Rebound Talk Persists as Developers' Pain Deepens
Despite ongoing talk of a bottoming and rebound in the commercial real estate market, distress among Canadian real estate developers continues to deepen. Jeffrey Berger, Executive Director for restructuring, dispute resolution and asset trustee services at TDB Advisory Ltd., said his caseload is larger than ever, showing the industry still faces severe challenges. He shared the observations at the 14th Canadian Real Estate Conference in Toronto, hosted by Veritas Investment Research.
Condo Projects Hit Hardest as Cleanup Timeline Lengthens Sharply
Berger noted that condo projects are facing the most severe financial distress, with condo development land the main driver of growth in his firm's business. Some developments have been stalled for years, and distressed-asset receivership cases that used to be resolved in three to six months may now take three to five years to clear. There remains a large amount of distressed assets and projects to be dealt with, and although the market expects a bottom, consumer bankruptcies have reached a record high, highlighting widespread pain. Even industrial properties, which benefited from e-commerce during the pandemic and performed strongly, have seen some bankruptcies, especially for assets acquired at the market peak.
Waiting for Recovery or Delaying Liquidation? Views Diverge
Veritas Investment Research CEO Anthony Scilipoti asked whether owners and lenders are prudently waiting for a market recovery or merely delaying an unavoidable liquidation. He said the rebound varies across office, condo, retail, industrial and other property types. CoStar Group Chief Economist Mario Lefebvre argued that reduced new supply is a positive factor for real estate prices, with construction and development activity at historic lows and much idle commercial space gradually being absorbed.
Transaction Volume May Be a Lagging Signal as Valuations Come Under Pressure
David Black, who heads valuation and risk advisory at JLL Canada, warned that the current rise in transaction volumes may merely reflect deals struck months ago. He observed higher capital costs and surging bond yields, with many clients including pension funds frequently asking how real estate valuations are affected and questioning whether required returns or capitalization rates need to rise to justify investments, implying property values could fall. Development land plans often require multiple revisions, and some office properties, particularly suburban buildings, are already in distress. With sparse transactions, property pricing is based more on market sentiment than objective data, and some segments of the Canadian commercial real estate market are still seen as overvalued, with the market ahead to test whose assessment is correct.