Supply-Demand Imbalance in Housing Market Means Stealth Investment OpportunitiesOctober 16, 2018
Solid employment growth, high costs of home ownership and a preference for millennials to rent are currently underpinning the strong demand for apartments, while record-growing immigration levels are expected to drive demand even higher. These factors, together with insufficient and constrained rental supply, are expected to only intensify housing challenges, especially in Canada’s gateway markets.
Due to the growing imbalance between housing demand and supply, the multi-family sector is expected to continue to see steadily increasing rents along with low vacancy rates for the foreseeable future.
Data released by the Canada Mortgage and Housing Corporation (CMHC) showed that national rental rates continued to increase in 2017 with the national average rental rate growing by 2.3% to reach an all-time high of $1,075. The national average vacancy rate dropped to 2.9% in 2017, down from the 2016 average of 3.3%.
In most markets this level of demand/supply imbalance would be quickly corrected. However, according to CMHC, only 1.2% of the total national rental supply was added in 2017. The inability for supply to keep up with demand is not expected to materially change as supply in many markets is limited by increasing costs associated with construction, physical land constraints and development-hindering policies. Rather than rental housing being a natural off-ramp for increasing demand due to rising home ownership costs, the insufficient level of supply is further contributing to the imbalance between rental supply and demand.
This significant demand and supply dislocation for rental properties across Canada has created attractive investment opportunities in the multi-family rental space. The lower vacancy rate provides landlords with the opportunity to increase rents and improve net operating income.
Further to the demand-driven rent growth, there’s also additional pressure in other areas, such as materials and labour, which increase the cost of new construction. This provides further support for rent increases since the economic rent (the amount of rent that produces a reasonable yield on the cost of construction) will increase and new supply will be delivered only at higher rent levels.
As a result, multi-family real estate investors of existing properties can consider substantial capital investments including property improvements and renovations with the goal of producing even greater income potential.
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