Moishe Alexander's Review of the Charlottetown CA Rental Market

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Moishe Alexander's Review of the Charlottetown CA Rental Market and CMHC Outlook Report Fall 2008

Moishe Alexander of Canadian Funding Corp Reviews and Comments on the Rental Market of Charlottetown CA

By Moishe Alexander

Moishe Alexander's Review

Moishe Alexander says Charlottetown's vacancy rate in the Fall of 2008 was 2.3 per cent, down from last year's level of 4.3 per cent. The overall average rent increase in the Charlottetown CA was 2.2 per cent in 2008. Within the CA, the highest average rent was $637 in the Downtown area, while the peripheral area posted an average rent of $613.

Rental Market Survey

Moishe Alexander says the vacancy rate for apartment structures containing three or more units in the Charlottetown CA had risen for five consecutive years, after recording a historic low of 1.8 per cent in 2001. However, beginning last fall this trend was reversed. The momentum has carried through into 2008. In October 2008, the average vacancy rate was almost cut in half to 2.3 per cent, from 4.3 per cent during the same period last year. This trend indicates that the demand for rental accommodations remains healthy in the Capital Region. The October 2008 survey aggregated the rental information for 3,790 rental units in the Charlottetown area, which was essentially unchanged from the 2007 figure of 3,795 units. Of the 3,790 units surveyed, only 86 were vacant, compared to 163 vacant units during the same period last year. The 2008 survey revealed that vacancies among two-bedroom units, which make up the majority of the local rental universe, were down with only 54 vacant units, compared to 107 units last year. As a result, the vacancy rate for two bedroom units dropped to 2.2 per cent from 4.5 per cent last year. Among the other unit types the change was less dramatic. Three bedroom + units recorded the second largest variance, as the vacancy rate for these units fell from 6.5 per cent last year to 3.1 per cent in 2008.

With less than 90 new rental units eligible for the survey this fall, and only about 40 in 2007, a decline in the vacancy rate was anticipated. The reduced level of rental construction over the past two years was the result of a rising vacancy rate from 2001 to 2006. The reason for the aforementioned increase in the vacancy rate was that during this period over 450 rental units were completed in the Capital region. This represents a substantial increase in supply above the annual average of 70 rental starts. As a result of this increase in supply, the vacancy rate rose from the near record low of 1.8 per cent in 2001 to almost 5.0 per cent in the 2006 survey. Despite the decline in rental starts the development community has remained active during the past three years, building multiple unit projects targeted towards the homeownership market.

The most striking change in vacancy rate at the zone level was the fact that Zone 1 (the downtown core) posted a lower vacancy rate than Zone 2 (Peripheral). In recent years Zone 2 has posted a lower vacancy rate than the downtown area, due to limited rental stock in the area. Although the vacancy rate for the peripheral area of Charlottetown fell to 3.0 per cent from 3.9 per cent in 2007, it was not enough to match the decline posted in Zone 1. Zone 1 posted a vacancy rate of 1.9 per cent down from 4.5 per cent last year.

There was a fairly significant difference in the increase in two-bedroom rents recorded in Zone 1 (Downtown) compared to Zone 2 (Peripheral). In Zone 1, the average two-bedroom rent advanced by 4.9 per cent, while in Zone 2 the increase was a more moderate 0.6 per cent, as measured by the fixed sample.

Moishe Alexander says according to the 2008 survey, renters again showed a preference for the newer, high-end units. This trend continues to be the norm in most markets. For apartment units built after 2000, the vacancy rate was 0.3 per cent which is well below the overall average of 2.3 per cent. These new units continue to record the lowest vacancy rates despite the fact that they also command the highest average rents at $854 compared to the regional average of $629. It is also interesting to note that most of these new units although unheated, continue to command the highest rents.

Structures built before 1940 were the least popular of all units surveyed this year with a vacancy rate of 3.4 per cent. However, the rents that these units command places them in the third grouping below units built after 1990. These units are able to achieve higher rents than some newer units because the majority of these units are located in the Downtown Core, which continues to be a popular location with renters.

Most Expensive Rents Record Lowest Vacancy Rate

Moishe Alexander says when broken down into rent ranges, the October 2008 Survey showed that like the 2007 results, there was no obvious pattern. This varies from previous years where there was an inverse relationship between average monthly rent and vacancy rate. For the second year in a row, apartment units in the Capital Region that rented for between $700 and $799 per month had the lowest average vacancy rate at 0.9 per cent down from 2.5 per cent last year. It is interesting to note that the highest recorded rent range, $800+, posted the largest decline in vacancy rate, falling from 6.5 per cent last year to 1.7 per cent in 2008. The 2008 result is a more expected outcome, as traditionally the rental demand is strongest for the newest and most expensive apartment units. The vacancy rate for units in the $500-$599 range also posted a significant change, declining from 4.9 per cent last year to 2.3 per cent this year.

