The past year set the stage for a perfect storm in the real estate sector. Rising interest rates, economic deceleration, and policy shifts impacting capital gains converged to create an atmosphere where the pause button on acquisitions has become the norm. Wary of further economic turbulence, investors adopted a wait-and-see approach, stalling transactional momentum.
Investment sales in the Greater Toronto and Hamilton Area have plummeted by at least 19 per cent compared to the previous year, reflecting a broader hesitancy among buyers to commit in this volatile environment. According to Altus Insite, residential land sales alone have nosedived by 34 per cent in the first half of 2024, underscoring a profound caution among stakeholders across all asset classes. Similarly, Urbanation showed new condominium sales have hit a 27-year low, with just 3,159 units sold—a staggering 57 per cent decrease from last year and a 72 per cent drop from the 10-year average.
The downturn highlights a market frozen by uncertainty. Developers are hesitant to launch new projects until they see stabilization in revenue streams and operational costs, including the current interest rate environment. So, they wait and look for signs of assurance needed to commit to new acquisitions.
Over the past 12 months, the real estate market has been characterized by a palpable sense of gloom. Activity has been weak across all asset classes. Market demand is waning, and buyers are adopting a "pencils down" mentality in no hurry to transact based on predictions that interest rates may fall even further in the next
six months to a year.
The distressed real estate sector has faced challenges marked by several troubling factors:
Distressed real estate transactions today can be characterized by many things, from lowball offers to debtors claiming they have unsubstantiated buyers or financing without sufficient or highly conditional supporting documentation. Forbearance agreements between lenders and borrowers may also be required in some circumstances.
However, when there is a breakdown in trust, lenders often avail themselves of the court process to appoint a receiver to work out a financial problem for their distressed real estate loan.
Receivers must decide whether to sell properties "as is" or invest in enhancements to increase value before sale. In a situation where it is a sale of land, and there are pre-existing agreements of purchase of sale, a buyer often requires the receiver to terminate these existing contracts that would be unprofitable to complete as they no longer reflect current market value. Through the insolvency process, courts have the discretion to terminate contracts and transfer title to the purchaser without being bound by these contractual obligations.
Transaction creativity is imperative in these times. Given the current market, lenders and receivers must consider creative solutions and arrangements. Examples include stalking horse purchasers or credit bidders or arrangements for new financing for the buyer.
Future Bank of Canada rate decreases of .25 per cent or .5 per cent will not move the needle significantly. The road to recovery remains challenging and will require patience and deep pockets. Nonetheless, there is cautious optimism in the purchasing community, which has kept capital on the sidelines and is ready to deploy at the right opportunity. As we approach the end of 2024 and move into 2025, pension funds and other stakeholders should see a slow yet promising recovery. Still, they must remain agile and ready to seize emerging opportunities in a landscape poised for gradual transformation.
Bryan A. Tannenbaum is a seasoned restructuring professional in corporate restructuring, recovery, and insolvency. A licensed insolvency trustee, he provides businesses with leadership, effective strategies and resolutions in corporate reorganizations, business investigations, receivership assignments, proposals, bankruptcy matters and liquidations.
