Following a breakthrough year in 2013, 2014 saw the GTA apartment market return to its normal supply and demand dynamic. While over $1.4 billion in sales were completed in 2013, 2014 experienced a decline of 57 per cent, with transactions totaling just $900 million.
This drop in activity was found among all measuring indexes. The number of deals completed in 2014 totaled 92 while in 2013, that number was 137. As well, the number of units trading hands dropped to 6,314 in 2014 from 9,700 in 2013. Average building size stayed steady at approximately 70 units per deal.
From a volume perspective, the 2014 numbers are generally in line with those between the years 2007 and 2012. This further highlights the huge year that was 2013, which was a record-breaking year in commissions for many apartment brokers.
So, was 2013 a fluke or an aberration?
By examining the numbers, it can be argued that investors in 2013 looked back and saw the unprecedented 20-year rise in apartment values. Many anticipated a correction in the market, or were doing estate planning and considered that it was the correct time to sell. Interest rates were at an all-time low and demand was at an all-time high. It was a perfect storm. The question is, were they right to sell? Given that only a year has passed, time and statistics have yet to tell.
Throughout the last four years, vacancy rates in the GTA have increased—albeit slightly—from 1.4 per cent in 2011 to 1.65 per cent in 2013, and in 2014 they dipped back to 1.55 per cent. But, the rising trend was there and the fear of many thousands of condos coming on stream had an effect on apartment ownership, psychologically. Downtown Toronto saw vacancies go from 1.2 per cent in 2011 to 1.5 per cent in 2014.
While vacancies edged up and more condos were developed, many thought there would be a downward pressure on rents. But statistically speaking, this did not happen. Between 2011 and 2014, all areas in the GTA experienced healthy average rental increases. In fact, the Statutory Guideline Increase (SGI) was 0.8 per cent for 2014. All areas in the GTA surpassed this. East York was the lowest with a 1 per cent increase while Brampton was the highest at 4.1 per cent. (Toronto was a close 2nd with a 4 per cent increase.)
The speed of growth is also interesting. All across the GTA, rents have grown, on average, 2.4 per cent per year since 2011. In downtown Toronto, this growth was 4.3 per cent. Such a fast increase in rents and vacancies could have caused investors to question the sustainability of the trend. But the growth in rent was largely due to apartment owners stepping up their game and renovating units to condo-like quality, charging higher rents in return.
Interest rates also played a part in this growth. In 2012, 5-year Canada Bonds ranged from 0.88 per cent to 1.42 per cent and averaged 1.12 per cent. In 2013 they ranged from 1.19 per cent to 1.9 per cent and averaged at 1.62 per cent. Perhaps many thought the days of low interest rates were over. In 2014, bond rates were between 1.55 per cent and 1.75 per cent, until November when they nose-dived to under 0.7 per cent.
Other key statistics
Price-per-suite traded between $90-100k from 2007 to 2011. In 2012, the average jumped to $126k and then up to $144k in 2013. In 2014, it dropped to $140k, suggesting market pricing has stabilized.
Similarly, cap rates traded between 6.25 to 6.55 per cent from 2007 to 2011. Between 2002 and 2014 cap rates held stable around 5 per cent.
In conclusion, even though initial numbers show that values are stabilizing, more data is needed to see if the sellers in 2013 were on the ball. Owners today will be facing more pressure on net operating incomes from rising property taxes and double digit increases in utility bills. They will also need to spend more on renovations in order to maintain occupancy and healthy rental levels. Furthermore, given that the bulk of the GTA stock is over 45 years old, other issues (from structural to HVAC) may loom on the horizon if those matters weren’t properly addressed during prior ownership.
The recent drop in bond rates and interest rates will place downward pressures on cap rates but this is expected to be a short term situation. 2015 will be an interesting year in this market and we look forward to the challenges and opportunities that it will bring.
Lorenzo Digianfelice is Broker of Record at Commercial Focus Realty Inc. and is part of the Apartment Group which have sold over $100MM of apartments in 2014 alone. He can be reached at ldigianfelice@cfrealty.ca or direct at 416-907-8281.
