How is Ontario’s Rental Housing Industry Weathering the Pandemic Downturn?

Last year, in November, I wrote a post asking “Is the rental housing industry recession-proof?” In that post I mentioned that the industry didn’t seem badly affected by the 2008-2009 recession, which was probably a fair conclusion, at least based on what I saw at the time. In that post I also speculated about how the industry might fare in a future recession, hypothesizing that luxury rentals at the top of the market might be affected the most because for most renters paying market-leading rents is a discretionary spend not an essential spend. Given the wide and deep impacts the current pandemic is having on our society, especially the economy, I think it’s time to revisit that question (and maybe hypothesize about the future again).

First of all, I was partially wrong about luxury rentals being most affected. SVN Rock Advisors, a brokerage and consulting firm located in Burlington, recently conducted a survey of landlords which found that, on average, a higher percentage of tenants in 1 beds paid their rent in April than tenants in 2 beds, while for both unit types the percentage of tenants who paid their rent increased as the monthly rent increased. The survey also breaks down rent collections by building age and geography (city or region) and . You can watch a video about this survey and download the associated slides here (see webinar #5):

Second, tenants for the most part aren’t failing to pay rents. CAPREIT, one of Canada’s largest owners and managers of purpose-built rentals, in a recent press release noted: “We have collected approximately 98% of April rents for the combined apartment and [mobile home community] portfolios. This is generally in line with the same period for our March, 2020 collections. We will closely monitor the May, 2020 collections.” That’s great news. Here’s more: “Occupancy remains strong at 98.2% for our apartment portfolio and 95.8% for our MHC properties.” You can read CAPREIT’s full press release here:

Both the SVN Rock survey and the CAPREIT press release are interesting because they indicate that high percentages of tenants paid their rent for April. The SVN Rock survey did find that landlords were concerned about collections for May. It’s still early days for the global pandemic and its economic effects, so there’s still a lot of unknowns and a lot can happen or change in the weeks and months to come.

What does the future hold for Ontario’s rental housing industry? Here are my thoughts:

  • Near-term (the next few months): Over the next few months we will likely see a slight increase in failures to pay rent, with more in May than April, and more in June than May. By June we’ll see the provincial government re-thinking the existing landlord/tenant relationship resulting in an expansion of tenant protections on a temporary basis. We will also see a reduction in vacancies as over-extended homeowners sell and move into rental housing. Rent growth will weaken a bit (something which the consulting firm Urbanation Inc has identified and which I discussed in my post last week) but I suspect this phenomenon will be limited to non-purpose-built rentals and rents in “official” rentals will continue to grow.
  • Medium-term (later this year and early 2021): Later this year will likely be the toughest time for the economy but a good time for the rental housing industry. Construction will be back to work, since physical distancing is relatively easy to achieve on a worksite, and because too much investment is tied up for projects to be shut down. Tenant stability will be high thanks to provincial government intervention and an inability for many renters to buy houses. Vacancies will be at or near zero and rent collections will have returned to percentages after a dip in the late spring and early summer. Rents will increase, at least for the small number of units that turn over (the provincial government will increase the annual guideline rent increase to help out landlords a bit).
  • Long-term (mid 2021 and onwards): Next year will hopefully see a vaccine or several highly effective treatments that more or less end the pandemic. Most renters will stay put for years to come as they realize that it’s not that bad. Ongoing development of new rentals will help with supply. Rents will keep driving upwards. Negative economic effects from the pandemic will linger on but the rental housing industry will be back to normal.

Is any of this going to happen? You have my personal guarantee that the future will unfold exactly as I’ve described above… wait, stop, I have no idea what’s going to happen. Neither does anyone else. And of course nothing I’ve talked about in this post constitutes investment advice, etc. Warren Buffett said it best, if blandly, in his latest annual shareholder meeting: “We’ll see.”