Feeling the pinch: No new rental buildings despite low vacancy rate
Marty Hope and Kathy McCormick, Calgary Herald
Published: Saturday, January 27, 2007
About 71 people per day are expected to move to Calgary this year --and for some of them, it will mean the start of a frustrating search for rental accommodation, says a federal agency.
Potential tenants not only face a second straight year of overall vacancy rates below one per cent, there is no new rental housing planned at a time when 26,000 people are expected to migrate to Calgary this year, says Lai Sing Louie of Canada Mortgage and Housing Corp.
"There just isn't any new market rent projects being started or completed -- and besides, the rental universe continues to shrink," he says.
Construction started on 148 rental unit starts last year, but 88 were destined for the seniors' market and the other 60 were for social housing.
In the past two years, the number of rental units dropped by 2,000, says CMHC. By the end of last year, the total was 40,333.
"The decline in the rental stock can mostly be attributed to the continuation of conversion of units from rental tenure to condominium," says Louie.
Last year, the number of condo conversions totalled 946. That pace is expected to continue this year as property owners capitalize on their rental investment.
Besides low vacancy rates, potential tenants have also faced rising rents.
But that situation might just stimulate some rental construction, says Gerry Baxter, executive director of the Calgary Apartment Association.
"Previously, investors have not seen any reason to construct new rental property because the economics of doing so just weren't there," he says, adding he has heard of a couple of companies who are "closely examining" the feasibility of construction.
"However, the fact remains that the high cost of construction will most likely result in very high rents to justify the cost of building," he says.
Partially offsetting the loss to condo conversions is investors renting out condos, says Louie.
Of the 26,689 apartments purchased, nearly 18 per cent were being rented out, says CMHC.
But renting a condo doesn't come cheap. The average rent for a two-bedroom condo is $1,257 per month, more than 31 per cent higher than the average for a two-bedroom unit in a rental building, says CMHC.
Rents will likely be going up this year in response to the strong demand and low inventory, says Louie.
Baxter agrees. "Because these are new or completely renovated to near new condition, they usually command much higher rents than conventional apartments.
Abed Itani, president of Intergulf-Cidex, is developing the comprehensive high-rise and townhouse project called Westgate Park at bow Trail and 33rd Street S.W.
While less than a dozen suites in the 149 apartment condos in his Brava tower have found their way to the sublease market, moving them to the rental market makes good economic sense, he says.
"Those people are smart," says Itani. "If they bought two years ago, the value of that purchase has gone up 50 per cent or more and they are letting rent rates pay the mortgage."
He has heard reports that rent for suites in Brava is running between $1,700 and $2,500 a month, depending on the size of the unit and its location in the building. Those renting out the suites have plans to some day move into the units, themselves, or have purchased for their children to live in, he says.
"I'm not surprised so many condos are being rented out," says Itani. "It just makes good economic sense."
During the past two years, Calgary's vacancy rate has tightened dramatically, falling from a 10-year high of 4.4 per cent in 2003 to equal a record low of 0.5 per cent in 2006, says Louie.
While the rate will likely go up marginally this year, it will remain below one per cent, he says. "As a result, the period of high vacancy rates which caused landlords to provide incentives and keep rents flat is long behind us."
Part of the increase in rents is simply catch-up, says Louie. "The increased operating and maintenance costs that landlords were absorbing in the past are to some extent being recouped this year."
Largely because of the period when there was little in the way of rent hikes in Calgary, the percentage gap between house prices and rents is extremely wide.
Between 2003 and 2006, house prices soared by 71 per cent while rent rates gained only 19 per cent, says a report from Toronto-based Clayton Research.
In Edmonton, the numbers were 61 and 12, respectively.
"While pronounced rent increases would normally be met with resistance from tenants, increases in average rents in Calgary and Edmonton in the past few years pale in comparison to increases in house prices," says the report.
By the end of last year, the average rent for all bedroom types -- from bachelor pads to suites with three or more bedrooms -- in Calgary was $851, says CMHC.
But the federal agency expects the average to climb another $60 this year.
Rising home prices also mean more Calgary renters will be delaying the dream of home ownership in 2007, putting further pressure on vacancy rates, says Louie.
"Last year, we saw condo prices go up even faster than single-family homes," he says. "Moreover, the high cost of housing will keep some potential first-time homebuyers in the rental market as the spread between monthly payments between renting and owning increased in 2006 -- and is expected to widen again in 2007."
The average price of resale condos hit $261,009 last year, an increase of nearly 42 per cent compared to 2005.
That's expected to climb about nine per cent to reach an average of $286,500 by the end of this year, says CMHC.
The average price for single-family resale homes, which increased 39.2 per cent last year, is expected to grow a further 9.5 per cent this year.
"Those apartments vacated by new home buyers will likely be filled in a very short period of time," says Louie. "The average rental apartment vacancy rate in 2007 will be low, somewhere around 0.5 per cent."
That rate remains largely unchanged from last year, and with net migration expected to be slighter ahead of last year's total of 25,794, people will be looking for somewhere to live. Net migration refers to the inflow of people minus the outflows.
"Demand for rental accommodation will remain vigorous due to continued arrival of people from other parts of Canada and foreign countries," says Louie.
© The Calgary Herald 2007