Unofficial Rentals, Part II

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In my first post in this series I examined the size of the non-purpose-built or unofficial rental supply in Ontario’s ten largest cities. In this post I discuss the three main types of non-purpose-built rentals, comment on their importance, and explain why knowing all of this is important.

The non-purpose-built rental supply can be separated into the following three categories:

(1a) Single-Family Houses: These are typically not direct competitors to purpose-built rentals, nor market equivalents or analogs, because they offer a substantially different housing configuration than most purpose-built rentals. Detached and semi-detached houses, for instance, offer more rooms than rental apartments, plus basements (often furnished), backyards, and direct-entry private garages. What this means is that houses for rent offer a lot more than rental apartments. An argument could be made that rental buildings can offer amenities that houses can’t, such as fitness rooms, that might help equalize their appeal to renters, but ultimately I think it’s best to think of single-family houses as a much different—and not comparable—housing type.

(1b) Townhouses: Townhouses for rent are slightly different. They certainly offer more than purpose-built rental apartments, but they don’t necessarily offer more than purpose-built rental townhouses which are basically the same product except under a different ownership structure. Townhouses available for rent are therefore comparable with purpose-built rental townhouses, but not with purpose-built rental apartments since the latter offer a much different product. Townhouses typically offer basements and backyards, but not always direct-entry private garages.

(2) Condominiums: Condos available for rent, by contrast, are often direct competitors to rental apartments, since condo buildings often offer amenities and features similar or superior to purpose-built rental buildings. In fact, most new purpose-built rental buildings constructed since 2000, especially in Toronto, are essentially indistinguishable from condominium buildings of similar age. When condos-for-rent offer more or less the same amenities, features, and overall quality as rentals, and when condos are available in large quantities, then the condo-for-rent supply must be considered a source of competition, especially for newly constructed purpose-built rental apartments.

How is understanding this useful?

First, it helps to ensure that market surveys used to help set pricing in new rentals are thorough. If your new rental property is a townhouse property, then the market survey must include townhouses available for rent to ensure similar product is compared. Since the number of purpose-built rental townhouses is small almost everywhere, they therefore compete directly with townhouses available for rent (the exceptions are Mississauga and southwest Ottawa, which both contain large quantities of purpose-built rental townhouses). If your new rental property is an apartment building, then you need to make sure to check local comparables and consider the character of the local housing market. If your building is in a core area of a big city (such as Toronto or Ottawa), or in a suburban city with a large supply of condominiums (such as Mississauga), then the market survey should also include condos available for rent. If the local market is in a small or medium sized city or town, then it’s usually acceptable to ignore the local condo market since it’s probably very small and not very relevant. When you are talking to a consultant about commissioning a market survey to be used for pricing, or when reviewing one that you’ve had prepared, pay close attention to the non-purpose-built supply: make sure it’s included, or your pricing might not reflect all available comparables.

Second, it helps gauge demand or depth-of-market for new rentals since unofficial rentals contain renters who are not finding the rental housing they need in the official rental supply, and are therefore a pool of prospective renters from which new rental buildings can draw prospects during leasing. There are many reasons why renters may turn to the unofficial rental supply: for some renters the unofficial rental supply offers lower monthly rents; for other renters, the unofficial rental supply offers amenities, features, and other advantages (including “newness”) that existing official rentals might not. How many unofficial renters will be tempted to rent in new purpose-built rentals? That’s impossible to determine, but it makes sense that when thousands of renters are renting unofficial rentals in a city a significant portion of them are renting because they want better quality purpose-built rentals. If a new rental building with, say, 100 or 200 units ready to lease was constructed in that city, some of those unofficial renters would migrate to the new building. In other words, the non-purpose-built or unofficial rental supply is sometimes a source of prospective renters that should not be overlooked.