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Has The Toronto Bubble Finally, Popped?

Has The Toronto Bubble Finally, Popped?

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Understanding the Shift Toward Digital-First Agents

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11/09 - #AskFM, Rentals

A Landlord’s Guide to Surviving the Storm:

Navigating Toronto’s Rental Shift:

In Toronto’s current real estate climate, landlords are navigating through a period of unprecedented challenges. As the country’s economic stability undergoes a seismic shift, the terrain of real estate investment, property management and tenant challenges is becoming increasingly complex. This article dissects the multifaceted issues landlords face today—from the cooling of both resale and rental markets to changing demographics, financial woes and job security concerns. What is their impact on rental dynamics? We delve into the realities that confront property owners, exploring how these trends are reshaping strategies and long-term planning. Our discussion is rooted in a commitment to clarity and insight, shedding light on the subtle nuances of the Toronto market and providing actionable advice for those at the helm of rental properties.

And don’t just read about the rental market shifts—see and hear the stories behind the stats. Our podcast provides an insightful (and more personal) touch on the realities unfolding in Toronto’s housing sector. Whether you’re a property owner, investor, or market enthusiast, our video podcast offers the additional clarity and depth you might be looking for:

Are we facing a simultaneous slump in both resale and rental housing markets?

The residential resale market is decelerating, paralleling a surprising downturn in the rental sector. With interest rates climbing steeply to combat inflation, the Bank of Canada’s strategy has inadvertently depressed market activity to historic lows despite the city’s population burgeoning. This downturn is not yet widely reported, but the evidence is clear from our listings and our dealings with landlords and tenants; both markets are slowing in unison. Contrary to the once “on fire” rental market, the reality is shifting. In Toronto, the previously brisk rental pace has stalled; September, usually bustling due to school commencements and post-summer relocations, saw the lowest rental absorption rate in a decade, save for the COVID year. Rental condos, which could be leased in a matter of hours during the frenzy, are now languishing on the market for around 20 days in October, a stark contrast to the mere week they took at the height of the madness.

How are shifting demographics shaping the rental market’s trajectory?

The current market cooldown stems from resale property prices being more sensitive to interest rates than rentals, which are tied to income and job stability. With wages stagnating, tenants are less inclined to move as rent escalations outpace income growth. The staggering rise in average rents—about 20 to 30% since January 2022 post-COVID normalization—has tenants locking in current rents to avoid paying exorbitantly more for the same space. Consequently, with people either unwilling or unable to afford to move, we’re noticing a surge in inventory and a rental rate plateau. Many are opting to move back with their parents to other provinces like Alberta or different regions like the 905 or 705 areas.

Adding to the complexity is a pervasive psychological unease among potential renters and homeowners alike. Big bank headlines aren’t about hiring sprees, and snippets of news about layoffs at firms like RBC or scaled-back hiring at tech companies temper the job market optimism. This uncertain economic sentiment, particularly among younger renters, is curbing their willingness to stretch their budgets for higher rents amidst flat career income prospects—especially with inflation escalating costs across the board. It’s a scene reminiscent of the pandemic, with many seeking the security of returning home.

Are landlords facing tougher challenges in attracting desirable tenants?

Landlords are grappling with the challenges of a swiftly changing market, where a surplus of options empowers tenants with heightened expectations and greater bargaining power. Monthly data analyses have become vital for landlords and agents to stay agile in pricing strategies. With properties no longer leasing as rapidly as before, landlords notice the leverage shift towards tenants. To stay ahead, proactive landlords are pricing rentals slightly below market value to attract a greater pool of quality tenants rather than holding out for a top dollar. Despite the instinct to counter rising interest rates with increased rents, savvy landlords recognize the value in securing reliable tenants swiftly, understanding that vacancies are costlier than slightly reduced rent.

Recent trends indicate that some landlords, fixated on past rental rates, still need to acknowledge the necessity to adapt to the current market conditions, where listings are abundant and days on the market are extending. A case in point is a landlord unwilling to accept that the rental value from just a few months prior is no longer applicable. Such a stance is precarious as we approach winter, the slowest season for rentals, where the cost of a vacant property can swiftly eclipse the losses from a modest rent reduction. It’s crucial for landlords to preemptively adjust to market trends, avoid vacancies, and secure the best tenants possible rather than chase declining rates in an increasingly competitive landscape.

Are today’s market conditions prompting landlords to offload non-cash-flowing assets?

