Investor move to trade rent for longer leases

“Recently, clients – and I, as a property investor  have also had to do it – are cutting rates as long as they can get a tenant to sign a three-year lease,” Steve Arruda, a Toronto real estate investment specialist with Century 21. “Those clients are worried about vacancies because of flood of properties, mostly condos, expected to come into the market. They’ve decided to take a bit of a rent drop in order to ensure occupancy and maintain cash flow.”

The analysis comes on the heels of last week’s warning from the Central Bank, suggesting condo markets across the country are most vulnerable to a correction.

“Certain areas of the national housing market may be more vulnerable to price declines, particularly the multiple-unit segment of the market, which is showing signs of disequilibrium,” reads the Bank of Canada’s December economic review, issued Thursday. “The supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of a correction in this market.”

With a building crane seemingly on every downtown corner, Toronto tenants are already showing more willingness to ask for rent reductions in exchange for longer leases.

A grow number of landlords are ready to make that compromise, not only because of the tens of thousands of new condo units likely to hit the rental market by the end of 2012, but also because of a possible increase in the number of renters willing to make the leap to homeownership.

Those prospective buyers, said Arruda, may be waiting for the kind of price correction the BoC is now hinting at. That could translate into a market where demand is falling even as supply grows.

For property investors, that phenomenon would likely strain cash flow.

Still, that hasn’t yet happened. In fact, the national vacancy rate fell modestly this fall, according to the CMHC’s new rental market survey, released Tuesday.

Although some segments are more insulated than others.
"Demand for rental condominium apartments remained strong, with the vacancy rate for such units falling in most of Canada's largest urban centres, including Toronto, Montreal and Vancouver." said Mathieu Laberge, deputy chief economist at CMHC.

That may support the decision of many investors to adopt and maintain a buy-and-hold strategy, said Arruda. "It's wise to hold it long-term."

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