The pandemic introduced some unexpected twists in the Toronto real estate market. The first was that despite an initial knee jerk reaction, the housing market did very well. The second was that short-term rental investors found their businesses go up in smoke. They were forced to sell or switch to a long-term rental model in the midst of a turbulent rental market. Lastly, condo owners used working from home and their fear of living in confined spaces as the perfect excuse to move outside the city. Here they could have a larger house and a backyard to entertain. As a result, the 2020 condo market became over-saturated, and prices dropped. However, with more condo apartment units available for long-term rent, rent prices also went down significantly, particularly in the core. So while this wasn’t the best case scenario for condo investments in 2020 despite reduced prices, the question is, how is the condo market looking in 2021? With stats from the recent TRREB Market Report, I offer a little insight below.
First Quarter 2021 Rentals
At the close of the first quarter of 2021, one thing I noticed is that average condominium apartment rents are still down significantly from pre-COVID. This points to what I saw last year, which was that the existing supply imbalance was working in favour of renters for once. Despite this fact, when looking at year-over-year growth in rental transactions, it points to the rental market starting to tighten up. There were 13,168 condo apartment rentals, an increase of 81.6% year-over-year. This is a new record, but also indicates more people are feeling confident enough to put pen to paper and sign a lease.
Monthly Rent Decrease
Looking at the cost of rent for a one-bedroom condo, the number dropped from $2197 in 2020 to $1820 in the first quarter of this year. That represents a 16.8% decrease. For two bedrooms, it was down by 13%. This is likely due to the fact that renters had more choice and landlords were struggling to adjust their expectations. Pre-COVID, many condo investments were already cash flow negative so a decrease in rental income was not sustainable for many investors. Cash flow negative means the rental income is not sufficient to cover all expenses and have a profit month-to-month; the value as an investment is based on the amount the unit appreciates year-over-year, realized when the owner sells.
These statistics were more pronounced in the core and in buildings with formerly high Airbnb supply. What we need to consider now is how will vaccines and the re-emergence of city life impact this scenario? For example, as we return to a new normal, there will be more students returning to the city in September and beyond, as well as increased immigration. When this happens, rental demand is likely to increase and landlords will start to gain the upper hand. Students and immigration have always been a strong driver of the rental market and this in turn bolsters the resale and pre-construction buying markets. For the first time since pre-COVID, in April 2021 we have seen the number of leases signed surpass the number of new lease listings. Rents are trending upward, increasing at an average of 1.2% per month since January this year. If this continues, we expect to return to a pre-pandemic average rent of $2,087 within the year.
Toronto Condo Sales
The average condo selling price in Toronto in the first quarter was still below the pre-COVID records of 2020 however, condo sales volume was up 79.8%. This indicates consumer confidence has returned to the market and people are once again interested in condo purchases. Stylish and functional units in desirable buildings (particularly those with outdoor space), are seeing multiple offers and selling well. Every single condo I’ve sold this year had multiple offers (minimum five) and sold at prices that greatly surpassed what we would have anticipated if we had brought the units to market mid-to-late 2020. This is not to say that all condos are selling like this and that there aren’t challenges, especially in buildings with a lot of competition.
Although condo selling prices were down 1.4% for Q1, prices for April 2021 we are actually up 19.6% from last year (18.7% for 416 and 19.1% for the 905). For the downtown core (where the drop was felt most severely last year) prices are up 21%. In April, Active listings remaining at the end of the month was average when compared to the last five years, but because of high demand and bustling sales activity, only 1.2 months of inventory remain. The average price is $817k, a new record for core condos. This is a strong return in both sales volume and prices, which have grown each month so far this year and culminating in these stellar April numbers. While we expected to be up significantly from the crickets of April’s 2020, the bigger story here is that prices are up 20% over the last four months. This is the official signal of the return of the condo market.
Future Trajectory
This tells me there remains a good amount of confidence in, and demand within the condo market. Pretty impressive really, if you consider the amount of people who have left the city and the major decrease in market rent. As more people start their condo hunt and return to urban centres, these prices are likely to continue to rise. Some of those who have left the city in haste may be surprised by future office time requirements from their employers and my expectation is that many people will grow tired of the commute. We expect to see even more confidence return to the market as people’s job security increases. Return to vibrant city life and the office workplace as a result of the vaccine rollout are also sure to have a positive impact on the market. So while the market has already picked up significantly from mid-to-late 2020, there is definitely an opportunity to invest in condos before everything gets back to normal.
Pre-construction Activity
It also appears that the appetite for new condos (pre-construction) is also strong. The 10-year average is 4924 sales, and we’ve hit 5383 for Q1/2021. 76% of new launches were sold and a new record average sales price per square foot of $1,280 was achieved. This level of demand hasn’t been seen since the peak of 2017 (80% absorption). Developers want to see 75% sold before they commence construction, so these numbers are supporting projects getting underway three months from launch. The condo demand is also strong outside the core, with the price per square foot breaking the $1000 mark in the 905.
Condo Returns Over The Last Decade
If we track condos in the core as an investment over the last decade we see a 6.6%, 10-year composite annual growth rate; 9.7%-5-year composite annual growth rate; 4.8%-3-year composite annual growth rate, and 18.5%-1-year composite annual growth rate. If you have a large enough down payment to attain a cashflow positive and realize these gains, then it stands as a solid investment. If you are net neutral or only slightly in the red, then condos still hold up as a solid investment, particularly if you’re bullish on the longer-term trajectory of Toronto immigration, expansion, and development.
If you are interested in investing in a Toronto condo, reach out today to develop a plan to get you the best value and ROI potential for your real estate investment. For more information on investing in general, check out this blog. If you’re considering investing with family or friends, check out this blog for some helpful tips and things to avoid.
Photo by Jacob Mathers on Unsplash
