Market forces, public policy driving distress in commercial real estate
Vancouver developers are struggling to deliver residential projects amid a "perfect storm" of factors including interest rates, the cost of construction and tepid demand, says one commercial broker.
Lower sale prices, prohibitive zoning, tariffs, taxes, inflation and demographics are fuelling court-ordered sales as lenders call their debts on unviable projects, said Mark Goodman, principal of Goodman Commercial Inc.
"We're probably getting at least 10 to 12 calls a week from developers in trouble," he said.
"The discussion is, what do I do? Do I pivot from condo to rental? From rental to condo? Do I move forward from third reading and just get the development permit or the building permit so that perhaps there's some value there, or do I just sell?"
Third reading refers to a city council's final discussion of a proposed project.
Goodman gave the example of a client who has a site in Vancouver and spent time and money going through the entitlement process, meaning the legal process of obtaining municipal approvals. The project was shovel-ready in the Cambie Corridor at a floor space ratio (FSR) of three.
The numbers didn't work, so they instead considered building under the city's transit-oriented area (TOA) zoning at a five-and-a-half FSR. FSR refers to how much floor area a structure can have compared to the size of the lot, and more is usually better for developers.
But inclusionary zoning rules, which require 20 per cent of a building to be below-market, put the financials even deeper into the red.
"We have a five-and-a-half FSR property under the TOA that's worth less than the three FSR property that's already been approved," he said.
"It's a lose-lose situation."
Goodman said he's seeing more court-ordered sales as projects are squeezed and developers run into trouble, particularly in relation to their land holdings.
"It's a lot more that we're working on, and the amount of overtures that we're getting for us to submit proposals, it's at least double," he said, adding that his firm currently has five mandates from court-appointed receivers like Desjardins Group and Deloitte Canada.
On the flip side, court-ordered sales can be investment opportunities for well-capitalized developers. Those with deep pockets and a multi-year horizon are "playing the long game" by snapping up currently unprofitable land and banking it for the future.
"The bid-ask spread is still quite significant in many cases, so what the seller wants versus what the buyer is willing to pay," Goodman said.
"That gap is still quite large in many cases, and it's the court-ordered sale process which basically forces the seller to meet whatever the market is for the buyer."
Goodman said he expects the anemic environment to persist "for another couple of years." He cited an "anti-business, socialist government" in B.C. that has left developers "overtaxed" and "overburdened."
"And then you combine that with the macro world economics with inflation and the cost of borrowing money and increased construction costs, and then you throw on the tariff thing -- boy it's a tough time. People are really suffering and struggling right now."