"I believe that the market will bounce back much faster than a lot of people expect and it's going to be surprising to many." — Shaun Hildebrand
The way the pandemic has disrupted rental housing makes a ton of sense given the impact on employment, immigration, and the student population.
But the data offers some surprising insights into how the rental market has changed.
And it offers a glimpse into what we can expect in the months and years to come.
In this episode of Sync or Swim, we're featuring Shaun Hildebrand, President of Urbanation, a Toronto-based real estate consulting firm that provides research, market analysis, and consulting services to the apartment industry.
What we talked about:
- The pandemic-driven turnover in the rental market
- How growing supply and shrinking demand led to a drop in rents in the purpose-built market
- The major factors driving excess supply in the market
- Whether we should be expecting a bounce back in the rental housing market in 2021
Get more insights into the rental housing market by following Urbanation on Twitter.
Mitch Fanning [0:38]
Welcome back to Sync or Swim. I'm Mitch Fanning with Rentsync. And joining me today is Shaun Hildebrand, President of Urbanation. And for those of you who might live under a rock, Urbanation is a Toronto-based real estate consulting firm that provides research, market analysis, and consulting services to the apartment industry. Shaun, how you doing today?
Shaun Hildebrand [1:02]
I'm doing great. Thanks for having me.
Mitch Fanning [1:05]
Well, I'm really excited to have you. What's interesting is, excuse me, Urbanation, of course, provides really premium data and insights and trends to the to the department industry, to really help decision-makers make better decisions. And some, in some respects, I would like to think that this podcast shares that in common with Urbanation. So I'm really glad that you, we can kind of get you on the podcast, and we can talk about that stuff. But before we do, maybe you can do that intro some justice by maybe expanding on it and telling us a little bit more about yourself, and Urbanation, and maybe specifically how you got started in the apartment industry.
Shaun Hildebrand [1:38]
Sure, so I guess I got my start analyzing the apartment market, probably around 2008 or so I had been previously working in economic analysis before then. But around that time, I joined Canada Mortgage and Housing Corporation. And I was responsible for leading the research for the Greater Toronto Area. So a lot of analysis obviously, with respect to the condo market, the ownership market, and, and the rental market as well. And I can tell you that the rental market report that CMHC puts out is its most highly downloaded report. And the GTA report in particular. So there is so always so much attention to the rental side of our analysis that I got really interested in that side of the market, and was involved in a lot of different special research projects during my time with CMHC. And then around 2013, an opportunity came up for me to run Urbanation. And as a CMHC. employee, I did have access to Urbanation that was a big fan of urbanization. And so it was a good move, I think over the last number of years being there. And since joining Urbanation, about eight years ago, now, we've really expanded our research into the rental market. The firm is primarily known for tracking new condominium apartment projects, which we still do and is still a very, very large part of our research and our business. But over the last number of years, we've taken a number of steps to expand our coverage of the rental market. And we we track the rental market in the Greater Toronto and Hamilton area through monitoring lease transactions that happened within the condominium sector. So these would be you know, Mom and Pop individual investors in most cases that are renting out their units. So we track that lease activity, monitoring such metrics such as average rents, rents per square foot, and we can drill down into the unit-level basis, look at trends across different submarkets and projects. And then another big part of our business is doing market feasibility studies for developers. And not long after I joined the organization, we started to notice a pretty big shift in the requests for studies coming across our desk. Now they used to be mostly condominium studies. And then increasingly we started to see attention starting to shift for the first time in probably decades towards building new purpose-built rentals. And a lot of the new business that was coming in was looking at the condominium sector from the angle of seeing what what the achievable rent levels could be for a potential new rental project. And at that time, there was very few rental buildings that had been completed in the GTA over the last 10 to 15 years. I could probably count them on my hand at that time. So we said okay, look, this is an emerging opportunity, let's start to track and collect data for all the new rental projects that are in the supply pipeline. And over the last several number of years. We've been we've been building up a very strong database of all new purpose-built rental apartment projects across the region. And within those buildings, we're surveying building managers and property owners for information such as vacancy rates, rents per square foot and the same sort of way that we that we track the condo rental market. So having that database where we're looking at, you know, the majority of new rental stock, which is in effect within the condo sector, as well as this emerging new product type of purpose-built rentals, which again has been almost absent from the market for the last 2030 years, we're able to give our clients which are primarily developers and lenders, a lens into what the market looks like for a brand new, higher-quality rental product across the GTA. And that's, again, that's something that we leverage for our quarterly market reports, as well as our consulting studies that were commissioned to do on behalf of developers. So that's kind of where we are right now. We've, we've been expanding geographically as well. As I mentioned, we started in Toronto, now we're covering the whole GTHA, including Hamilton Grimsby, we're starting to do a lot more work in areas surrounding the GTHA like St. Catharines, Niagara, Kitchener, Waterloo wealth, Simcoe County, and a ton of work and an expansion underway into the auto market, which has been receiving a lot of attention from developers from purpose-built rental angles, so a lot of exciting things going on, on at Urbanation. And yeah, like I said, rentals has been a big part of that.
