Marcus & Millichap released its bi-annual Apartment Market Report in mid-November, highlighting steady job growth and strong apartment demand in the Greater Toronto Area. With the arrival of 60,000 new residents this year, the GTA is expected to add 51,000 jobs to the economy—growth that will keep vacancy rates below two per cent and potential residents in line for more purpose-built apartments.

According to the study, the mass construction of condominium rentals is doing little to squelch investor interest in the GTA. Long-term owners are offering properties for sale while interest rates remain low and buyer demand is heightened.

“Toronto is experiencing continued cap rate compression, particularly in the GTA’s urban areas,” said Daniel Holmes, Regional Manager, Toronto, Marcus & Millichap. “There is a big push to the suburbs and Toronto Tier 2 and 3 neighbourhoods for higher yields in Class B and C properties, particularly in areas transitioning into neighbourhoods that are attracting young professionals.”

However, Holmes said even within these areas, Class A property cap rates remain compressed. For example, a recent transaction in Whitby was completed at 4.9 per cent cap rate with a strong Tier 2 apartment investor in Toronto. “Yet some buyers are still encouraged to purchase these assets based on maximizing the value appreciation of the property,” said Holmes.

More highlights from the report:

Employment: Though employment growth will not accelerate as quickly as it has in past years, payrolls will expand a modest 1.6 per cent this year, or by 51,000 jobs, raising total employment to 3.2 million positions. Last year, 61,000 jobs were added.

Net Migration: During the past four years, in-migration has topped an average of 260,000 new residents. This year, in-migration is expected to pick up to 66,000 people after an estimated 60,000 entered last year.

Vacancy: A constant flow of new residents to the GTA for more than four years has kept housing demand high throughout the market, compressing vacancy below 2 per cent. Though housing options will open this year, the area’s vacancy rate will remain low at 1.8 per cent.

Rents: Asking rents will advance 0.8 per cent to an average of $1,223 per month for a two-bedroom apartment in 2014. This controlled rent growth will be one of the lowest gains in more than a decade. In 2013, asking rents rose 2.5 percent.

Economy:

• Up to 51,000 new jobs will be created this year throughout the GTA. Most of the job gains will be in the professional-scientific-managerial services, finance-insurance-real estate services, retail-wholesale trade, construction and a variety of miscellaneous service industries.
• Despite growth in payrolls, the cost of owning a home is out of reach for many of the area’s residents. Housing prices are projected to grow to an average of $554,000 in 2015, an 18 percent increase over the past three years.
• Residential permits will remain steady as 38,000 are projected to be issued this year. A vast number of those coming online will be multifamily buildings. As home prices rise, residents will seek rentals.

Outlook: By year end, the expanding economy will draw new residents into the region. Though construction of new units will continue to be slow, household growth will generate demand to keep purpose-built rental units at nominal full occupancy.

Vacancy and Rents

• Though construction of rental condominiums has occurred continuously during the past decade, vacancy in purpose-built rentals remains extremely low at 1.6 per cent at the end of 2013.
• In 2013, asking rents jumped more than 2 percent, pushing the average rent for a two-bedroom apartment above the $1,200 per month threshold.

Outlook: Vacancy will remain low, but will tick up 20 basis points to 1.8 per cent by year end. Rent control regulations will ease rental growth to 0.8 per cent in 2014.

 Sales Trends:

• Investors are keenly interested in entering the apartment market across the GTA and owners are taking advantage of demand. Transactions increased 38 per cent to more than 260 sales during the past 12 months at the end of the first quarter compared with the previous time period. Since 2009, deal flow has risen an average of 36 per cent annually. Low-rises comprised 72 per cent of 2014 sales.
• A competitive buyer environment pushed low-rise prices 3 per cent higher over the 12 months ending in the first quarter to $195,000 per unit. Assets in Toronto captured the highest prices with an average of $242,000 per unit, while prices in other markets such as Richmond Hill, Mississauga and Etobicoke ranged from $155,000 to $232,000 per unit.
• Intense interest has compressed cap rates 20 basis points to 5.2 per cent over the last 12 months. Sales within popular areas have cap rates in the high-4 per cent range. Those searching for higher yields target cities such as Uxbridge, Whitby and Oshawa.

Outlook: Cap rates will remain compressed as more sellers bring their assets to market to take advantage of the rising prices. As net-migration grows and household

Marcus & Millichap is the largest firm specializing in commercial real estate investment sales, financing, research and advisory services, with offices across the United States and Canada.