Canada’s real estate developers are facing a massive insolvency crisis, with the rate of bankruptcies expected to surpass the levels seen during the global financial crisis. Rising interest rates and skyrocketing construction costs are the main causes, and experts warn that the trend will continue for some time.
According to the Office of the Superintendent of Bankruptcy, the number of real estate companies and projects that have gone bankrupt in the past year has skyrocketed, and if the current trend continues, it could surpass the global financial crisis. “This has been a long time coming, and it’s only going to get worse,” said Colin Doran, managing director of commercial real estate development consulting at Altus Group.
From January to May this year, an average of 20 real estate, rental or lease-related bankruptcies occurred in Canada each month. That’s a 57 per cent increase from last year and 13 per cent higher than during the 2009 financial crisis. Most of these bankruptcies were caused by developers filing for bankruptcy protection or restructuring their debts. But that’s only part of the story. Developers and projects that have gone into receivership are not included in this statistic.
According to data from Insolvency Insider Canada, 55% of all real estate receiverships this year have occurred in the real estate sector, up from 30% last year. A notable example is The One, a luxury condo project in downtown Toronto that went into receivership after failing to repay $1.6 billion in loans. The number of developers who have defaulted on loans or filed for bankruptcy protection is rapidly increasing, and it is having a particularly big impact on smaller developers. The current real estate market woes date back to 2017, when the Toronto real estate market exploded with rising home prices and demand for new condos. Construction costs also skyrocketed, making it easy for even inexperienced developers to secure pre-sales. However, the COVID-19 pandemic delayed development, and many developers were left in jeopardy as the central bank raised interest rates, sharply increasing borrowing costs.
The cost of residential construction in Canada’s major cities has increased by 81% since 2017, and in Toronto in particular, it has increased by more than 107%. In this situation, developers can no longer pass on the higher costs to buyers, and many new condo owners are not able to cover their mortgage and other expenses with rent.
“Developers today have to excel in all aspects to survive,” said Doran. “Rising interest rates are hitting developers hard on their profitability.”