Mitch Fanning [5:45]
Yeah, that's, that was a great overview. And I'm dying to actually get to get into to, or drill into the purpose-built rental conversation, I've got that kind of parked towards the end of the, towards the end of this discussion. So I appreciate you you giving us a bit of a teaser. But before we kind of talk about that, or even 2021, you know, obviously, you know, given your your background, you know, I need to kind of get your thoughts on, you know, the year we just kind of went through 2020. Obviously, COVID affected a lot of businesses and people and the rental markets in general. But just just as a macro view, like what what was your kind of biggest takeaways from 2020? You know, when it came to, you know, the rental market, it could be purpose-built rentals, or even, or even the condo market in general.
Shaun Hildebrand [6:30]
Well, I think, given the circumstances, you know, a pandemic, which had a severe impact on employment, immigration, the student population, you know, people not being in the office, working from home. You know, I think what happened to the rental market makes a ton of sense when you think about, you know, what, what sort of kind of disruption the pandemic had on the marketplace. So, you know, when, when we were all sort of in lockdown in early March, you know, we knew that the market was headed for some softness, right, we knew that these demand drivers were going to slow and at the same time, we knew that there was going to be more supply entering the market, both from tenants that, you know, couldn't afford the rent anymore, couldn't afford to stay in their current unit for whatever reason. And as well, the new condos that were construction that were scheduled for completion in 2020. So we were expecting around a 5% decline in rents. So what happened was that the decline in rents, specifically within the condo market, which was much steeper, by the end of the year, rents in the GTA condo market were down by about 13%. year over year, when you averaged out the whole of 2020. condo rents were down by about 6%/7%. So the decline was was was steeper, I suppose, than what we had originally forecasted. And I think that the biggest surprise coming out of, of 2020 was just how much turnover there was in the condo rental market. Like usually you'd see maybe 20, 25, upwards of 30,000 units, turnover in a given year. Last year, we saw close to 50,000 units turnover, like that was such an abnormal level of activity within the condo rental market. So you had this sort of perfect, perfect storm of supply entering the market at the same time, that demand, you know, it just wasn't there to to fill all that, that new supply. So as a result, rents came down. In the purpose-built market, vacancy rates obviously increased CMHC reported as such, and so have we, in our survey, we track newer buildings completed since 2005. And what we found was that the average vacancy rate within that, you know, relatively newer stock of rental product across the GTA increased to about 4.6%. Prior to that, you know, we were looking at vacancy rates at around 1%. And they had been at 1% for, you know, a decade at least. So it resulted in a pretty dramatic shift and what we've become used to seeing in the rental market, both in terms of consistent growth in condo rents, as well as very low levels of purpose-built rental vacancy. So we're you know, we're obviously entering into 2021, with a pretty weak handoff. vacancy rates, as I mentioned, are pretty elevated when you look at rents within the purpose-built market, the product type that we're tracking is seeing some decline as well. But behind that decline in rents is also a large number of incentives, which I'm sure you you've been tracking yourself and talking about on this podcast as well. You know, it's it's commonplace now, in the in the in the purpose-built rental market to see at least one month free being offered for new tenants. And a lot of cases now we're starting to see two months free. So there's, there's quite a bit of weakness there. But I will say, the end of 2020, and beginning of 2021, has seen some improvement. Now, we've been tracking absorption levels within condo rentals as well as is within new rental projects. And we have seen increased activity happening. And when we reported our January results for the condo rental market, what we found was that rents for the first time since the pandemic started, actually began to stabilize, meaning that on a month to month basis, they didn't change. And it seems like we're we're seeing a bottom in the market had an average monthly rent level of about $2,000 a month, that seems to be kind of where the floor is right now for the for the market. And a lot of demand is filtering in now. Because I think a lot of renters are realizing that, you know, rents are at their lowest level in probably three or four years, in some cases even even longer than that. And you know, they've been priced out of the market for so long, maybe they had a roommate, maybe they've been living at home with their parents or living in, you know, basement apartment or something like that. And this is their chance to move up into the rental market and be able to actually afford their rents for the first time. So a lot of people taking advantage of those discounts. And this is driving a lot of absorption. So even though we were still dealing with a lot of supply in the market, the important thing is that the absorption rates now are starting to grow faster. And I think you know, what we'll what we can expect over the course of 21 is that, you know, all of the excess supply that's on the market will eventually wind down and you know, will start to eventually see rents begin to rise again.
