A condominium project at the corner of Queen St. East and Mutual St. in downtown Toronto, reflected in a large mirror at a nearby development project, is photographed on Aug 29, 2023.Fred Lum/The Globe and Mail
In a country where rental affordability and vacancy rates got worse throughout 2023, how did rents fall and vacancy rates go up in the most expensive parts of downtown Toronto?
“Trust me when I tell you I’ve never experienced vacant units,” said Sundeep Bahl, a Toronto realtor with Re/Max Plus City Team, who specializes in buying and selling investor-owned condominiums and also provides his own property management services.
“We get a 60 days notice [from a tenant vacating] and we’ve expired the 60 days. The unit’s now become vacant and we can’t find a tenant for the landlord.”
According to condo market analysts Urbanation Inc., condo rents fell 5.7 per cent in the fourth quarter of 2023, the fastest drop since it began recording rental data in 2010. It doesn’t take prices back to where they were before a 10-per-cent increase in the earlier part of 2023, but the only recent comparable drop is the short-term exodus Toronto saw in the first year of the COVID-19 pandemic in 2020.
The dip in the downtown rental market has a lot to do with where Canada’s biggest market for condominium apartments finds itself at: Sales of unbuilt condos have reached rarely seen lows, the resale market is facing falling prices, and at the same time there are more newly completed units being added to the market every quarter. Urbanation says the number of new condos delivered in the final quarter of 2023 hit 7,408 units, up 26 per cent from the previous year. And the projection for the first quarter of 2024 looks to be about the same, or larger.
According to Mr. Bahl, that means there are at least 3,600 condo apartments up for rent in the two most dense downtown districts (known as C01 and C08 by local realtors) and close to 60 per cent of them are sitting vacant.
“They’re cannibalizing each other,” said Pauline Lierman, vice-president of market research with Zonda Urban. “It’s not the first time we’ve had cannibalization in certain neighbourhood pockets. But at that scale, it really makes a difference.”
The current market is an adjustment for landlords who bought Toronto condos to rent out as the condo universe became the most expensive rental category, according to data from the Canada Mortgage and Housing Corp. With a sudden glut of condos, plus more than 5,500 recently opened purpose-built rental apartments, there is more competition for the top tenants.
“They are so used to just a single-occupant, triple-A qualified tenants who make $90,000-$100,000,” said Mr. Bahl of his investors, who he said are losing patience with his inability to even schedule showings. “It’s really a struggle finding somebody qualified at this point.”
It’s also been a struggle to push landlords to consider dropping below what was the going rate of $2,200-$2,400 for a downtown condo. Anecdotally, one of Mr. Bahl’s clients who agreed to list “below market” at $2,100 had a tenant within two weeks.
The falling rents are just one more sign of a struggling condo market after a year that had some of the lowest sales volumes in modern history.
According to Zonda Urban, there were nearly 15,000 sales of preconstruction condominium apartments in the Greater Toronto Area last year – down 36 per cent from 2022. Urbanation Inc. had slightly lower sales figures for the GTA, putting the figure at around 12,600, but still said last year was only the third time in the past two decades that sales were below 13,000 units. The long-term trend, the firm said, has been close to 25,000 units.
In the city of Toronto, things were even starker: the 6,498 units sold in 2023 is a drop of 48 per cent from 2022 and marked another 20-year low. Worse is the rate at which new units are being “absorbed” by the market. Urbanation records 22,000 unsold preconstruction units at the end of 2023, which is roughly 21 months of inventory (or double the normal market amount). It found 31 per cent of projects sold less than 30 per cent of their units. “Two years earlier in Q4-2021, there were no preconstruction projects that were less than 30 per cent sold.”
According to Zonda, price is the key determining factor for which project is going to sell. “Of the 6,819 apartment units brought to the market in the fourth quarter, 26 per cent sold at an average of $1,334 [per square foot], or $816,101.” In 19 new project launches, 45 per cent of sales were for units that came in under $1,200 per square foot.
“Condo projects are recalibrating, pricing is coming down,” said Ms. Lierman.“ I have a [project] where they’re probably coming down $100 per square foot, just to keep things moving.”
Zonda also recorded 1,400 condo units that either saw efforts to pause sales indefinitely or get cancelled outright in the fourth quarter of 2023, with another 1,100 in receivership and facing cancellation.
Even in the resale market, prices are trending down even as sales tick up.
According to the most recent Toronto Regional Real Estate Board data for Toronto’s condo market, unit sales in January, 2024, were up 46 per cent from January, 2023, but the average sale price so far in 2024 ($709,419) was essentially flat, down 0.24 per cent from last year ($711,171).
Inventory is another likely cause, as the volume of available listings was up 28 per cent in year over year (from 2,494 to 3,215 active listings). Those listings are also spending more time on the market, up an average eight days longer in 2024 compared with 2023.
The other signal Ms. Lierman is watching closely is preconstruction buyers walking away from deposits. She said Zonda hasn’t seen anything statistically significant, but did note that she’s been told of an uptick buyers defaulting if they came in late in the sales cycle with a deposit of 5 per cent in 2022 for condos that are now finished. Such buyers were likely hoping to flip units on the assignment market and were unable to find takers for units that cost upwards of $1,900 a square foot.
“There was a lot of exuberance, in the sense that this – price escalation – would just continue,” said Ms. Lierman. “Not now, not now.”