Moishe Alexander says according to the 2008 Rental Market Survey, the largest apartment buildings in the Charlottetown area command the highest average rents and enjoy lowest vacancy rates. In the October survey, apartment buildings in the Charlottetown area, with between 50 and 99 units posted the lowest vacancy rate at 0.4 per cent, which was well below the overall vacancy rate of 2.3 per cent. The second largest buildings in the area, ranging from 20 to 49 units, also fared well in this year's survey with a vacancy rate of 0.6 per cent. The largest buildings also command a higher average rent than the smaller structures. Buildings with 50 to 99 units had an average rent of $725, while the smallest structures, those with three to five units recorded an average monthly rent of $583. The escalation of rents from smaller to larger buildings is logical given that more amenities are offered to tenants as the building size increases. These features such as elevators, underground parking and common rooms raise the operation costs for the landlord, which in turn are passed on to the tenants.

Moishe Alexander says in addition to the vacancy and rent data that is collected each year as part of the annual Rental Market Survey, landlords and property managers were asked about rental unit availability. The apartment availability rate in Charlottetown declined this year to 4.0 per cent. This is 1.7 percentage points higher than the apartment vacancy rate. Availability rates by bedroom type are also higher than the vacancy rate with differences ranging from zero to 2.9 percentage points.

Moishe Alexander says many factors have an impact on rental demand in any given market. This includes, but is not limited to employment growth, migration patterns, interest rates and shelter costs. Employment growth has posted a slight improvement from the 2007 level which is expected to continue to the end of the year. During the first three quarters of 2008, the increase in employment can be attributed mainly to the public service and finance/ insurance sectors. Employment in the construction sector started to decline in 2008 as numerous large non-residential projects came to an end. The main benefit of the elevated employment levels in the Captial Region is that it continues to be the most attractive job market in the province. This has lead to the continued trend of urbanization in the province, as Islanders continue to move to the capital region from more rural parts of the province. Positive net-migration has been one of the main factors contributing to the sustained demand for housing in the capital region. The results from Statistics Canada's 2006 Census revealed that the Charlottetown CA recorded a population gain of almost 1,400 people or 2.4 per cent, from 2001 to 2006. In addition to the Census, Statistics Canada produces a series of data based on income tax returns (Tax Filer Data) that details the migration patterns by county on an annual basis. The results of this survey reveal that in any given year about 70 per cent of the people moving to the Capital Region are coming from elsewhere in the province. It also shows that of the remaining 30 per cent, the vast majority are coming from another major urban centre in Canada. These results seem to confirm that there are a number of ex-Islanders moving home to either retire or finish their careers. Another benefit this trend provides is that many of the people returning home are coming from much higher priced housing markets, which has resulted in the accumulation of equity. This provides a partial explanation for the increase in the new home price recorded over the past five years.

Interest rates having remained low over the past few years continued to remain fairly steady during the past year. While rates are expected to edge up slightly over the forecast period, this should not be enough to dissuade potential homebuyers.

The strong demand for all forms of housing over the past five years has pushed up the cost of single-detached homes much faster than average rents in Charlottetown. When the most recent expansion in the housing market began in 2001, there was a small difference between renting and owning in terms of monthly payment. However, due to the aforementioned price increases, the gap between the two is now fairly substantial and as a result many renting households looking to purchase a home will find making the switch more difficult financially.

Moishe Alexander says as a result of lower levels of rental construction in 2008 and the recent uncertainty in the economic environment the average vacancy rate is expected to fall again in the 2009 survey. The average apartment vacancy rate is expected to decline to the 2.0 per cent range in October 2009, as in-migration continues and the level of new rental construction remains low.

Rental Market Forecast

Moishe Alexander says with declining levels of rental construction, continued in-migration and a larger than average allowable rent increase in 2009 expect to see an increase in the average rent next fall. The Island Regulatory and Appeals Commission (IRAC) has approved a 9.0 per cent allowable rent increase for heated units in 2009, and many landlords are expected to take advantage of this to make up for increased oil costs experienced during the 2007/2008 winter. Although fewer new high-end rental units are expected to hit the market in the short-term,

compared to the past five years, average rents are still forecast to advance by 4.5 to 5.0 per cent in 2009.

You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64375/64375_2008_A01.pdf

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