Mitch Fanning [11:07]
Wow. So there's a lot to dig into there. And I am going to definitely go off script and pick some of these data points that you've you've suggested. So one of the things I took from that is and I think i remember correctly, you saying in another podcast, and this was in June, that about when it comes to supply, you were seeing about 15% of the supply being from the short-term rental kind of markets. So what are you guys still? Is that kind of you guys still seeing that? Or is it kind of you know, where is that in terms of the percentage of the overall supply chain?
Shaun Hildebrand [11:37]
Yeah, it's a great question. And, you know, there's no absolute data on you know, how many Airbnb units have now converted into long term condo rentals. Unfortunately, one proxy way of measuring it is to look at the number of units that are now being offered on a 12-month lease basis that are furnished with the connection that these units were probably previously operated as a short-term rental that was furnished. So now that they're not being operated as a short-term rental that now entering into the long-term rental pool. So that that's kind of one way of at least estimating what the impact may be. And what we found was that furnished long term condo rentals represented, as you said, somewhere in the range of around 12 to 15% of the market. In terms of the supply growth last year, they represented a higher share, so around 20%, but, you know, they weren't the dominant factor for all of the rentals that were on the market last year. And I think that's a that's an a misconception in the market, that the reason why we have rents falling and an excess supply of units is because Airbnb caused it. And, you know, it's not an insignificant factor, but it's not the dominant factor. Really, the dominant factor for all of the supply on the market is simply people turning over their units, they're no longer able to afford higher-end rental units, which like, you know, we can admit is really represented by the condo market and the newer purpose-built rental market, right, this is really the newer higher quality stock and rentals in the city. And if you've lost your job or you no longer need to be right downtown paying, you know, $2,500 or $3,000 a month in rent, you know, you're not going to do it and and as a result we saw a lot of people make that decision to either vacate the city or move to a cheaper unit move back home with their parents get a roommate, whatever the case may be. They were looking to save on costs. And it wasn't essentially, the Airbnb story. Now, if you drill into certain neighborhoods, certain buildings, yes, you know, the the movement of short-term rental units into the long-term rental pool was much more evident and a bigger factor, but when you sort of look at it for the broader market, it's, it wasn't the biggest factor in it. It wasn't as significant as I think a lot of people thought it would be.
Mitch Fanning [13:43]
Yeah. And that's kind of where I was going, is, is what was that real big driver for, for a decrease in rents. And, and, and kind of just shift gears for a second, you know, and going into even 2021, you know, you guys had put out, you guys have put it up report, or it was just an article that stated there was that shift from the the, you know, the 416, to the 905 area code, as far as the condo market was concerned. But what really struck me was there was that big demand for affordability, even in the 905 areas in terms of smaller unit sizes. And we're also seeing that shift when it comes to rental demand, we track that stuff, and we're seeing that huge shift from from rental demand from primary to secondary markets, that whole migration. So, you've kind of answered that question, essentially. But, you know, you know, you're seeing the same things, but, you know, well, this, do you think this trend will continue? Do you think people will still? It has, do you think there's been a shift in kind of mindset around, you know, what, we don't necessarily need that, that that kind of class A, that bigger space, we can kind of we can afford to live on, you know, in smaller places? Like, what are your thoughts in general?
