Real estate developers are often perceived as corporate entities who are always – and only – after more savings and higher profits. But that perception has perhaps started to change over the course of the past year, as developers facing insolvencies has become a bigger and more common story and people are starting to understand that real estate development is not a surefire moneymaker.

In Metro Vancouver, the first — and biggest — domino to fall was Coromandel Properties, who filed for creditor protection under the Companies' Creditors Arrangement Act (CCAA) in February 2023 after accruing $700M of debt.

Another big domino — and the tallest — was Haro-Thurlow Street Project Limited Partnership, who were planning a 55-storey residential tower on 1045 Haro Street in Vancouver before it was placed under receivership in January 2024, as first reported by STOREYS.

In between those two, and since the latter, smaller developers and projects have similarly fallen into debt and been placed under receivership or become subject to foreclosure proceedings, including Align Properties, Centred Developments, and Quarry Rock Developments.

The story is not just limited to British Columbia. Over in Ontario, the biggest receivership case is, of course, The One, a 91-storey residential tower that was being developed by Sam Mizrahi before it was placed under receivership in October 2023. Other notable cases include Stateview Homes and Vandyk Properties. (The story extends to the US as well, where foreclosures have jumped 117% from March 2023 to March 2024.)

To make some sense of what's happening, understand some of the fine details of the court-ordered sales processes, and figure out whether the uptick in receiverships and foreclosures will continuing ticking up, STOREYS sat down with Colliers' most-experienced team when it comes to court-ordered sales in Metro Vancouver: Hart Buck and Jennifer Darling, who have handled many of the aforementioned foreclosures in Metro Vancouver, including many of those pertaining to Coromandel Properties.

To start off with, are we in fact seeing an uptick in court-ordered sales, or has there just been more attention paid to them?

HB: We had a peak of the cycle in 2018 and the market went down after '18. We never got to foreclosures. It really wasn't that bad. It was a bit of a correction, but it wasn't as deep as what we've got now. Then COVID came along, and now it's hit the fan, and there are more foreclosures today in the market than I've ever seen.

JD: I would echo that, and that's true across the country. It's not just a BC thing. We follow CCAA filings as well as foreclosures and there's been quite a large uptick in the last year compared to 2023, and definitely compared to 2022.

HB: I'm just about to finish my 39th year selling land and non-income-producing assets. The first things that go sideways are those non-income-producing assets, because interest rates catch up to them faster than other asset classes. But what's unique about this cycle is the pool of lenders and the pool of developers — there [are] a lot more new Canadians in that group. There [are] people that haven't been through this before. Or if they have, they haven't been through it in Canada before.

And things like first mortgages that have post-default interest rates that kick to 18%, which is not uncommon, means that anybody on the debt stack behind the first get pushed off the back of the chain pretty quickly, whereas in previous cycles, a national bank would have the first mortgage and the post-default rate would be the same as the pre-default rate. So now things are happening a lot faster, people are getting pushed off the back much faster than in previous cycles, and everything becomes a lot more time sensitive, in terms of finding a resolution, because if you're in second or third place [as charge holders], time is not your friend.

Has there also been an increase in office and industrial insolvencies? From what I've seen, it's mostly been residential.

HB: The players behind the industrial and office market — the owners — have more staying power, I think, than the typical residential developer.

JD: And part of that comes down to cash flow. A lot more income-producing assets, a lot more cash flow goes on those developers' books. I expect we may seem some, but it's certainly not been the norm so far.

You mentioned the new Canadians aspect. Have you guys seen any other commonalities across the foreclosures and receiverships?

JD: I would say potentially just experience in the market and getting through that development and entitlement process [to secure permits], because, as Hart mentioned, bare land that's non-income producing is a challenge because you can't service any of that debt.

HB: There's some developers in the city that buy land and immediately go the City and get entitlements and then they build. But some of the properties that we see in foreclosure today have been held by the owner for years and they haven't gone to the City for entitlements. It's almost a debt play in that there's a mortgage, there's another mortgage, and somebody comes in and takes out one of them. At times, you can look at it and call it more of a debt play than a development play.

JD: And frankly, in the past, there's been an underlying assumption that land values were going to continue to go up on a fairly steep basis, year over year, and that isn't always the case. We have enough factors that have slowed the market down and those values are being reset.

On the note of the market slowing down, has that made finding prospective buyers for these properties more difficult?

HB: Under $20M, there's great traction.

JD: Low-rise and medium density sites that are a bit more scalable, that are more bite-sized, have more traction. This is a larger buyer pool and there's less risk on the end sales or end lease-up for a slightly smaller or mid-sized development. The larger concrete projects are a lot more expensive and they're also just a huge amount of units being produced that come with a lot more risk.