Landlords are exploring the sale of tenanted properties more frequently, which requires a tailored approach, given these assets will fetch a different premium than a vacant and staged one. Selling a property with a tenant, especially under a fixed-term lease with significant time remaining, narrows the buyer pool to primarily investors who expect a price reflective of the current rental income. These sales are complex, often involving reluctant tenants unhappy with the disruption and potential of needing to relocate, complicating showings and logistics. Surprisingly, despite these challenges, there is still some buyer interest, albeit less than if the property were vacant. A proactive tip we have offered landlords, which is now proving beneficial, is to take high-quality photos of the property when it’s vacant. These photos are invaluable marketing tools that help a tenanted property present well online, potentially increasing its attractiveness to buyers. This underscores the long-term value of capturing your property at its best before any tenant moves in! More pro tips can be found here!

Are investors delving deeper into tenants’ backgrounds before purchasing?

When an investor considers buying a tenanted suite, thorough due diligence on the tenant’s covenant is essential, though only sometimes standard practice. The buyer’s agent and investor must dig into the tenant’s background just as they would when initially leasing the property. This includes verifying employment, running credit checks, and contacting references to ensure reliability. Especially in rent-controlled buildings, where eviction options are limited, knowing the tenant’s payment history is critical. Investors should be wary, for a landlord’s eagerness to sell may stem from issues with tenant payments. Hence, a landlord must be ready to provide comprehensive records of their tenant’s payment history and other pertinent information to the prospective buyer.

Is a “hold tight” recommendation becoming common advice for our landlord clients?

Our conversations with landlords lately hinge on a single strategy: hold, don’t fold. As we shepherd a growing portfolio of rental units, we’re steering our clients away from the sell button. The market’s shaky, sure—every call we get is tinged with panic over the uncertainty, the inflation, the spikes in interest. But we’re reminding them of Toronto’s sterling history in real estate, the costly regrets of past sellers, and the wisdom of playing the long game. Emotional reactions can sabotage sound investments, so we’re advocating a clear-headed look at the long-term outlook. Even as rents rise and the temptation to evict for a quick sale looms, we’re counselling landlords to resist. The cost of losing a steady tenant far outweighs any potential short-term windfall. This isn’t the time for rash decisions; it’s a time for patience, for waiting out the storm. The market’s in flux, but the fundamentals remain strong—our stance is unwavering:

  • Hold your ground.
  • Stick with the tenants you have.
  • Ride out the market’s troughs.

Acting on fear can backfire, so as the market’s pendulum swings, remember: the best play might just be to wait for calmer waters.

Are prevailing market conditions fostering a reluctance to rent out property?

In today’s market, many potential landlords are grappling with a tough choice: rent out their property or sell it amidst life changes, such as moving to a newly completed home or a cottage. Yet, despite the robust rental market, they’re hesitant to step into the landlord role. Why? It boils down to horror stories about tenants’ rights and nightmarish legal battles with the Landlord and Tenant Board—a place often seen as overly tenant-friendly, with landlords sometimes unfairly cornered and costly delays in resolving disputes. It’s a harsh reality that discourages many from becoming landlords, thus exacerbating the city’s housing supply issues. For those accidentally thrust into the role due to changing personal circumstances, there’s a sharp learning curve—they can’t simply rent for a short term and expect to sell vacant later. We at Fox Marin make it a point to lay out the hard truths to potential landlords: renting is not a short-term solution; tenants have substantial rights, and once they’re in, you can’t easily reclaim the property.

Owning real estate and managing it as a landlord isn’t a set-it-and-forget-it business—it’s active, often as intense as running any other enterprise. It involves late-night emergency calls and awkward rent chases. Suppose you’re not ready to provide a well-maintained home and address tenant issues promptly. In that case, “landlording” may not be your calling, and shirking these duties only tarnishes the reputation of good landlords everywhere. Yet, we recognize the differences across property types—being a landlord in the condo market, especially with new builds, can be relatively hands-off, while freehold properties may present more complexities.

Nonetheless, we urge potential landlords not to be daunted; while the job has its challenges, the nature of the asset can influence the experience. As much as due diligence is critical in tenant selection, the landlord journey always carries an element of the unknown, regardless of how perfect a tenant seems on paper.

Are studio apartments or shared living spaces winning the rental race?

