Cataclysmic to Calm – the rental market

Last week I had the opportunity to reflect on the rental market response to COVID in a chat with Dominic Nesci.  We covered a variety of topics, but it was interesting to dig down into what happened across the rental market last year, where it is now and what we can take from it all.

So, what happened and what can we learn?

Let’s be frank……around this time last year the rental market imploded.  In the middle of last year, the vacancy rate in the CBD was sitting at an astonishing 14%.  That was a cataclysmic collapse that I worried would take a significant time to turn around, but here we are in late February already with the vacancy rate and days on market for rental properties almost back to normal and sitting calmly below 2%.

Looking back, it’s clear to see the disruption actually came from two quite different directions. The most obvious was the impact of lockdown on employment and the flow-on effect that had on tenants who found themselves having to re-evaluate budgets, expenditure, and priorities. A premium-priced rental property was no longer top of the ‘must have’ list. As a result, what is usually a relatively uniform turnover of lease renewals were not automatically being taken up, vacancies increased as did days on market.

But equally, we found a dramatic increase in the actual quantity of rental properties suddenly coming to market.  With the COVID lockdown and the continuing uncertainty around interstate border travel, let alone international travel, investment property owners sought the sanctuary of long-term tenants rather than the potential risk of Airbnb rentals.  And so, the market was flooded.

It’s an interesting reflection on the resilience of the market that even with borders still closed things have returned to almost normal in terms of vacancy and demand. Yes, returns are still softer than they were, but savvy investors are appreciating the stability of a good tenant.  And with that, we are also seeing investors return to the buying market.

As Dominic explained during our chat “capital growth on investment is what delivers the big dollars. Investors are looking for 8-10% returns on a property over five to ten years rather than stressing over a comparatively small drop in rental return of $50-$100 a week.” 

It is that big picture thinking which is underpinning performance right now even as we continue to experience a certain level of uncertainty in a world with COVID.