Today I ended up in an article in Macleans magazine The Vacant Truth About Rental Condos for speaking out about vacancy rates.
I have known for quite a while that published vacancy numbers were complete balderdash but I had no idea how the mysterious 1% number came about. So I asked.
Initial Inquiry Email
I have a question for Benjamin Tal. I was reading in the Globe http://www.theglobeandmail.
So my question is… how exactly is Benjamin Tal coming up with a figure of 1.7% for the vacancy rate?
1% vacancy for one single condo is 3.65 days of vacancy, and 1.7% vacancy leaves me with an average of 6.21 days of vacancy per condo in Toronto. This calculation traditionally included repairs, renovations, painting and obviously leasing of the suite. Of course not every condo becomes vacant and many stay occupied for several years. In fact in my sample, a full 50% of condos sampled had 0% vacancy.
I thank you kindly for your time and eagerly await your response to my question.
What methodology is being used to calculate this 1.7% vacancy rate?
Mr. Tal took these numbers from the latest CMHC quarterly, so he is only reporting the numbers. You would need to contact CMHC directly on the methodology for these rates.
Please let me know how your conversation with them goes.
This made me even more curious. Because 10.1% or 6.9% is different from 1.3% or 1.7%. And this is CMHC who are ostensibly, part of the government and who also are responsible for publishing statistics that matter.
So I sent this email.
I have speculated about why all of a sudden developers (Who are not known for their altruism) are selling prime condo building sites to Pension Funds and I can only come up with a a few answers.
- They need cash to finish building out other sites.
- Condos are no longer selling.
Again what is driving this move is the ultra low low vacancy rate. Under 2%. Wow that sure is low. Really super duper low. Amazing. It’s too bad it’s a fabrication but oh well.
Email sent to CIBC Media Inquiry
I’m sure Mr Tal would love to update the real condo vacancy rate. http://landlordrescue.ca/what-is-torontos-condominium-vacancy-rate-not-1-thats-for-sure/ Here’s the CMHC report in question http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.cmhc-schl.gc.ca%2Fodpub%2Fpdf%2F68161.pdf%3Ffr%3D1409775767290&ei=6N8BVdWbO5KYyATQrIG4BQ&usg=AFQjCNF2Me7NgM2Gg6JpYE6SOiZZ0U3wUg&sig2=gDV3RRClWVEIZMm74BNsRg&bvm=bv.87920726,d.aWw
At this point I’m really thinking that a legitimate error has been made. It’s not hard to make but it should be corrected. Benjamin Tal is the Deputy Chief Economist of CIBC World Markets Inc. in case you don’t know he’s a VIP. Unlike me who is a smelly, ignorant property manager.
Benjamin Tal’s Email 1
Rachelle, thanks for your comments – the report stated clearly that the vacancy rate is for purpose-built privately initiated apartment structures of three units and over– and the source is CMHC just go to their web site. The report does not quote vacancy rates in the condo space . in that space my estimate is that the vacancy rate is between 3-4%. Newspaper quotes might be misleading—when in doubt I suggest to read the actual report. Thanks again
Rachelle, the 10.1% is out of COS (Condo Owner Survey) investors which is 17.1% of the market so 10% x 17.1% gives you 1.7% —I think the number is higher than that –but it is not 10% .
Bad Math Response
For example if you call 100 people and 20 percent eat chocolate you can then use that data to extrapolate that 20000 of 100000 people eat chocolate but if you say only 20 of 100000 or .02 percent eat chocolate you have missed the entire point.
Benjamin Tal’s Email 2
Sorry but I must disagree. The following is the situation: say they called 100 people and asked if they are investors. 17 of them said yes. That is the number that CMHC reports 17.1 percent. Then they take those 17 people and ask them if they have a vacant unit. 10 percent of those 17 people say yes. So it is 10 percent of those 17. That is the way it was done. As a footnote I was one of the people that helped to design the survey and vetted it so I know that that is the way it was done.
My Email Back…
You’re correct. Actually according to the methodology in the report 42,426 people were surveyed. 17.1 percent owned another condo. That’s 7212 investors with a second condo. Roughly 50% rent out their condos to tenants or 3606 people Additionally, 6.9 per cent of COS investors or 248 people indicated that their last purchased unit was vacant (for sale, for rent or for other reasons such as renovations) This is the overall vacancy rate for condos according to the sample.
For new owners the vacancy rate is higher 10.1 % according to page 9 table 19 which has a vacancy rate of 10.1 % for condos purchased in the previous three years and around 5% for the rest. This is quite possible as new condos suffer from competition, and some blinds and light need to be installed. 100% of them are vacant and this increases the percentage of vacancy. Also new owners may be inexperienced and this may affect the percentage as well.
These numbers actually correlate with my own internal vacancy statistics, of 3.6 for management clients and 11% for new condos and all condos. However there is a bias, because people sometimes hire me specifically because of my skill with problem tenants. So that skews my number upward in the new clients segment. I am quite pleased with my managed properties vacancy rate though.
