Foreclosures continue to emerge in an interest rate environment that is too challenging for companies that are inexperienced or unfamiliar with Vancouver’s typically lengthy development process.DARRYL DYCK/The Canadian Press
Great-West Life’s real estate division had wanted to purchase the site on Robson Street in downtown Vancouver for some time, so when they heard that it had gone into foreclosure, they didn’t hesitate to act. They officially purchased the site at 1555 Robson St. earlier this year.
The site had been owned by a numbered company that was operated by Vivagrand Developments, sold through a court-ordered sale as part of foreclosure proceedings. Vivagrand had obtained approval to develop a 28-storey condo tower at 1555 Robson St., but GWL will be submitting a new plan for a rental tower. Vivagrand, which is now known as Align Properties, had also defaulted on loan payments at another West End site, a four-storey apartment building at 1485 Davie St. Align Properties is the North American arm of China’s Xiangli Group.
“We had been tracking Robson for a long time.” says Geoff Heu, GWL Realty Advisors vice-president, development for Western Canada, who has plans to now build 400 rental units over two towers on the sites, with 40,000 square feet of retail. It’s near another GWL project, the completed Chronicle rental building, with 128 units. The recent purchase is part of GWL’s expansion plan along Robson Street.
“The bigger established developers are just fine,” says Mr. Heu. “They are well-capitalized, and they have a brand to protect. The less experienced and newer developers, that’s where we are seeing problems.”
Foreclosures continue to emerge in an interest rate environment that is too challenging for companies that are inexperienced or unfamiliar with Vancouver’s typically lengthy development process. It’s brought to light the many players in the market who are eager to make an easy profit but weren’t prepared for the down cycles of the market. Some are more interested in properties as investments rather than land to build on, so they merely become holding properties. The increase in interest rate hit small investors hard. Some manage to take their projects through rezonings and even to the development permit application stage before they run into trouble. Often, these projects, sometimes vacant land or assemblies involving single-family homes have insufficient income to cover the carrying costs.
Industry experts are seeing an unprecedented number of foreclosures among the lesser-known and generally smaller developers – and they don’t see any reason for the trend to curb any time soon.
Colliers’ vice-president Hart Buck and senior associate Jennifer Darling have been dealing with a lot of foreclosure sales in recent months. They have three active foreclosure listings in Greater Vancouver, “ready to go,” and two of them are properties that had started construction.
“In ‘93, ‘97, 2008 and 2018, they were the peaks of the cycles, and following each one of those, there was a downturn, as there is now,” says Mr. Buck. “And there are more foreclosures in the market now than there have been following any one of those peaks.
Ms. Darling said the “proforma” – or initial cost and income projections – for many projects have been severely distorted and she doesn’t see the foreclosure trend abating.
“Even if interest rates do start to come down later this year, which we are expecting, a small change is not going to necessarily solve the problems that some of these proformas are going to experience,” says Ms. Darling. “So, I don’t think we’re suddenly going to see foreclosures and receiverships dry up in the next six months. I would expect that that runway will be longer.”
Early this year, Haro-Thurlow Street Project’s plans for a 55-storey tower at 1045 Haro St. went into receivership, and there were several others before that. But the first sign of trouble was last year’s announcement that larger developer Coromandel Properties had filed for creditor protection, with $700- million in debts. Mr. Buck calls it a “classic example.”
“There’s a company that had over a dozen sites and built some [projects], but a lot of them never really got even started in the development process. They were just holding a position of good land. They’ve got some great land. But when things turned around and, you know, if you’re carrying a dozen sites with no cash flow, it doesn’t take long – when rates go up, when they quadruple in a year you get into trouble, which is, I think, the basis of a lot of the problems we’re seeing today.”
Mr. Buck says that the investors started changing the scene going back several decades.
“I started in 1985 and we had just come out of the dreaded early ‘80s. And some people would tell you there are some similarities between what we’re feeling now and that period.
“By 1997, we saw a lot of offshore buyers coming to town, buying land and paying prices that a lot of the locals thought were just unsustainable. And we saw locals going to Toronto or going to the States, Seattle, and down in the desert to Arizona and into Dallas, and building. And there’s a lot of Vancouver developers that are very active in the States, and some of them will tell you that the reason they went there was because they didn’t want to compete with these groups that were buying in Vancouver for other than pro forma driven reasons.”
A pro forma analysis determines how a property will perform over the long-term, including income and expenses. Experienced, established developers often have portfolios that contain income-producing properties such as rental properties to get them through downturns. The ones running into trouble don’t have that buffer.
“A lot of the more established local developers will have income-producing portfolios in addition to development sites, which certainly helps when interest rates and other factors change in the market,” says Ms. Darling.
Tom Huang, co-owner of Tera Development, said some of the smaller developers will have second or third mortgages, and sometimes a private lender will just take over the property and hold it until the market picks up again.
“Development companies, they come and go, like a lot of the small businesses,” says Mr. Huang. “A lot of what we jokingly call ‘the flippers,’ they will create a company called ‘so and so development’ to make it sound a little more legit. But do they really do development? Not really. “They buy, they wait, they flip, but they don’t really do anything development related.”
The ones who do go through a rezoning often build to maximize the square footage, to make the property more valuable. That can mean odd spaces, such as corridors that are useless to the resident, instead of efficient use of space and perhaps less square footage, he says.
“For a developer that really wants to really build something for people to live in, the approach we go through with a rezoning is quite different from someone who has the intention to just flip it to get the maximum resale value of a piece of land,” says Mr. Huang.
The downturn has meant condo developers have pivoted to rental projects, which are helped along with government financing. Jacky Chan is a Vancouver developer and marketer who just returned from Asia, where he met with large developers, fund managers and government, to help bring money for rental housing into Canada, where the demand for rental is stronger than other countries.
Mr. Chan says his company’s lawyer is dealing with 10 foreclosures right now and that’s not even her specialty. He cites the “double whammy” of the higher interest rate combined with China’s foundering housing market as having a direct impact on Vancouver.
“During a massive crash like this, nobody is able to cover for anyone else – they are all cash strapped. It’s a domino effect,” he says of the Chinese housing market.
“The second thing is people talk about less experienced developers or less capitalized developers. And yes, there is some truth to that, but a lot of these developers have done a lot, maybe in Asia or globally. … So, they are not technically inexperienced, but it’s the unfamiliarity of how the bureaucratic system and policies work in the development cycle and industry in Canada that adds to the burden of these developers.”