Recent headlines about declining Greater Toronto and Hamilton Area (GTHA) rents have prompted Canadian real estate investors to look closer. While high interest rates have slowed overall rent growth compared to last year’s record highs, purpose-built rentals remain resilient.

Why are GTHA Rents Slowing?

The GTHA has seen a notable increase in new condominium rentals in recent quarters. In Q3’24 alone, Toronto saw a 52% increase in condos listed for rent. Driving the shift are highly leveraged investors and speculators, unable to sell at desired margins and facing rising mortgage payments. As a near-term solution, many are listing their condos as rentals, often at attractive, below-market rates.

Additionally, developers have delivered a record number of new condos, some of which are also being converted to rentals. These typically measure 400 to 500 square feet — sometimes as small as 350 square feet — and may be located in dense high rises, commanding lower rents. Notably, condo rentals under 500 square feet experienced the largest annual rent declines (7.1%-9.2%, Q3’24) in the GTHA, according to Urbanation’s UrbanRental Q3 2024 GTHA Rental Market Report.

What the Data Shows: Purpose-Built Rentals on a Positive Long-Term Trajectory

This influx of condos has temporarily slowed rent growth across all categories, but not equally. GTHA purpose-built rent growth, down in Q3’24, held onto approximately twice as much momentum as condos. Looking long term, however, GTHA purpose-built rents are up 17.5% over pre-pandemic levels recorded this quarter five years ago and continue to trend positively.

Rental Declines a Temporary Trend

Several macroeconomic drivers have supported the rental category’s long-term resilience and low volatility:

Population growth: After recent cuts to federal immigration targets, Canada still plans to welcome 1.14M immigrants over the next three years. The GTHA receives a significant share of Canada’s newcomers, who tend to rent.

Home affordability: The GTHA could overtake Vancouver as the most expensive housing market in Canada this year. Many Canadians choose renting over ownership due to the category’s relative affordability and flexibility.

Limited housing supply: Rental apartments are chronically underbuilt in the GTHA, even as purpose-built completions reached a 30-year high of 2,319 units YTD. With Canada needing more than 2.2 million such rentals by 2030 to meet excess demand, according to the National Housing Accord, the entrenched supply-demand gap will continue to support investments in purpose-built apartments.

Maintaining Growth in All Types of Markets

In periods of slower-but-positive growth, private REITs like the Equiton Residential Income Fund Trust (Apartment Fund) leverage strategies to maintain momentum:

Gap to Market: A healthy gap to market allows property owners to increase rents on natural turnover without outpricing tenants. The Apartment Fund, with a 35.1% gap to market as at Q3’24, achieved a 19.9% YTD rent increase on natural turnover, generating $40.0M in value. It was able to capture an average increase of $305 per new lease. The Apartment Fund’s recent strategic acquisition in Toronto aligns to its gap-to-market strategy with a 25% revenue gap to market.

Tactical Rent Pricing: In markets with higher vacancy exposure, strategic rent adjustments may be necessary to stay competitive. Even then, the Apartment Fund’s rental rate spread enables continued growth when compared to previous periods.

Quality Units: In tight markets, renters seek value-for-dollar. Units in the Apartment Fund’s GTHA portfolio average 710 square feet — typically larger than some newly launched condos — and receive on-site customer service, a notable driver of resident satisfaction. Desirable layouts support higher rents.

Rental Market Outlook:

• New condos’ effect on GTHA rent growth is expected to be temporary. As interest rates decline further in 2025, more condo investors will likely raise rents or transact units, stabilizing their impact on overall rent growth.
• The GTHA finds itself at the tail end of a period of oversupply. With Q1’24-Q3’24 condo starts down 54% compared to 2023, the resulting undersupply in the next three to six years will put upward pressure on prices and rents.
• Rentals with larger layouts and professional management will continue to drive a premium amid an influx of undersized condos. Strong fundamentals will continue to support rent growth in the purpose-built category, although at a slower pace versus recent highs. An anticipated reacceleration in 2025 offers investors the opportunity to benefit from a potential recovery as temporary rental declines resolve.