The point is that the vacancy rate for condos is high, much higher than the 1.6 % often quoted for much more affordable purpose built housing. Unfortunately that number is misused to convey to small investors that the rental market is great, that rental prices are higher than they can get and that people are falling over themselves to rent their 500 square feet in the sky. That really is what I want to stop.
I have already sent a copy of this ignored report to the Toronto Star, The Globe & Mail and the Financial Post to get them to correct the numbers on several recent articles.
As a person of influence you have a responsibility to help spread proper information, and I hope that in the future you will be super clear about the vacancy rate for condos.
CEO Landlord Rescue Inc.
Back To Benjamin Tal
I am with you. I think that the actual vacancy rate is higher and more importantly will go higher.
But on this note in case you are going to quote their number from table 19 you have to look at table 4 and table 19 together . Table 4 gives you the distribution less than 3 years , four to five and so on. So for example according to them 33.1% bought the condo in the past three years. Now you go to table 19, and you look at how many of this group say that they have a vacant unit. The number is 10.1% . SO IT IS 10.1% OF THE 33.1% OR AROUND 3%. And so on…..the numbers on table 19 are not vacancy rates but the percentage of people out of each sub group that say they have a vacant unit.
Again in case you are thinking of using those numbers I just want to make sure that you use them correctly. Best BT
Now I’m Kind Of Mad
What I care about and any investor cares about is the vacancy rate for condos that people are attempting to rent out. We don’t care about owner occupied ones because they don’t form part of that market so there is no point in adding back the greater sample size. That particular vacancy rate for condos being rented out is 6.9% overall, 10.1% for the first three years and around 5% thereafter.Also I’m not sure you realize this but the CMHC condo owner survey did not come out in time for your article in the Globe and Mail. The last time I emailed Kevin, he told me to get back to you about what I found out.
However it appears that CMHC is still using that statistic in their rental market report even though it (hopefully) erroneously includes the owner occupied statistics. I will also be contacting CMHC next week and asking them to explain and or correct their figures. I wouldn’t want to suggest that a government agency is misleading the public because that would be awful.
Frankly, now that I think of it, I hope to heck CMHC is not using the same flawed formula for purpose built housing. Actually they probably are because I was just talking to my friend who manages Greenwin Properties and she told me that she too is noticing the vacancy rate is high.
A one percent vacancy rate is almost impossible, it means that if one hundred tenants give notice, the day they move out ninety nine new tenants move in. Using a daily calculation, one percent is 3.65 days of vacancy for each condo in Toronto. If you figure out that a most tenants will stay on for more than a year, say 2 years, then you get 7.3 days for the old tenant to move out, repairs to be done, renting/advertising/showing to be done, and the leases signed, in one week. for every condo in Toronto/Vancouver.
A ten percent vacancy rate is not so bad if you think of the flow of the rental market. First this is for the new condos, they get the keys to their condo, they have to order and put in window coverings and light fixtures, they have to take pictures, place ads, deal with an unfinished/dirty building and the competition, It’s not unusual to have 20-30 other mostly identical suites available in the same building. Using a daily calculation that’s 36.5 days on average before the new tenant moves in.
Or for the suites that are from the 3 year and on mark, 5% is also pretty good. We get 60 days notice and as long as we have a clean cooperative tenant we are able to show the place and possibly rent it with no days vacancy. Or if the incoming tenant is flexible a few days or 15 days after the 1st. Some suites may well need repairs and painting in which case it might be longer depending on what the repairs are. 5% equates to 18.25 days on the market, or if suites churn ever two years or 18 months, it’ll translate to more days empty when the suite does turn over. The most common scenario is that the old tenant moves out, the owner cleans and paints and the new people move in the following month. I’d wager that most owners prefer it that way, back to back rentals (old tenant leaves and new tenant arrives the same day) are stressful as heck.
Thank you for your time, I know this might seem pedantic, but the vacancy rate is a very important number. As someone who has advocated very heavily for small investors before http://www.theglobeandmail.
I work very hard for small investors and I am alarmed that they are currently the prey in this unsustainable game. If they are misled to the amount of rent they can get, and the vacancy rate, and the purchase price is unlinked from the rent like it has been for the last 10 years it cannot end well. Currently most of these small investors are paying in monthly to cover the expenses. Call me a skeptic but I do not see that 50% of investors with no mortgage on their condos. I have one among my clientele but he’s a foreign investor. The vast majority are using leverage to play this game and many are using a HELOC for their downpayment and possibly the whole purchase (Smith Manoeuvre)
Back To Benjamin
Thanks for that. I respect your commitment to that cause. And I think I now understand where you are coming from. The issue is that when CMHC or economists like me use the term vacancy rate the focus is the entire market. That is if say it is 10 percent of total units then it means that we should expect a significant increase in supply (as those disappointed investors sell) and lower prices and that’s why the size is important here. The focus is on the potential impact of such situation on the stability of the market as a whole and not on the likelihood of a potential investor to successfully rent his or her unit. But I think that the later is your focus which I think is a legitimate focus. Therefore I think the best thing is not to use the term vacancy rate but another term (like likelihood of failure to rent) and then I think most people would agree that in the condo space it can approach 10 percent for new condos. To the extent that a potential investor looks at a vacancy rate as the likelihood of failure then you are absolutely right that they are wrong to do so. And here I think that what you do in terms of educating people about that is important.