Shaun Hildebrand [14:41]
Yeah, I think I think the pandemic is gonna have some lasting impacts. And, you know, it may take some time to play out, but certainly one of them will be, you know, people perhaps not desiring as much as they did, pre-pandemic to live right downtown in a small condo unit, right. There may be more, more demand shifting towards suburban locations at lower price points, as you just mentioned, and, you know, when you look at sort of the surrounding area of the city of Toronto in this in the 905 region of the GTA, it wasn't really as impacted by the by the downtown, as much as the downtown markets, I'd say, you know, rents, the rent decline last year was really concentrated in the downtown core market. And this was a combination, obviously, a reduction in demand, because people didn't need to be downtown. And you know, there was a, there was a, there was a point where I think we're renters, were starting to evaluate what the premium attached to living downtown really is when you don't need to be downtown. And one of the interesting things we found in our data was that the the premium for for downtown Toronto condo rentals shrunk to 15% from 30%, before. So it was cut in half effectively over the course of 2020. And, you know, that that's, that's an abnormal shift. And to suggest that it's going to remain at that premium is probably unrealistic, whoever to also expect that it's going to suddenly bounce back to what it was previously is also probably unrealistic. So I think we'll probably end up somewhere in the middle. But I think, you know, one of the important things about the 905 region is that it is vastly under supplied of rental properties, right? When we when we look at the downtown market, you know, not only was there an impact on demand, but there was a huge impact on supply, not just from people vacating their units, but there was a record number of condos completed last year in downtown Toronto, right. This was just unfortunate timing, because it happened at the same same time as the pandemic. But there are over there were over 20,000 units completed in the condo market. And as we know, investors presale investors represent the majority of buyers downtown. So when these units get completed, you see that more than half of the building gets listed for rent. And since the goal for the rental investor is to have the unit leased as fast as possible, because they need to cover their mortgage payments and all of their expenses, they quickly drop rents. And since they're competing amongst each other, in a lot of cases for the same sized unit, same rent level, they quickly drop the rents to have their unit leased as fast as possible. So I think, you know, partly the drop in rents downtown within the condo market was a little bit exaggerated by that fact. And I don't think it wasn't necessarily something that we saw across the board and certainly not something that we saw outside of the downtown region and in the 905. In the 905. Market rents they did decline a little bit but not anywhere near the decline of the downtown market. And I think that speaks to obviously a shift in demand into these into these more suburban locations. But I think just as importantly, or perhaps even more importantly, it's just how vastly under supplied, those markets are right? Like almost all of the new rental supply in the 905 comes from the limited number of condos that are used as rentals in those markets. Now, there's certain pockets of the 905, we see a lot of condo rentals like Mississauga city center, you know, some some areas of Scarborough Town Centre, and increasingly, in Vaughan Metropolitan center. But you know, once you start to move outside of those, those city center areas and 905, there's almost no new rental supply, and very little existing purpose-built rental stock, right, there was almost no rental stock built in those areas. So when you have that demand shifting into the superb suburban locations in virtually no supply, it has the impact of keeping vacancy rates extremely low. And, you know, we saw this in the CMHC data. And within our data, what we found was that in the city of Toronto vacancy rates increased close to 66%, in the downtown market, and then the 905, they were 2%. So I think, you know, a lot of opportunity here for the 905, just given how under supplied they are and how under supplied, they'll continue to be. And that shift in demand that speaks to increasing opportunities, I think for for rental development, and probably higher rents down the road.
Mitch Fanning [18:33]
Yeah, it's it's interesting, you know, in a way, the 905 was an opportunity, but it took almost COVID to push that opportunity forward in in record time. You know, when we switch gears and kind of focus in more on the rental markets in the urban markets, obviously, you'd mentioned a couple things that, you know, Toronto vacancy rates are at all time highs around almost 6% versus the sub two. You mentioned, though, also that you're kind of seeing that bottom. But you know, the the rent, the rent, rental rates almost bottomed out essentially that 2020. Again, that should probably just average. But, you know, I guess the million dollar question, and you kind of alluded to it already is, do you think we'll see that that sub 2% vacancy rate again, or, like you'd kind of mentioned, we're gonna meet somewhere in the middle of kind of, is this the new normal?
