Low Vacancy Rates Won’t Translate into Stronger Rental Apartment Construction
John Clinkard
According to Canada Mortgage and Housing Corporation’s (CMHC) most recent Rental Market Survey, in 2007, the vacancy rate for residential building with three units or more was little changed for the fourth consecutive year.
This comparatively tight rental market appears to be due to four factors:
- Robust growth of employment;
- Healthy income growth;
- High levels of foreign immigration; and
- An increase in the cost of home ownership, compared to renting.
On the supply side, the effect of a relatively limited increase in rental construction was offset by an increased supply of condominium units purchased as investments and then rented out.
Lowest Rental Vacancy Rates are in the West
From a regional perspective, the four western provinces have had the lowest rental vacancy rates in the country for the past three years. In 2007, British Columbia (1.0%) led the pack, followed closely by Saskatchewan (1.2%), Manitoba (1.5%) and Alberta (1.6%).
But Largest Declines in Vacancy Rates are in the East
However, there are signs that rental demand has strengthened in central and eastern Canada when compared to the west. In fact, eight of the 10 census metropolitan areas (CMAs) exhibiting the largest declines in apartment vacancy rates in 2007 were east of the Manitoba border.
It is also worth noting that this pattern of stronger central/eastern versus western rental demand is completely consistent with the relative strength of employment growth in central/eastern Canada compared to western Canada over the past 12 months.
The Outlook
Looking forward, persistently low vacancy rates and healthy, in some cases double-digit, increases in rents have created a favorable climate for new rental construction in most of the CMAs in western Canada.
However, according to a recent report by Altus Clayton, this positive rental climate has not triggered a significant increase in apartment construction. Instead, increased apartment demand has been met with a significant increase in the supply of rental condominiums, many purchased by investors.
In summary, look for the increasing supply of rental condominiums in many major metro areas to limit new rental apartment construction throughout 2008, despite the more balanced regional pattern of rental demand.