I don’t really go along to get along
Dear Mr Tal,
The problem is that the term “vacancy rate” has had the same definition since long before we were born. What CMHC calls “vacancy rate” is not a vacancy rate. This term were defined long before you or I were born as a measure of building and hotel performance.
Vacancy rate does not include all the residences in a city. It only includes those that are for rent.
“Likelihood of failure to rent” is a meaningless term and my colleagues would wonder if I suffered from aphasia if I used it to describe the vacancy rate.
This definition is from from Investipedia
Vacancy rate is the ratio of rental units not rented versus the total number in the building, city, state, etc.
How it works/Example:
The formula for vacancy rate is:
Vacancy rate = Units not rented out / Total units
For example, let’s assume that Company XYZ owns an apartment building that has 300 units. Of those units, 25 are not rented out. Using this information and the formula above, we can calculate that Company XYZ’s vacancy rate is:
Vacancy rate = 25/300 = 8.33%
Though our example uses units as the basis for calculating vacancy rate, it is possible to use square feet or rent dollars instead.
Why it Matters:
The vacancy rate is equal to 1 – Occupancy rate. In our example, the occupancy rate would equal 1 – 0.0833 = 91.67%.
I did not invent this, CMHC invented another calculation that is completely irrelevant and called it “vacancy rate” I would love to think this is in error but its hard to believe that not one person at CMHC’s entire department in charge of providing these statistics to the general public knows how to calculate a vacancy rate.
It’s very embarrassing for CMHC that’s for sure to have some lowly property manager bring to their attention how to calculate vacancy rate.
Back To Benjamin Tal
We are talking about the same thing. In a purpose built apartment building it is true because everything is for rent and thus “total units” is by definition all units and that is the 1.7 percent that CMHC reports for purpose built. The issue is that you cannot apply the same to the condo market since only part of it is for rent. Again from a macro perspective we care about the absolute level to see to what extent this excess supply can lead to a massive increase in supply in the resale market. For example if the vacancy rate as you measure it is 50 percent but the rental market is only one percent of all units this is hardly a macro issue that will lead to a massive sell off. I think it is a question of definition. If you want we can discuss it over the phone tomorrow.
My Final Email
You certainly can apply this definition to the condo market. The ones for rent are part of the condo rental market. The others are not. It’s very simple. That is the 10.1 percent vacancy rate. I own a management company and this agrees with my own internal review of the Toronto condos I manage. Of course the sample size is very small.
Just like when looking at purpose built rentals you don’t include retirement homes, hospitals, police stations or office buildings when determining the vacancy rate. Actually this number looks really low too maybe they do.
The issue with the vacancy rate is that it includes all Toronto areas, Jane & Finch and Bayview & Bloor and even Scarborough so the numbers have to reflect that.
As for your concern, about a sell off, I think that there is a very real possibility. I have been disseminating a cap rate spread sheet for the use of small investors for years and it does include such things as maintenance and vacancy. What you find when evaluating real estate in Toronto is that it makes no financial sense at all unless capital appreciation is relied upon to make the investment.
If there is one single act that would cause these condo investors to sell off as a group and cause significant problems, I would say that would be if the rent increase laws were changed. Currently any rental properties built after 1991 are exempt from the rent increase guideline. If maintenance fees go up and the rental market goes up a few $$$ the landlord is able to increase the rent above the measly guideline.
The latest condo owner’s survey was taken in 2013, we are almost 2 years later. Since then about 20,000 units were completed in 2014 with apparently another 478 active projects on the go. Every single patch of grass in Toronto has become a condo project with a condo billboard on every street corner.
As someone who is renting these units out and dealing with the competition, unfinished state of the buildings, lack of cash flow for investors etc. I think we can finish what we have started and stop building. The condo vacancy rate is high. We don’t need more condos. We don’t need more high end rentals. What we need are affordable places for average people and families to live. There is no “trickle down effect” when you are dealing with condos because the costs are fixed and owners are already not making any money.
I took pictures of the Ice Building notices and there was floor after floor with obvious vacancies and what can only be described as an auction atmosphere for savvy tenants. The Ice building is not alone or an isolated case. I also rented a unit at 8 Mercer during the same time period, and 33 Singer Court, and I’m still renting a unit at 66 Forest Manor Drive. The owners haven’t reduced the price on that unit yet and so it sits, unloved and abandoned.
It is not acceptable that CMHC is not using the standard calculation for vacancy rate. I did not invent this number. It is used by countries all over the world.