Distressed real estate sales rise despite price mismatch between buyers, sellers

Buyers smell blood in the water as distressed commercial properties are put up for sale. But so far, sellers of that troubled real estate are refusing to accept rock-bottom values.

With developers filing for bankruptcy protection or lenders forcing their projects into receivership, the number of available properties is on the rise. And, certainly, sales are up substantially: Over the first half of the year, there were $803-million worth of distressed commercial property sales in Canada, according to commercial real estate brokerage Colliers International Group Inc. That is more than double the amount from the first six months of last year.

“It really started to pick up at the end of last year and really kind of took off in the first quarter of this year,” said Jeremiah Shamess, who started Colliers’ private capital investment group and is working on about a dozen distressed asset sales, compared with three in the previous year.

Still, real estate pros say there’s a disconnect between buyer and seller expectations. If the two sides start to come together, the number of transactions could boom – particularly as defaults are expected to increase. More troubled properties are expected to hit the market as real estate companies struggle with higher borrowing costs and miss their loan payments. Lenders are losing confidence and are increasingly pushing their borrowers’ projects into receivership.

Jeffrey Berger, managing director of insolvency firm TDB Restructuring Ltd., said there has been a gross mismatch between buyer and seller expectations. He said buyers “smell blood in the water” and want the best deal possible. Meanwhile, he said, “Sellers are still clinging on to these appraisals from five years ago with unrealistic valuations of their property.” TDB is working on 20 to 25 real estate receiverships and has about 20 properties up for sale.

In the first six months of the year, there were 137 construction and real estate receiverships in Canada, an average of 23 a month, according to new data from the federal Office of the Superintendent of Bankruptcy. At that pace, the country would hit 274 receiverships in 2024 in real estate, rental, leasing and construction.

That compares with 143 real estate and construction receiverships last year, according to the data.

That was up from 108 in 2019, before construction and borrowing costs soared.

The real estate receivership data include all types of properties, from office and retail to residential sites, unfinished condo towers and vacant plots of land.

Mike Czestochowski, who has worked with distressed commercial property for four decades with CBRE Group Inc., said more and more lenders and receivers are calling his team for advice. Mr. Czestochowski, a vice-chairman with CBRE, said two years ago he was getting such a call every two to three months. Now, he is getting inquiries about twice a week.

“It’s going to keep us busy for some time,” he said. “We’re going to see an increase. When is it going to bottom out? I wish I knew.”

Minto Group, a major Canadian housing developer, said it has become more common to receive pitches for power-of-sale assets and court-ordered sales, which occur after an owner defaults on payments and creditors push the project into receivership.

Pitches to Minto include one for a high-rise development concept in Brampton, Ont., and another for the unfinished luxury condo tower The One, in Toronto.

Minto has also been pitched on two residential developments sites in the Vancouver area; a redevelopment in Surrey, B.C.; a townhouse subdivision in Simcoe, Ont.; vacant land and residential sites near Victoria; vacant land with architectural and landscape drawings in Langley, B.C.; and a plot of land in Hagersville, Ont.

Minto passed on all of them.

Like other developers, Minto acquires land to have a steady stream of developments in its pipeline. It wants property that complements its existing portfolio, prefers land that already has project approvals and avoids partially developed sites because that would mean accepting design and pricing decisions made by somebody else. Not many distressed properties fit the bill.

“It would have to be an extraordinary opportunity. And by that I mean extraordinarily cheap,” said Dan Dixon, Minto’s senior vice-president of corporate affairs.

Brokers say they have to canvass more buyers and work harder to convince a potential buyer to consider a troubled asset. Then, the buyer is not willing to pay close to what the creditor envisions, and lenders are not willing to slash prices and lose money.

For example, Colliers sent marketing materials for one distressed project to 6,217 potential buyers, according to court records. The property in Toronto was owned by a housing developer, the Vandyk Group of Companies, and was supposed to be turned into townhomes.

According to court documents, 26 parties got access to the data room, where they could learn more about the property. But the documents said that while a number of parties expressed interest in the property, the prices “contemplated by these parties were substantially less than the purchase price.” And ultimately, only one purchaser submitted a formal offer, the documents said.

“A lot of these lenders are unwilling to take major losses,” Mr. Shamess said. “There are no lenders who are saying, ‘We just need to get rid of it no matter what.’ ”