Morguard’s 2022 Economic Outlook report, released in late December 2021, predicts that the modest softening of rental fundamentals observed since the onset of COVID-19 will improve in 2022 with the eventual easing of pandemic restrictions.
Rental demand weakened in the late spring of 2020, a trend that carried through 2021 as international borders remained closed preventing migrants and foreign students from entering the country and occupying rental accommodations. This weakening demand was more pronounced in the downtown and central areas of Canada’s major cities, where Canadian residents unable to attend in-person classes further diminished need.
Meanwhile, weaker youth employment patterns negatively impacted rental market fundamentals, causing demand to soften and the average vacancy rate to rise. According to Morguard’s data, the national vacancy rate rose 100 bps to a four-year high of 3.2 per cent over the 12-month period ending October 2020. The upward trend was more pronounced in the downtown and central areas of Canada’s larger metros compared to suburban areas where vacancy was relatively stable.
Investment market trends
Canadian multi-suite residential rental sector investment market trends were broadly positive during 2020 and much of 2021, the report states. Investment demand outstripped supply across the country, in keeping with medium-term trends. The asset class remained a prime target of a range of institutional and private investment groups. Buyers looked for acquisition opportunities in the country’s largest metropolitan areas. The demand-pressure drove transaction volume to a benchmark high level in several regions.
Multi-suite residential rental properties were trading at a record pace during the first half of 2021, with $6.6 billion in closed transactions recorded for the period. Generally, investors continued to bid aggressively, particularly for concrete high-rise properties or assets with development or rent upside potential. Cap rates continued to compress, with cycle-low averages reported in most regions. Sector investment performance patterns were also broadly positive during 2020 and much of 2021.
Properties contained in the MSCI Index registered an annual average total return of 5.2 per cent for the 12-month period ending June 30, 2021, on the heels of a 9.4 per cent return over the previous 12-month period. The healthy near-term performance pattern was one of several broadly positive investment market trends reported over the recent past.
Rent growth outlook
Looking ahead, Morguard predicts that rental sector fundamentals will gradually strengthen over the near term, following a brief period of modest erosion. Demand will gradually strengthen as post-secondary schools and offices continue to open, assuming the Omicron variant is effectively managed after the holidays.
Additionally, rental demand will increase with the return of international students to the country’s major urban centres. As vacancy levels decline, central area and downtown effective rents will stabilize, as fewer landlords offer incentives to prospective tenants. The combination of stronger demand and declining vacancy will eventually drive rents to a benchmark high level in most markets.
In summary, rent growth outlook will continue to support the multi-suite residential rental sector’s position as a preferred acquisition target with investors. As a result, sales activity will continue to peak, assuming product availability.
For the complete report, click here: Morguard 2022 Economic Outlook
