Growing risk of debt default for Metro Vancouver real estate developers

Feb 10 2023, 4:05 pm

More than 14 years ago, the private real estate developer tasked with building the Vancouver Olympic Village in Southeast False Creek went bankrupt — a situation that unfolded when the company’s source of construction financing, an investment firm in Wall Street, stopped its stream of promised funding upon the sudden onset of the 2008 financial crisis.

Over the time since Millennium Development Group’s default in 2008, developers in Metro Vancouver with a significant portfolio have never come this close to imploding in such a way and extent — up until this week, when Coromandel Properties filed an application in court seeking protection from its creditors due to the company’s insolvency.

As reported by Daily Hive Urbanized, Coromandel Properties has 16 active real estate projects within the city of Vancouver that have amassed a combined total of $700 million in outstanding debt. Eight secured lenders have issued default notices, seeking repayment of over $200 million, which the company does not have.

The active projects entail thousands of future homes (condominiums, rentals, and social housing), as well as commercial uses including proposed hotels. In its court filing, the developer warns that if it is unable to receive the court’s protection, it will be forced to perform a fire sale of its properties.

“The development work on the various Properties is in jeopardy,” states the filing, which also notes that cost escalation for under-construction projects is also an immense challenge.

In the short time since the publication of the petition, Coromandel Properties’ precarious situation has quickly reverberated throughout the region’s real estate industry. The questions many are now asking are: “Will there be more? Who is most likely to be next? Is this just the beginning?” For legal reasons, we’re unable to speculate exactly who will/could falter.

Of course, the factors, inputs, and variables driving Coromandel Properties’ precarious situation are extremely different from the issues faced by Millennium Development Group.

As Coromandel Properties’ petition notes, the company has been unable to service its significant levels of debt due to the historic rise of interest rates since 2022, and they now have an insufficient cash flow to complete their projects. Sales demand has substantially dropped over the past years, and so have potential prices.

To answer the question of whether there could be more, Bryan Yu, the chief economist of Central 1, explains how certain types of developers are more susceptible than others to the current once-in-a-generation market challenges.

“Every organization will have different circumstances, but developers face significant headwinds at this point due in large part to the abrupt change in interest rates over the past year. Home buying activity and pre-sale conditions have dried up, home prices and land values has declined,” Yu told Daily Hive Urbanized.

“Developers face a period of weaker demand and high commercial interest rates (which could be worse depending on how debt is structured). Smaller more indebted developers and builders that bought up land more recently are at greater risk of a cash crunch, although larger established groups some with long-time ownership of land should be fine.”

Vancouver-based Coromandel Properties, which has its roots in China, is a relatively new player in the local real estate market. It first began acquiring properties for the redevelopment in 2013, with the filing stating it depends on a combination of secured loans, unsecured loans, and equity financing for its business.

While securing loans is generally the conventional approach, not all developers depend on debt to cover their cost of property acquisitions, project design and planning, and construction.

Earlier this week, during an Urban Land Institute event moderated by Daily Hive Urbanized that discussed the BC real estate industry’s emerging trends, two major established local developers provided some insight into their operations.

A representative with Concert Properties stated their company only acquires land with the cash and savings they have on hand — there is no debt. Concert Properties is owned by unions and management pension funds.

PCI Developments, which is privately owned, claims to have a decent amount of cash on hand. Their representative at the event suggested there is an opportunity for them to come in and buy properties released by other developers in any forthcoming fire sale.

Upon being inquired, local real estate firm Goodman Commercial told Daily Hive Urbanized the buyer profile in this region remains skewed towards private investors, based on their accounts. Although there has recently been heightened awareness of the growing activities of institutional groups, including pension funds and real estate investment trusts (REITS), these entities were responsible for only 15 of the 129 transactions they recorded in 2022, worth over $2 billion.

“Buyers and sellers have been staring each other down in all commercial real estate asset classes, especially for development land, over the past six months,” Cynthia Jagger of Goodman Commercial told Daily Hive Urbanized.

“The reasons for buying and selling remained, though the pace at which owners and investors made business decisions slowed substantially. We were fortunate to close several deals and help establish new benchmark pricing to assist with market comparable analysis in a changing market.”

While the current conditions hurt projects of all types, it could particularly slow down the rate of much-needed rental housing for the large swath of growing middle-income households, especially with the continued high flows of immigration over the coming years.

Indeed, some of Coromandel Properties’ largest future projects were slated to be rental housing projects, including one East Vancouver project with 1,150 rental homes. They also proposed condominium projects with sizeable inclusive social housing components.

Mark Goodman of Goodman Commercial added that some rental projects have been sidelined for years, even when there were previously comparatively more favourable conditions and inputs, which were already far from optimal. Other builders, he says, will wonder if they should pause or continue with the projects they have lined up.

“We anticipate that projects under construction will complete, but financing on finished buildings may be less than projected at the beginning of construction. This disconnect will hit smaller builders and nonprofits especially hard,” said Goodman.

“New rental construction is desperately needed, at a level and pace unthinkable even five years ago.”

In its filing, Coromandel Properties blamed Vancouver’s municipal government for being one of the major factors for its predicament.

The developer took specific pointed aim at the City of Vancouver’s expensive and slow approval processes, including years-long, uncertain rezoning application reviews that involve lengthy negotiations with City staff on the allocated community amenity contributions (CACs).

“The process to develop real estate in Vancouver is complex, expensive, and slow. The process to obtain the required approvals from the City prior to commencing a Project is also slow and can take many years. It includes, but is not limited to, the Petitioners preparing proposals and plans, submitting applications for zoning and development permits, and negotiating with the City,” reads the petition.

“The pace of developing the various Projects has been slower than anticipated due to the lengthy application process, and the discussions with the City surrounding density potential and social housing requirements.”

Although there are other major factors in play, Jagger suggested there is much truth to how the municipal government’s practices, processes, and policies are detrimental to the financial viability of rental housing to the extent that potential affordable homes have simply evaporated over the years.

Yes, there are overwhelming headwinds that are completely out of the City of Vancouver’s control, such as the Bank of Canada’s interest rates, global market inflation in the cost of labour and materials, and the provincial government’s low annual rental rate increase limit.

But if the City of Vancouver is able to fix the problems that fall directly within its jurisdictional powers, especially the drawn-out process for accepting and reviewing applications, in some cases this could be just enough to push projects just over the line into the realm of financial viability, with shovels in the ground — against the current overwhelming odds, with other factors beyond the City’s control hammering from the other sides. This would also potentially keep certain types of developers not just afloat, but active.

“All levels of government can be part of the solution. For municipal leaders, proposed rental housing units are falling through the cracks and not moving forward. Thousands of approved units haven’t made their way to completion,” she said.

“Time will tell how serious our new mayors and councils are about addressing one of the most vital aspects of our cities’ future: where and how people will live. Civic leaders should show courage by using thinking creatively and reversing tired policies.”

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