Happy Monday Morning!
We’re in the dog days of summer so there’s not much happening in the Real Estate world. However, we couldn’t help but notice a recent earnings report from CAPREIT, Canada’s largest residential REIT (Real Estate Investment Trust).
The company reported earnings last week, and has significant exposure to Ontario and BC, arguably the two weakest rental markets in the country.
We believe CAPREIT is a great proxy for the overall rental market. They are the largest REIT in the country, with tremendous scale and talent to navigate a bear market. However, even they’re not immune.
Occupancy rates peaked at 98.9% in Q3 2023 and have been sliding lower since, now sitting at 97.5%. Certainly far from catostrophic. However, where it gets more interesting is the sharp decline in turnover rents, specifically for tenants who have been residing there for less than two years.
If a resident has been living in one of their properties for less than two years, and then leaves, they are filling that vacancy with a new tenant at a rent that is, on average, 7.1% lower.
The stock has responded accordingly, now down 45% from the highs.
How much of this bad news is priced into the stock price today, who knows. However, the ticker price reflects the uncomfortable outlook we’ve been flagging for several years now. Zero population growth, higher interest rates, and a record pipeline of new purpose built rental product hitting the market, with more coming.
As we have noted, more condo developers are pivoting to rental, not out of desire, but out of necessity. Soon, they’ll be competing with the likes of CAPREIT for a tenant pool that’s flush with supply, and should be well stocked for several years.
Per CAPREIT, "Until demand really comes back, the net absorption is probably going to be pushed out in Vancouver, maybe closer to late 2027, early 2028, where we're hopeful the GTA, we think we might be approaching a more balanced market in the quarters ahead."
As we’ve noted before, the vacancy rate in Vancouver sits at a 31 year high of 3.7%, per CMHC.
However, it’s likely going higher, and a recent report from Marcus & Millichap also seems to agree.
Per Marcus & Millichap, vacancy rates are forecast to rise to 5% in Metro Vancouver, noting,
Apartment vacancy is expected to rise further this year as the historic development cycle continues. Vacancy has increased most notably in properties built after 2000, reaching 6.8 per cent at the end of last year, while older buildings have maintained tight vacancy in the 2 to 3 per cent range due to greater affordability and less competition from the recent construction wave. Vacancy also remains higher in Burnaby, Downtown Vancouver, and Surrey, where the bulk of apartment deliveries have been concentrated.
When was the last time the Vacancy rate hit 5% in Vancouver? Apparently not in the history of CMHC data collection going back to the 1980’s.
We say all of this not out of concern for CAPREIT, they’ll be fine. However, small to medium size condo developers, who have little desire nor experience in operating rental apartment buildings but have been wedged into the rental business in an effort to avoid any capital losses that would have been realized by developing condos.
We also have concerns for current condo sellers, who are increasingly taking their condo off the MLS resale market, and pivoting into the rental because their condo has either gone no bid, or low bid.
Condo listings that have been cancelled/ terminated hit new highs in July across Greater Vancouver and the Fraser Valley. They’re effectively running at double what we saw during the bull market.
Many conversations we hear today are from frustrated sellers, pulling their listings off the MLS and hitting the rental market instead. Soon they’ll discover they’re competing against a growing chorus of well capitalized institutional players, in a rental market that’s as soft as anyone has ever seen it, at least statistically speaking.
In other words, there’s no place to hide. The condo market, and the rental market are equally bleak.
The rental market across many parts of Canada is seemingly becoming a place to defer capital losses. Some (CAPREIT) will make it, others won’t.
Let’s watch.
Be careful what you wish for!
In the not too distant past, local affordable issues were politicalized by taxes and demand was stinted by limiting immigration.
Buyers & sellers wear different hats and politics is a blunt instrument.
Your publication is a worthy services. Thank you.
additional issue for purpose rental built property developers is size (shoebox) vs. rent (unrealistic), so sitting empty