and it had extra amenities, and it didn’t matter much if the place was smaller because they didn’t spend too much time at home.
- Blue collar workers: There’s real estate related blue collar jobs, entertainment and retail workers who live and work in the core. This group tends to rent an apartment or share a house which are more affordable options and similar to office workers, they spend a lot of time at work, so they also don’t need a big place to live either.
- Mew immigrants move here because they are attracted to our vibrant city and these people will want to live in Toronto, not Barrie, Bradford, or Branford. Their renting behaviour is similar to many blue collar workers: they tent to rent an apartment or share a house due to limited budget.
- Families also rent in the core and the reason they choose it is because the parents need to live close to work. Families are bigger, kids like to run around, so they tend to prefer houses more rooms and a backyard.
Toronto Rental Market During COVID
Now that we’re more than a year into life with COVID, we know what happened to our renters. The shutdown meant that renters who could move back home did. We’re talking students since they can do online class anywhere, entertainment and retail workers since there’s no work, and even office workers who work from home. Some workers who couldn’t move back home opted for more space and took advantage of low interest rates to buy a house in the suburbs mainly because they were priced out of Toronto.
This caused a huge boom in property prices in the suburbs and there’s a term for this now, “the bubble contagion”, where real estate price growth is correlated to the distance from the core. Basically the further a property is from the core, the higher the price growth has been over the past year and it’s reaching a point where it’s a bit irrational now and with more froth at the edges, which means the suburbs have the highest risk of slowdown moving forward.
Immigration also declined declined drastically over the past year and we’re hitting immigration lows that haven’t been seen since the 80’s! It’s not that Toronto is no longer attractive anymore, but when you have COVID processing delays combined with closed borders, it’s a simple recipe for population growth slowdown, which takes down the rental demand growth with it.
The renters that haven’t changed as much are families and a majority of blue collar workers, including construction, cleaners, admin staff, and designers. Even though these people have stayed in the core, we do notice a shifting focus towards larger units especially in the blue collar worker group and this is simply because renters don’t want to be isolated by themselves and would rather want to live with friends. According to torontorentals.com, you can see that the price of larger units in Toronto continue to rise during COVID, whereas smaller units declined in price.
Toronto Rental Market On Recovery
We know what’s happened to the renters, so let’s shift gears now and talk about what might happen as we recover. A simple answer is that renters will come back and the rental market will pick up again. U of T says most of their courses will be in person starting September. Ryerson and York University are easing in more slowly with a hybrid online and in person learning model. We’re eventually going to have entertainment, malls, restaurants, and events come back which will bring back their workers. Immigration will also slowly come back.
As a general forecast, Rentals.ca expects fall 2021 to be a busy season for landlords and we’ll continue to see rental growth month on month in Toronto from this point on. Torontorentals.com predicts 13-14% increases to average rents in Toronto in 2022.
Now here’s where I think things might change. The reality is that most offices will still be a thing although it won’t ever be like how it was before. We did a poll a few weeks ago on instagram and asked our followers how many days they think they will work in the office each week. The response was that most expect a hybrid model. So instead of going to the office to 5 days a week, our followers expect to spend 2-3 days in the office. That’s pretty much in line with a lot of company announcements in recent weeks!
The 2-3 days in the office plus being close to all the entertainment action is enough for white collar young professionals to move back to the core. However, because they might still be working from home 50% of the time, there might be a long term change where they will prefer larger homes.
On top of the change in work situation, another long term change is the lingering fear of isolation in the back of everyone’s minds. Earlier, I talked about blue collar workers wanting to live in houses even though their work situation hasn’t changed simply because they didn’t want to live alone. Now I believe this mentality will trickle down to the rest of the renters as they head back to renting in the core as well.
Three Main Themes In The Short To Medium Term
- We expect rent yields in Toronto to go up across the board no matter if you’re looking at condos, apartments or houses driven by higher demand. Rents went down 15-20% in Toronto core so we expect things to recover back in the next 1 to 2 years. As a real estate investor, if you want optimize your returns, you can try to strategically elect more transient renters so you can better capture market rents.
- There might be long term reshuffling of preferences. Demand for condos and apartments will be lower than it used to be, and houses will be more popular for the next while. Freeholds already have the best rent yields, but now we expect it to see higher rental price growth relative to condos and apartments as well.
- When you have better rent yields and faster rent growth, freeholds will attract more more attention from investors. When investors ask us about timing to capture the best growth potential, we do believe that there will be continue to be more investor demand in the freehold market in Toronto will mean that Toronto freehold appreciation will outperform the general Toronto market in the medium term.
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