Shaun Hildebrand [19:20]
Oh, for sure, we'll we'll be back sub 2% vacancy rates, I think, within the next five years. So we've been doing a lot of sort of high level macro analysis when it comes to projecting rental demand and rental supply across the province, but also specifically within the city of Toronto. And, you know, when we look at sort of normalized demand factors, such as you know, immigration population growth within the prime renter cohort, typically between the ages of 20 and 34, homeownership affordability, employment growth, unemployment rates that are sort of, you know, what we were seeing pre pandemic and what we're expected to eventually return to, once we get on the other side of the health crisis. And you look at those demand factors and relate them to how much rental supply is actually being delivered, and how much rental supply is in the pipeline, and is going to be delivered in the next number of years. And it's very clear, when you look at these numbers, and you do the math that we're gonna be under building by a significant number of units, at least for the next 10 years. Right. So when we, when we make our projections for the province, we're looking at, you know, upwards of 20,000 units a year in the in the GTA, you know, 10,000 units a year, GTA is about half the province when it comes to rental demand and supply. So that that's a big gap, you know, to have to fill now, it may not feel like we're under building rental right now. But it's because we're in a pandemic and you know, things will begin to normalize. And once they do, what we'll find is that those conditions that were in place before the pandemic, will reemerge. Now, I think because of the pandemic we're gonna have, we're gonna have to rethink, you know, where that supply needs to be directed, because there has been a change in demand. And, you know, it's not necessarily the case that we need an extra 10,000 units a year of purpose-built rental supply, right downtown that's priced at 3000 or $4,000. a month, right, that that might not be the case probably isn't the case. What we need to see is more diversified supply coming in across the the the 905 region. And part of this exercise that we did with projecting demand and supply was to look at opportunities for rental developers to bring in more supply in more affordable markets, such as those in the 905. And what we found was that there was a substantial opportunity for infill sites, you know, the so called towers in the park that were built in the 60s and 70s, with a lot of excess land that could be intensified. And, you know, with the right incentives, these these landowners who essentially have a zero land cost because they already own the land, could intensify the sites.
Mitch Fanning [21:39]
Alright, so switching gears for a second, you know, let's, let's talk really about the purpose built rental market. And, you know, you know, we're seeing even though we'll come back to that, you know, you know, we'll get to that normalization around 2% mark, in a way, purpose built rental, the rent personal rental markets seem pretty stable and even is poised for growth. You know, what are your thoughts on that? Do you agree, disagree?
Shaun Hildebrand [22:01]
I think the purpose-built rental market is poised for growth, I think it's going to take a little bit of time. But, you know, things will begin to normalize, as you know, the fundamentals, I think, will begin to normalize. And, you know, the issue is that the fundamentals have been impacted by a health crisis. And the timing and evolution of the health crisis is obviously difficult to predict. Now, we, we have information and knowledge that mass vaccination will happen by around the fall of this year, and you would, you know, reasonably expect that things would start to at least begin to normalize after that. You know, we'll start to see immigration begin to improve, people go back to the office, students go back to in class learning. And so I think at that point, you know, you'll you'll begin to see demand strengthen, and vacancy rates begin to come down and rents start to rise again, the timing obviously, is subject to change, because we're dealing with obviously, a pandemic that continues to evolve. But I think that's, that's the sort of the current line of thinking. Now, bigger picture, longer term, you know, the the trends that were in place, prebuilt COVID, are expected to reemerge. And, you know, I think, before long, we'll start to see vacancy rates back down, you know, to 2% or less, and rents beginning to grow again, now, it could take some time, it's hard to say, but the GTA has been averaging less than, you know, one and a half percent vacancy rate for for most of the past 20 years, and over the last 10 years, averaging rent inflation of around 4% to 5%. So, you know, if you, if you if you sort of subscribe to the notion that, you know, the the market, you know, the market fundamentals pre COVID will return, at some point that, and I think it's sort of easy to make that connection, that, eventually, we'll start to see some of those conditions come back in place. And as I was saying, you know, the big supply gap is, is really the is really the story for the market. You know, we've been under building rental properties in the GTA for so long that, you know, that that that fundamental under supply is still going to be with us for the foreseeable future. And I think what we'll see coming out of the pandemic is that housing affordability has eroded significantly, right. So even though interest rates have dropped back down to record lows, we're looking at double digit price growth, really, in most cities across Canada, yeah. And as this is happening, you know, it's going to be tougher and tougher for first time buyers to get into the market. And I think this is really the the the issue here is that the pandemic I think, is creating a big gap between those that have housing in terms of ownership housing, and those that don't. And I think I think as a result, you'll see a lot of demand coming into the rental market at the expense of the ownership market down the road because of this big affordability issue for for first time buyers. And that'll be a key driver, as you know, as well as the the the rebound in immigration, the government has been very vocal about raising immigration targets over the next several years in order to make up for the loss that we saw in 2020. So, you know, it's just a matter of time. But I think, yeah, we'll definitely begin to begin to see some of those conditions come back in within the next, probably not the next year or so. But you know, a couple years, three years down the road, I wouldn't be surprised to see us back in the same spot that we were in.
