Lenders turning into developers as the number of Canada condos distress grow

Some lenders to Canada’s distressed condo developers are finding they have little choice but to buy the troubled projects they backed and finish the buildings themselves.

 

As the country faces its biggest wave of receiverships among real estate developments in at least a decade, lenders are going to new lengths to avoid losses. In one of the biggest examples, British Columbia-based Gentai Capital and two partners spent $75 million (US$53.7 million) last month to buy a partially complete condo project in the city of Kitchener, about an hour and a half west of Toronto, out of receivership.

 

Gentai’s second mortgage on the project was converted to a majority of the equity. The firm also contributed new capital, while a fresh loan from KingSett Capital allowed the old senior lenders to get their money back and walk away.

 

Gentai won’t be overseeing construction itself — ELM Developments, one of the partners, will — but its new role means one of the project’s lenders has become its developer.

 

And that deal comes after similar maneuvers, sometimes called credit bids, resolved three other receiverships for smaller development projects around the province of Ontario since interest rates started rising, according to data from commercial real estate brokerage CBRE Group Inc.

“The preference would be just to get the cash back for the debt and be done with it,” said Mike Czestochowski, vice chairman of CBRE Canada. “But this is the lender getting creative, and having their hand forced.”

 

Receiverships allow lenders to attempt to sell an asset to get repaid. Generally, lenders buying a project out of receivership themselves are a bad sign in the world of real estate finance, as most of those firms lack experience running construction. But with Canada’s housing market down about 14% from its peak, the alternative may be selling the project for less than the debt is worth.

 

Lenders’ willingness to do this may also indicate they expect Canada’s housing market to rebound.

 

“It will come back,” said Brian Dorr, head of commercial mortgage lender Dorr Capital, which is the third partner on Gentai’s Kitchener credit bid. “If you can do this, I think it’s the best solution for keeping the lenders whole.”

 

Gentai declined to be interviewed, referring questions to Dorr.

 

The abrupt rise in interest rates since 2022 caused receiverships to jump in Canada as developers fell behind on mortgage payments. The figure hit its highest point in at least 10 years in 2023 and is on track to exceed that this year.

But with interest rates still high, the housing market still depressed, and so many condo developments under construction or completing this year, it’s been hard to ensure everyone who lent money for construction projects gets it back through a sale.

 

That’s seen more lenders buy the projects themselves. Since interest rates began rising, lenders have staged credit bids for a condo project in Ontario’s wine country, an apartment building in a bedroom community outside Toronto, and a townhouse development in one of its suburbs, according to CBRE data.

 

“If you feel that there’s no profitable way to complete the project you certainly wouldn’t be putting more money into it,” Czestochowski said. “They have to be optimistic that our market is getting better and not worse.”

 

Underlying this optimism is the view that, while the recent run-up in interest rates created dislocations in the real estate market, Canada has a fundamental housing shortage.

And while the past year has seen a wave of newly completed condo projects create a supply surplus in markets like Toronto, that’s also led developers to avoid breaking ground on new projects, according to data from consultancy Urbanation.

 

Because condo towers can take years to complete, the sharp pullback in projects getting underway could lay the groundwork for a more severe shortage down the road.

 

“It’s really going to be a big dramatic change in the market,” Shaun Hildebrand, Urbanation’s president, said in an interview. “You’re currently dealing with a glut in the market at the moment. But it’s a temporary phenomenon and it’s going to quickly turn into a situation of under supply.”

With the Bank of Canada’s recent interest rate cuts already prompting a surge of buying activity across Canada, lenders buying their own condo projects today are hoping prices will be high enough by completion to let them recoup the initial mortgages.

 

“It allows the parties to establish a floor and effectively deters bottom feeders,” said Mitch Vininsky, a managing partner with KSV Advisory who works on receiverships.

 

While credit bidding is generally a last resort for lenders, he said, “if a developer falters and bids are not forthcoming or below market, a lender has to be prepared to step in to protect its interests.”

 

 

 

 

 

This article was first reported by BNN Bloomberg