The Toronto rental market entered 2025 with mixed signals, with transaction volumes rising, but average rents softened amid sustained inventory pressure. However, there is the potential for this dynamic to change.Q1 Rental Activity Strong, But Rents FallAccording to the Toronto Regional Real Estate Board (TRREB) Q1 2025 Rental Report, there were 14,797 condo apartment rental transactions across the Greater Toronto Area, showing an increase of 16.7% over the same period in 2024. However, this acceleration in leasing activity was matched by a continued rise in rental listings, which climbed 11% year-over-year to 22,652 units. Despite healthy absorption, inventory levels remain historically elevated, exerting downward pressure on rents.One-bedroom units averaged $2,343 per month in Q1, down 4% from the previous year. Two-bedroom units averaged $3,036, a 3.3% annual decline. Smaller and larger units followed a similar pattern: bachelor apartments averaged $1,864, and three-bedroom units hit $3,863. While the gap between rental demand and supply narrowed slightly this quarter, TRREB noted that if the pace of leasing continues to outstrip new listings, vacancy rates could tighten by late 2025, however.Broader Market Dynamics and Investor UncertaintyAn Edge Realty July 2025 market deep dive further notes the current soft rental conditions. Total active listings in the Toronto market, including both resale and rental units, reached a record 31,600 in June, with the condo segment carrying nearly seven months of inventory. Although this number relates to MLS resale supply numbers, and does not include rental-specific listings, it has been noted that many of Toronto’s condos, especially ones under 600 ft., are investor-owned and likely for rent. This oversupply has led to further declines in resale prices, which are now 22% off peak levels.Declining property values and falling mortgage rates have improved the condo cash flow index to its best point since rate hikes began in 2022, but the prospect of more rental inventory hitting the market, particularly as record completions are still scheduled for this year, raises concerns about further weakening in rents before the market rebalances.New construction data adds more complexities. Overall housing starts across the GTA have fallen 7.4% from last year, with condo starts down 11.5%. However, rental-purpose construction is bucking the trend: up 14.5% year-over-year, indicating a continued shift among developers away from ownership models toward long-term rental stock. This could sustain elevated rental supply into 2026, further delaying rent recovery.Investor sentiment remains cautious, creating further impacts. While falling prices and improved cash flow fundamentals might draw some back into the market, many are waiting to see how much more rental softness lies ahead. New condo sales, often purchased by investors for rentals, have fallen, with fewer than 3,000 units sold over the past year, compared to a peak of 36,000 in previous years. This is leading to a sharp decline in new construction, with condo starts down 11.5% year-over-year, which could result in undersupply in the longer term.