Mitch Fanning [24:49]
Perfect. So usually my my last question was, you know, what trends do you expect to see moving forward? And I think you've answered it quite nicely. So. So we'll really just jump right into, you know, what I would consider my favorite part is the quickfire round. So the quickfire round is really, you know, I'll ask you a question. And you'll have about 60 seconds or less to to answer so. So Shaun, are you ready? All right. So question number one, who should I have on this podcast?
Shaun Hildebrand [25:13]
You should have one of the number of new innovative rental developers that are that are in the GTA. There's, there's there's a lot of them that have units that are you know, really occupancy are those that are under construction or those that are in pain. There's so many that you can choose from now, way more than there was even just a few years ago, and I'd be happy to make introductions if you're interested.
Mitch Fanning [25:31]
Perfect. So, question two, what's one thing you wish your phone could do?
Shaun Hildebrand [25:35]
Disappear every once in a while. That thing is hard to lose.
Mitch Fanning [25:42]
Alright, question three, what, you know, given COVID, perhaps, what's one thing you've changed your mind about lately?
Shaun Hildebrand [25:48]
I guess the trajectory, the ownership market, I think, I think the rental market behaved as you would expect during a recession. But the ownership market moved in the complete opposite direction. And I think what I changed my mind about was just how much of a factor low interest rates can have on the market, in the middle of a pandemic, or any sort of major disruption, such as a, you know, a big recession or anything like that. And how how, how resilient ownership demand can be in the face of all of this uncertainty. I don't think anybody expected the market in terms of housing, sales and price appreciation to perform as it did. And just to see how widespread that was across the country. And, obviously, particularly here in the GTA, the numbers that we're seeing come out for early 2020. I certainly didn't expect it. And I would say that's one thing that I've had to change my mind about is just, you know, what the outlook for the market will be this year in terms of housing, sales and price appreciation. But again, that that feeds back into higher levels of rental demand down the road, because we know that there is a there is a feedback loop there.
Mitch Fanning [26:45]
Absolutely. Question four, artificial intelligence fills you with hope or dread. Pick one.
Shaun Hildebrand [26:52]
Well, I suppose I don't know enough about it. So in my ignorance, I'll say, hope.
Mitch Fanning [26:56]
Okay. And last question. Before we close up, what do you believe that others might disbelieve?
Shaun Hildebrand [27:01]
What do I believe that others might disbelieve? Well, I think a lot of is what we talked about with with just how quickly I think the rental market might bounce back. I think, you know, a lot of people are looking from the outside in and seeing how depressed the market has become. And, you know, I think I believe that the market will bounce back much faster than a lot of people expect and, you know, it's going to be perhaps surprising to many.
Mitch Fanning [27:21]
Perfect. Alright, last question is really where can people find you on the interwebs?
Shaun Hildebrand [27:25]
Well, they can go to Urbanation.ca. And, and quickly see all the different things that urbanization does. You can find probably my contact information on the website and you can follow us on Twitter. We're pretty active on Twitter, and probably the easiest.
Mitch Fanning [27:38]
Perfect Alright, well that's it for another episode. Sean, thanks so much for doing this and until next time, keep swimming.