HB: It's really hard to find a financial project on a big project. Twenty years ago, pension funds didn't want to get involved in residential in any capacity and now they're quite interested in creating long-term cash flow. For example, Oxford bought into the Ashley Mar project. Great West Life just bought a site out of foreclosure on Robson Street. We're seeing examples, but they're few and far between, relative to the smaller deals that have a much broader buyer pool. Under $20M, there's significantly more buyers than something at $50M and up.

In general, for prospective buyers, does the court-ordered aspect change anything for them? Do they view it as having more risk, or is it a non-issue?

HB: It's pretty minor. One of the impacts of the court-ordered sales process is we can't have long buyer subjects. There's deals on Broadway for instance that are being done with a six months buyer subject and a six months close. That structure doesn't work for a court-ordered sale. That difference can have an impact on price and it can have an impact on how many people come to compete, but having said that, we're getting good velocity on sales.

We're really in the process right now, through foreclosures of not, of redefining market values. The market used to be X and now it's Y. It always changes, but we're in a process of redefining it to the lower end.

What about from the lenders / mortgage investors perspective? Are they more cautious about lending or do they see opportunity? I understand some lenders specifically seek out risk.

JD: I think across the board, not specific to these kind of sales, what we're hearing from developers is that access to financing right now is very difficult. We're seeing higher interest rate loans from the previous cycle and I don't expect that to change, but even well-capitalized and well-established developers have spoken about the trouble they're finding with some of the banks in terms of accessing money to do these projects — specifically ones that are maybe condominium-focused, where there is more perceived risk. Rental seems to be a little more insulated from that.

HB: A lot of the foreclosures you look at, there's no national bank participation, or even credit unions. It's all syndicates related — often — to the owner. That would give you an idea as to how accessible debt is for those deals.

With these court-ordered sales, obviously the debts are known and the final sale prices are usually known, but there are all the closing adjustments and interest. At the end of the day, how often do lenders recover the full debt they are owed? Are they still taking some losses?

HB: There's really no answer to that. Generally speaking, there's a reason there's a first mortgage, because it got registered first, and it's typically at a lower rate than the second, which is a lower rate than the third, and that interest rate is a reflection on the risk, so the first [mortgagees] do better than the second, who do better than the third, who do better than the fourth.

One technical question about the court-ordered sales process: Regarding conduct of sale in foreclosures, I understand the lowest-ranking charge holders often get the first priority to sell the property, but since the proceeds from the sale still go to the first-ranking charge holders first before the lower-ranking charge holders, what is the benefit for lower-ranking charge holders to have conduct of sale?

JD: The court will typically allow whoever is lowest in priority to get the first opportunity to go market the property, because they are obviously the most incentivized to try to find the highest value for that property. They'll have a fairly limited time, typically, for that, then someone else could come in and apply for conduct of sale.

[The benefit is] they're able to control the process, hire the broker that they want, be in control of the offering and negotiation processes. In theory, the court believes they'll be motivated to maximize value. At the end of the day, the market is going to speak as to where value is, and every stakeholder should be trying to maximize value, but that is the rationale behind it — that there's more motivation the further down the debt stack you get.

You two kind of specialize in court-ordered sales processes and have a lot of experience with them. How do you find them, personally, from the broker perspective?

HB: This is something that I've been doing in the down-cycles for years and it's very interesting, technically, as a broker to do. It just adds a layer of interest. The clients we're working for with insolvencies are also very different than the typical clients we work for in the commercial real estate business — their primary business is finance, rather than development.

JD: And there's, potentially, exponentially more stakeholders in the process that need to be identified. You're not just working for one vendor, for example.

Is there any particular aspect of the process where that experience really pays off?

HB: People trust us. We wear two hats: the commercial real estate broker and the technical aspect of the insolvency process.

JD: I would say our ability to identify where those pitfalls may be and where those obstacles may lie in the process and work with our clients to address those before they become an issue. As Hart says, you know the process, you have the trust of the people involved in the process, and that makes it a lot easier.

To conclude, do you think guys think the uptick in court-ordered sales is going to continue, or are we kind of past the worst of it all?

HB: The thing that's unique to this cycle is we've got first mortgages that have post-default rates that are way too high — well, way higher than previous cycles. So that means it's going to be a lot harder for that foreclosure and that property to recover, because the interest on the mortgages is going to be so massive. Like at 15%, there's no way real estate is appreciating value at 15% today — nor will it anytime soon. That, unfortunately, may make the foreclosure cycle run a little farther into an improving market, just because so much debt has accrued.

I'd say we're bouncing along the bottom of the cycle right now. History has told me that the market will get better when rates come down. I think rates will come down by the end of the year — I'm a Q4 guy — and we will then see an improvement in the market, and fewer foreclosures.

Responses have been lightly edited for length and clarity.

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