Real estate insolvencies in Canada set to surpass levels of global financial crisis

Real estate insolvencies in Canada set to surpass levels of global financial crisis.

Residential property developers are increasingly facing insolvency as they grapple with rising borrowing and construction costs, and experts warn this trend is likely to worsen as interest rates remain high.

The number of insolvent real estate companies and projects has surged over the past year and is on track to exceed levels seen during the global financial crisis, according to data from the Office of the Superintendent of Bankruptcy.

“This has been building up for some time,” said Colin Doran, head of development advisory at Altus Group, a commercial real estate firm. With 15 years of experience advising distressed real estate projects, he notes, “More projects are undoubtedly in distress, but it’s unclear how many can avoid insolvency. We expect more inexperienced developers to find themselves in trouble.”

From January to May this year, an average of 20 real estate, rental, or leasing companies in Canada filed for insolvency each month. These companies either sought bankruptcy protection or filed creditor proposals to manage their debts under the Bankruptcy and Insolvency Act.

At this rate, Canada could see about 240 real estate insolvencies this year, a 57% increase from 2023 and 13% higher than the peak in 2009 during the global financial crisis.

This figure excludes the number of developers and projects forced into receivership for failing to pay bills. The Office of the Superintendent of Bankruptcy does not report industry-specific receiverships, but experts say more projects are ending up in receivership.

So far this year, real estate accounts for 55% of receiverships tracked by Insolvency Insider Canada, a significant rise from 30% in 2022 and 33% in 2021.

Among the most high-profile defaults is Sam Mizrahi’s luxury Toronto condo tower, The One, with lenders owed $1.6 billion. Many other developers have faced similar pressure from creditors or filed for bankruptcy protection.

“For the first time in quite a while, we’re seeing stress in the Canadian real estate system,” said Syl Apps, who co-leads the Canadian operations of Hines Interests LP, a Houston-based real estate firm managing about 850 properties in 30 countries.

So far, the stress is hitting smaller developers or those lacking the financial resources to withstand the sharp rise in interest rates since 2022.

For example, Maplequest Ventures, a smaller developer, faced trouble with a $24-million loan from KingSett Mortgage Corp. to develop housing in Brampton, Ontario. The loan, originally tied to a major bank’s prime lending rate, became more costly as the Bank of Canada raised its benchmark rate from 0.25% to 5% between 2022 and 2023. As a result, Maplequest’s loan interest jumped from 2.45% to 7.2%, making the project financially unviable.