Rents duel with condo development

by Vernon Clement Jones12 Feb 2014

A new report on that much-debate sector argues that despite the massive influx of supply in some cities, rental rates are expected to remain relatively strong -- welcome news for condo investors worried about growing competition and a possible swing away from the current landlord's market.

In a new report, CIBC says despite the fact there are some 64,000 condo units being built in Toronto — up to 50 per cent of them are likely to be rented out. They are, in fact, expected to have minimal impact on rental rates, with the same likely to be said for  Vancouver's expected surge in inventory.

“Such excess supply will raise vacancy rates in the condo space by an estimated 0.3 to 0.4 per cent in both cities in the coming years," writes CIBC deputy chief economist Benjamin Tal. "That is not large enough a damage to derail the market or lead to a substantial softening in rental inflation.”

Investors in Canada's largest condo markets have been in the catbird's seat for the last three years as urban centres continue to reclaim their spot as the preferred place to call home. While escalating condo prices have challenged cash flow, lower mortgage costs have helped to protect profitability. Things may be even sweeter for investors just now coming into the market as condo prices fall.

Tal indicates that real challenge for condo investors going forward will be higher financing or opportunity costs as the mortgage rates trend upward. Presently, the rate for five-year fixed rate mortgages is around 3 per cent, as bond yields fell recently.

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