Calgary Rental Market The Impact of New Apartment-Style Condos on Rental Markets in the Suburbs
The surge in new apartment-style condos in suburban areas, predominantly purchased by out-of-town investors, has led to a downward trend in rental prices for these units. When a new condominium building complex opens for occupancy, it introduces hundreds of new units available for renters almost instantaneously. Many of these complexes will be occupied by renters rather than owner-occupants, creating a competitive environment for prospective tenants with various options to choose from. Most units are relatively similar and vary by floor level, location within the complex, view, number of bedrooms, parking, storage, and size. This abundance of choices exerts downward pressure on rental prices until the complex is fully rented. Essentially and importantly, if you are an investor, you want your unit rented first!
Once the complex is fully rented, lease end dates will vary, and after 2-3 years, the availability of units for rent will be scattered, reducing the initial oversupply at one time. Many property managers use a dynamic pricing model, where rents are adjusted frequently, generally weekly, to attract qualified tenants quickly. This strategy involves initially lowering rents to secure a tenant, with plans to increase the rent upon lease renewal if the tenant stays. Once tenants are settled, the inconvenience and cost of moving make them more likely to accept higher rents consistent with the market.
Note that tenants who do not qualify based on rigorous standards will often offer the asking rent without negotiating hoping to get in by overlooking bad credit or other undesirable issues. However, the risk of housing a less-than-stellar tenant can cost significantly more money and aggravation in the long run. Evictions cost money and typically result in tenancy gaps, so it is best to avoid them when possible. While some issues like death, sickness, marital strife, and job loss or transfer cannot be predicted when evaluating a tenant, rigorous screening helps manage the investor’s risk exposure.
Investors are acutely aware of the costs associated with vacancy. While they may be concerned about future maintenance issues, which are generally minimal at the start since the unit is new and under warranty, their primary concern is the potential for extended vacant periods. Once a property remains vacant for a month or two, it becomes nearly impossible to recoup those losses. Additionally, vacant properties incur other costs such as utilities and inspections to comply with property insurance requirements.
A rough gauge of the supply trend in Calgary and the surrounding area is the total number of units advertised on RentFaster, an online rental platform which is well used by landlord seeking tenants. About two years ago, the total number of listings was around 7,500. About six months ago, this dropped to about 4,000, and ever since, the listing numbers have been creeping upward to 4,500 to 5,000 and beyond. The increase is evident daily, and as of today (Aug 1, 2024), the number of listings is close to 6,000.
Understanding Dynamic Pricing Models
A dynamic pricing model is a flexible approach to setting rental prices based on real-time market conditions. Unlike traditional fixed pricing, dynamic pricing adjusts rents frequently, often using algorithms and market data to determine the optimal rent for any given period. A property manager trying to sign up a new owner may not elaborate on the rental strategy, hoping to entice the owner to list with them by giving false hope of generating higher rent initially.
Key factors influencing dynamic pricing include:
Supply and Demand: Rental prices are adjusted based on the current supply of available units and the demand from prospective tenants. High vacancy rates typically lead to lower rents, while high demand with limited supply can push rents higher.
Competitive Analysis: Rents are compared with similar properties in the area to ensure competitiveness. This helps attract tenants by offering better value relative to other available options.
Seasonality: Rental prices may fluctuate based on seasonal trends, with higher rents during peak moving seasons such as in the summer and lower rents during off-peak times.
Property-Specific Factors: Features such as location, amenities, and the condition of the unit are also considered in setting the rent.
By continually adjusting prices, property managers aim to reduce vacancy periods and maximize rental income. Initially, lower rents attract tenants quickly. As the lease term progresses, property managers often incrementally raise rents, relying on tenant retention due to the inconvenience and cost of moving. Additionally, after a year or so, the issues in a new complex are resolved, and deficiencies are handled by the developer. This makes the complex more stable, attracting more prospective tenants and encouraging current ones to stay.
In essence, dynamic pricing allows property managers to stay competitive and responsive to market conditions, ensuring that properties are occupied and generating income consistently.