The rental market in downtown Toronto is witnessing a surge in demand for smaller units, with studios leading the pack. Since January 2022, the average rent for a studio has shot up by 35%, outpacing the growth of one bedroom, which increased by 27%, and one plus dens by 25%. Two bedrooms lag with less than a 20% increase. This trend suggests a shift toward more cost-effective living spaces as rental rates climb. Tenants, especially those earning around $65K annually, who once comfortably rented spacious one-bedroom-plus-den units, are now downsizing to studios due to affordability constraints.

Despite two bedrooms being around 40% pricier than one-bedroom, not all tenants are flocking to shared living to cut costs. However, there is a growing trend of long-term tenants seeking roommates to maintain their current below-market rates, especially in rent-controlled units. Such arrangements are becoming necessary for many, with single-unit living becoming a luxury for those earning up to $70,000 a year. For the lowest rent, tenants turn to freehold homes divided into multiple bedrooms in neighbourhoods like the Annex or Seaton Village, where they live with several roommates.

For landlords, studios are emerging as the most lucrative investment, offering better cash flow and appreciation than other unit types. As developers continue to shrink new condos, the market will likely see an influx of ultra-compact, sub-300 square-foot studios catering to tenants who prioritize location and amenities over living space—a trend set to persist.

Current market conditions creating clear winners and losers?

Investors sitting on cash or those who can tap into capital soon are poised to become the victors in Toronto’s real estate market as the frenzied competition subsides. While cash flow-positive condos are not on the horizon, savvy buyers aren’t just after immediate returns but are eyeing the prize of long-term appreciation. Imagine snagging a one-bedroom in the winter’s lull at a price slashed by 20% from 2022’s peak—come 2030, that strategic buy could be your million-dollar move. Those playing the long game, ready to pounce when the market ebbs, will likely reap the rewards of their patience.

Conversely, sellers who find themselves compelled to offload properties in the coming months will face the harshest seller’s market in recent memory. The wise move? Batten down the hatches—rent out your property, stay the course, do what you must to ride out the slump. A minor note of empathy goes to tenants being ousted from their non-rent-controlled sanctuaries by landlords in a panic sale. These tenants, though not losers in the true sense, are unfortunately cast into a tumultuous rental landscape, a harsh reality for those caught in the current market’s undertow.

What top tips can guide landlords through the current market uncertainties?

Landlords, the golden rule in today’s market is to steer clear of fear-driven decisions. Suppose you sense fear nudging you towards a choice—stop. Investment decisions must be cool-headed and calculated. It’s essential to seek advice from seasoned professionals in your corner, genuinely gunning for your success. Poor decisions often stem from poor counsel, so be selective about who you trust for guidance. If you’re confident in your motives and the quality of your advice, you’ll likely navigate these times successfully.

Fortunes are often made in downturns. There’s wisdom in this contrarian approach. While others retreat, the savvy investor looks to expand. History has shown us that many of the most successful investors and entrepreneurs made their boldest and most profitable moves during recessions. As we brace for tougher times and “blood on the streets,” remember this is not a signal to retreat but an opportunity to build and invest shrewdly. Now could be the moment to grow your portfolio, not shrink it. Keep a level head, consult with the best, and you could emerge stronger from the storm.

Conclusion

Changing is blowing through Toronto’s real estate market, and landlords are at a crossroads. Today’s market tests acumen and resilience as property owners wrestle with a blend of reticence and resolve. In the face of such unpredictability, the most astute strategy is often found in the patience to endure and the wisdom to recognize opportunity amidst the tumult.

As this article has illustrated, success in this environment demands a nuanced approach—one that eschews knee-jerk reactions in favour of informed, strategic patience. For landlords, the current climate is not just a hurdle to overcome but a landscape ripe with potential for those who can adeptly navigate its terrain! As Toronto continues to write its real estate story, landlords who heed the lessons of this shifting market will be well-placed to emerge unscathed and ahead of the curve (that we know for sure; we’re just not sure exactly when).

Contact Fox Marin, Toronto’s downtown luxury real estate brokerage, today to learn more about the advantages of hiring a quality team!

Contact Us (We’re Nice).

Kori Marin is a Toronto Broker & Managing Partner at Fox Marin Associates. For high-energy real estate aficionado Kori Marin, a well-lived life is achieved by maintaining an “all-in” attitude that realizes every last ounce of one’s full potential. This mindset has driven successful results in every aspect of her life – from her corporate sales and account management experience to her international travels to her years of fitness training and leadership – and is the hallmark of the exceptional work that she does on behalf of her clients in the residential real estate sector in downtown Toronto.