New Rental Units & Vacancies

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One thing that developers often wonder about is the effect new rentals have on vacancies. Does delivering a bunch of newly constructed rental units to a (housing) market cause vacancies to increase? Or will there be no affect?

Everyone will agree that delivering a relatively small number of new units to a large housing market will probably have little or no effect on vacancies, since demand for new rentals will remain much larger than the supply of new rentals. Even delivering a large number of new units to a large market shouldn’t affect vacancies too much, although that depends on what is meant by the word “large”. Conversely, it stands to reason that delivering a large number of new rentals to a smaller market will cause vacancies to increase until the new units are absorbed.

The chart below shows the total number of purpose-built rentals in Kingston, separated into existing and newly constructed rentals, compared to average vacancies for all units. Kingston has been chosen because it is a medium-sized city (roughly 125,000 people) to which a considerable number of new rentals (approximately 3,000) have been added over the last twenty years, particularly during the last ten. Kingston isn’t a small market, but it’s had a lot more new rentals built than most cities in southern Ontario, including many much larger cities, so if there is a link between new rentals and vacancies it will probably show up here.

After taking a look at the chart above, I don’t think there’s a link between new rentals being delivered to the Kingston market and overall average vacancies. If there was, then vacancies should spike up after a bunch of new rental units enter the market, theoretically speaking. The reverse appears to have happened. Average vacancies spiked up in 2003, a year before a large number of new rental units are delivered (in 2004). Average vacancies plunged in 2008 from an all-time-high in 2007, despite only a handful of new units delivered in 2007 and none in 2008. Average vacancies plunged again in 2017 and 2018, despite over two hundred new units delivered each year from 2013 to 2017.

What’s happening here? As noted, I don’t think there’s a link, or at least this data doesn’t show any link. I suspect the fluctuations in average vacancies are related to factors other than the delivery of new rental units, probably broader economic trends. For instance, note how vacancies dropped significantly during the Great Recession and a couple years after, which may reflect people who were going through a tough time switching to renting purpose-built rentals for a few years, absorbing vacancies. But that doesn’t explain the plunge in average vacancies in 2017 and 2018, though, since those weren’t bad years economically. There’s a lot going on in housing markets and among housing participants, so who knows?