What the 1990s real estate crisis can teach us about today’s Canadian real estate market • RENX

August 20, 2024
4 mins read
2024081543 briandorr ceo dorrcapital600



GUEST SUBMISSION: Picture a time characterized by aggressive lending practices, substantial value adjustments, a severe liquidity shortage and high borrowing rates, except it’s not the 1990s – it’s 2024. 

What was considered a historically turbulent time for Canada’s commercial real estate industry has quickly gained traction as a blueprint for what we are seeing today and what we can anticipate in the months ahead. Yesterday’s rapidly rising interest rate environment, coupled with today’s substantial losses in loan portfolios begs the question – could this time be different?   

While there are several indicators to suggest a similar storyline is at play, I’m here to tell you the good news – this version isn’t set to last as long or be nearly as catastrophic. 

Compared to 30 years ago, many of these factors are now met by modern-day supply shortages bred from record-high immigration and steady employment rates that continue to fuel Canada’s ownership and rental markets.

I can’t help but reflect on earlier days in my career, with thousands of defaulted units in my portfolio at CMHC, many being residential defaults including single-family mortgages.

Today, we’re witnessing the concentration of defaults confined to densified condominium and large-scale projects, and are holding our collective breath for what’s to come in the office sector. 

Is it possible to avoid a default?

What is true about both these periods is that liquidity is, and was, tight and values have come down dramatically. The key here is to leverage what we learned back then and work through these predicaments to minimize loss if you’re a lender, and to consider some tips if you’re a borrower in trouble. 

The concept of defaulting is quite simple, but the process of navigating it is complex.

Developers are finding it difficult or are simply unable to repay loans that were issued at a time their property was of greater value. With rising costs and an unforeseen dip in equity, they can’t afford to complete a project – and that’s when firms like ours get involved. 

Polarized by the influx of news surrounding properties entering receivership or the court-ordered sales of half-completed projects, developers are scrambling to “fix” what years of wrongdoings have led to. But what if there was a way to spot the early signs of turbulence to stabilize your property and avoid this outcome entirely?

The common mistake I see developers making right now is misusing their capital.

Most often, the companies I see are large, oversee a lot of staff, and stretch themselves thin by building multiple projects at a time. When operating costs get out of control with one project, or it experiences an overrun, we start to see the movement of one Band-Aid to cover the wound of another.

This remedy begins to feel like a slippery slope. In hindsight, developers should refrain from dumping money and ultimately put a fence around that project. Unfortunately, what we see in most cases is that the difficulties begin to cascade and intervention is necessary to navigate what comes next. 

In other situations, lenders can find themselves in scenarios where market factors impede borrowers’ efforts to meet their agreed terms.

The role of a loan servicer

Loan servicers work with these groups by involving investors and trusted developers to get that money back for the affected lenders. Loan servicers can come in to reevaluate the project and its economics by looking at the status, work with a builder partner to assess what costs need to be completed, and revalue the loan.

These servicers work in tandem with stakeholders to create a custom waterfall to ensure this approach works for everyone involved; From insurance companies, trades, to investors, working with loan servicing firms can help you weave in a solution early to ensure everyone gets paid while making sure you take a minimum loss on your books. 

For over 10 years, Dorr Capital’s core business model comprised advisory and loan servicing. Fast forward to 2024 and our highest inquiry count is for default management services.

Personally, I’m not surprised by this shift because there is a lot of technical knowledge required in successfully managing a default and this specific expertise isn’t as abundant as general advisory services. There are not many firms in Canada which specialize in this craft, because there aren’t a lot of professionals who personally navigated the 1990s crisis.

To successfully work out a default, groups need to lean on experienced players with a reputation for fixing complex problems. 

Our 4,700 per cent increase in the default management service type, based on asset value, indicates a drastic need for professional support in navigating these intricate deals and the importance of knowing who they are when you need them. 

My prediction is we’ll see a lot of groups try to sell before they get too deep.

Factors in your favour…

If you’re a borrower with a standing reputation, this will likely work in your favour. There will be lenders available to you and you’d be wise to work with them so they can help you strategize a go-forward plan.

For groups like these, there is a strong likelihood of a comeback, and these are the deals we as loan servicers try to save.

So, if you’re one of the rare groups that have liquidity, I advise you to hold on. With interest rates poised to fall, this will improve your situation. 

Though there are early indicators to suggest an upward trajectory, I don’t believe we’ve hit the peak of defaults in Canada. The reality is, even if these situations occurred a year ago, groups still need time to recover.

The good news is, with two consecutive rate decreases we can rest assured that we are close to the bottom.

So, if you’re one of these folks on the edge and hanging on, there will be institutional or alternative lenders that will back you. If you’re a developer with capital to spare and thoughts of buying one of these defaulted projects, you should pull the trigger because as rates go lower, prices of the deals will rise.

While defaults are happening across the country, we’re seeing a concentration in the bigger cities like Toronto and Vancouver. Deals with projects in urban centres will yield a higher likelihood for success simply because value adjustments will be greatest in areas characterized by population density and optimal locations. 

Some final thoughts

If you find yourself in a tight position, I urge you to find someone experienced to help get you through it. In this case, it really does pay to bring in wisdom from professionals who experienced the 1990s to lend expertise in the areas not familiar to our industry for the past decade.

It’s also important to remember this time has not been bad for all.

If you’re one of the lucky ones, and believe me there is luck involved, there are opportunistic ways to land a good deal and get something on a discount. If you are a credible builder with good standing relationships, hang in there.

Because it’s only going to get better. 



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