A new report from Canadian real estate firm Morguard says the strong U.S. economic recovery is fuelling a sharp increase in the multi-unit residential rental market south of the border.
Morguard believes the U.S. economy will continue to expand rapidly during the second half of 2021. U.S. GDP is forecasted to grow by approximately 7.0 per cent this year with further growth next year, setting the stage for continuing strength in the residential rental market.
Mississauga-based analyst Keith Reading, director of research at Morguard and author of the report, said the U.S. residential rental market will see a significant increase in rental demand, rent growth and substantial downward vacancy pressure. He also sees positive signs for the Canadian sector.
“We’re quite optimistic about the second half. We’re seeing investment activity has really picked up,” said Reading, addressing the U.S. projections.
“What we’ve seen thus far in 2021, in the first half, is a bounce-back. We had a sharp drop and a quick bounce-back. Rents were up something like eight per cent over the first half year. Now, the uptick in demand pushes those rents higher.”
The report, titled 2021 U.S. Economic Outlook and Multi-Suite Residential Rental Market Fundamentals Mid-Year Update, found that the surging half-year rental market surpassed annual totals for 2019 and 2020 in the U.S. The record-high demand drove vacancies to a 20-year low and supported increased investor confidence in the sector.
The economic growth stemmed from the improved public health outlook, healthy household finances and increased business confidence, Morguard reported. Reading said he feels confident the U.S. economy can withstand the fourth wave of COVID without losses given the overall level of vaccinations.
During the first six months of the year, economic growth was bolstered by double-digit increases in business investment, consumption and residential investment, and that has firmed up heading into the second half, Reading said.
Morguard thinks the recovery will moderate after this year’s bounce-back with GDP projected to expand by an annual average of approximately 2.0 per cent through to the midway mark of the current decade.
Rent increases paralleled the economic growth of the first half, Reading said, with a spike of approximately eight per cent. Then, as the economy moderates, so will rents.
“Things will start to even out over the next 12 to 18 months and I think you’ll see rents grow but at a more conservative rate,” he said. “I think that we’ll see a sort of levelling growth trend over the next couple of years, so I’d be looking at rent to grow by maybe three, four per cent as opposed to eight per cent.”
The rental markets in both the U.S. and Canada are somewhat protected from extreme volatility, Reading explained, in part because lower-income renters will always need a place to live. But “aspirational” renters backed off somewhat during the downturn causing a rise in vacancies.
He said increased economic growth not only boosts demand for rental apartments from the renter-by-necessity segment but drives the aspirational market as well. Within the second group, Reading said, as job certainty improves, they say, “Guess what, I’m going to go out there and I’m going to rent myself a really nice apartment.”
The growth will encourage investor activity in both the rental acquisitions and construction components of the market in both the U.S. and Canada, Reading believes, but the Canadian market has a couple of relative handicaps that tend to inhibit new builds. There are other factors at play, Reading said, but Canada’s slow permitting process and rent controls are concerns for some investors.
So in Canada, demand for rental housing will pick up while new supply remains somewhat suppressed, leading to a tight market and high rents.
Still, Morguard is positive about the overall prospects for the Canadian market.
“There’s a real squeeze on in Canada. There’s lots of competition for properties that are brought to the market for sale. We’ve seen construction activity pick up, it’s still not enough for demand, but there’s a bunch of reasons for that.
“But yeah, we were very encouraged with the Canadian outlook as well.”
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