A wave of foreclosure opportunities has been working its way through the court system, with more to come as lenders finally enforce their claims against developers and investors.
“What we’ve seen a lot is lenders holding off on forcing a sale; essentially they were just hoping the borrower would figure things out and the market would turn around,” said Mark Goodman, president of Vancouver real estate brokerage Goodman Commercial Inc.
A turnaround now appears to be taking shape, with a bottom in land prices having been reached following a 66 per cent decline in dollar volume last year, yet for many owners it’s too late. Moreover, the residential market has yet to recover its mojo. An initial surge of activity this spring has given listings a boost, keeping prices in check.
“It’s just gone for too long, they’re in too far over their head and it’s getting flushed out,” Goodman said of the predicament many land bankers have found themselves in.
The current wave of foreclosures is notable because it’s not just speculators or novices affected. Developers with several projects under their belts have been caught out, thanks to a combination of escalating construction costs and a rapid rise in interest rates that stalled demand and capped how much they were able to recoup from projects. Government policies and levies have also been factors.
“There are some developers who have successfully developed over the years that are stuck in this situation right now,” said Dylan (Dilraj) Sohi, a senior vice-president with Colliers International in Surrey specializing in development land and commercial investment properties.
With prices escalating through the pandemic and 2021, the added costs could be absorbed, but the short, sharp rise in interest rates in 2022 changed the math.
“You have to continue to feed the debt out of your own pocket, and that tends to get expensive, especially in the interest-rate environment that we’re in,” Sohi explained.
Some developers were paying rates in the high teens, making holding land prohibitively expensive. Those who banked on the market continuing to rise rather than adding value to their properties – either by taking it through the entitlement process or some other means – had nothing to offset the growing holding costs.
Sohi and business partner Mike Grewal have a listing at 14990 North Bluff Road in White Rock that offers good holding income, but the cash flow wasn’t enough to cover the owner’s costs.
Notably, the owner was experienced, with 30 years’ experience in the business. It had successfully completed thousands of residential units before this project completed and had thousands more in the pipeline.
But something had to give.
Strategically located, the White Rock site is now being offered through a court-ordered process, with the hope a better-capitalized owner will be able to acquire it, complete the entitlement process and realize the 247-unit project proposed for the site.
“Whoever comes in and purchases that property is likely to move forward and push the development process along in order to reap the rewards,” Sohi said.
The property is being marketed in the range of $19 million, the sweet spot for developers looking to restock their land banks.
“There are developers that like to land bank so they have land in place for when Project X finishes,” he said. “Properties that are, give or take, $20 million and under, there’s still a large buyer pool in the market.”
The current wave of foreclosures is also helping establish a new base for pricing for the next round of projects developers offer to retail buyers.
Since the main goal of a court-ordered sale is to achieve a price for assets that secures the lender’s interest, such properties usually come at a discount. Yet because the process is also competitive, Goodman says no one wants to be the first bidder.
This is the case at a 2.26-acre property his team is handling at 7010 204 Street and 20443 70 Avenue in Langley’s Central Gordon neighbourhood. Designated for 254 units, the site is priced at $17.5 million.
“The way the developer looks at a court-ordered sale is they know it has to be sold,” he said. “One of the challenges that we’re facing right now is we have 10 groups right now that want to write. … Nobody wants to be the first one out of the gate and have their offer shopped.”
Potential buyers include major developers with past experience in the Fraser Valley, but there remains an ongoing element of price discovery as the land market normalizes.
The uncertainties are also putting downward pressure on pricing for non-distressed assets, eroding value even as developers envision adding it to their future purchases.
Some developers are finding alternative means of boosting their development capacity.
Vancouver-based Headwater Projects Inc. has a portfolio of income-producing properties skewed towards multi-family rentals. All are long-term holds producing cash flow, but when they’re sold, the proceeds are generally reinvested in new housing projects.
“It’s not necessarily just rental housing. We’re also developing market housing,” said Headwater vice-president McGregor Wark.
Bridge & Elliott, a 128-unit residential project in Ladner, is a case in point. It will add density to a market typically dominated by townhome developments. Density will also help make the project financially viable.
“It’s been really, really difficult to pencil projects based on current interest rates and construction costs, and it’s sort of forced our hand to go in the direction of market housing,” Wark said.
Rental was not an option because “the rental rates that you have to achieve are astronomical” compared to local market rates.
Yet the June sale of two buildings in Victoria to the Greater Victoria Housing Society for $21.2 million showed how the province’s Rental Protection Fund is keeping cash flowing for developers.
The $500 million fund allows not-for-profit housing providers to acquire older assets at market value, freeing up owners’ equity for new construction that can command market rents.
“It’s a for-profit business, and if you’re not renting it out at over $5 a [square] foot, you’re not making a profit,” Wark explained. “You need to provide housing to those people that can’t afford $5 a [square] foot, which is a lot of the community.”
The sale price for the Victoria properties was in line with the list price, and above the current assessed value of $17.2 million.
While there is no direct flow-through to Bridge & Elliott, the liquidity is important for keeping developers in the development business, and delivering much-needed housing in key markets.
Meanwhile, in-fill projects are also providing opportunities to enterprising developers.
In Calgary, Goodman is working with Harvey Russell of NAI Advent to market the site of the former Salvation Army hospital in Calgary’s Hillhurst neighbourhood for redevelopment.
Owned since 2007 by Northwest REIT, which transformed it into 75,000 square feet of medical offices, the six-acre site is now coming forward for redevelopment with zoning in place for up to 1,300 residential units.
“The product will be higher-end high rise condominiums; probably some mid-rise buildings – could be rentals, could be condos,” Russell said.
Vancouver developers responded well to the initial marketing blast, Goodman said.
“Calgary is obviously a very, very strong market right now, and this is an A-quality site,” Russell said, ranking it among the top areas in Calgary such as Eau Claire and Marda Loop. “Typically, the affluent people want to live in these A markets; all other markets are a B or a C.”
With that in mind, Russell expects the condos that will eventually be developed on the site to command upwards of $800 a square foot – at the top-end of the Calgary market.
