Interest Rate Hikes Are Triggering a Rapid Increase in Distressed Sales

Rapidly rising interest rates have dealt a blow to smaller developers who are attempting to manage one of the most challenging development cycles in a decade, especially compared to well-capitalized larger players.

“We’re seeing a lot more distressed sales through receiverships and power of sales,” says Lauren White, who co-runs CBRE’s Land Services Group, which specializes in such situations.

“The velocity is definitely picking up. We’re getting several calls each week from receivers, lenders or the banks, wanting us to review or pitch on an asset.”

“Those smaller developers typically went to B and C lenders, who are now being cautious about what they lend on and watching their book of business carefully,” adds Mike Czestochowski, who along with White, has industry-leading expertise on distressed sales, having handled more than 50 of them over the course of his career.

The speed and extent of the rising interest rates caught many developers off guard, he points out, and it’s initiated a sea change when it comes to property valuations and home sales.

“Sales centres got quiet,” Czestochowski says. “We haven’t had any downturns in the real estate market in recent years, maybe a couple of blips. But not like we’re seeing today.”

While many smaller developers fell into distress sale situations, larger developers who have relationships with the big banks “seem to be doing fine,” he says.

“And large institutional and private developers are seeing this as an opportune time to buy up properties.”

Writing’s On the Wall

LSG saw the writing on the wall two years ago and began to plan accordingly.

“We started reaching out to receivers and lenders to make sure they knew about our experience in dealing with distressed sales,” explains White.

Experience counts for a lot here. “Because if a vendor feels their lender or receiver, through their broker, didn’t do a good job of marketing a property or achieving a fair price, they can sue for an improvident sale,” says Czestochowski.

“That’s why you don’t want to hire the wrong person or a team that doesn’t know how to deal with distressed sales.”

Czestochowski and his team know how to market these properties the right way.

And for younger sales professionals like Emelie Rowe, who started with LSG five years ago, when the market was red hot, it’s an opportunity to gain a different perspective.

“These are interesting times to say the least,” she says, “and I have a feeling this could be just the beginning of court-ordered and distressed sales.”

Czestochowski and team consult on distressed sales throughout the GTA and across Canada, and have the power of the CBRE platform to draw from if they require added expertise in property management, facilities management, brokerage or appraisal, to name just a few.

The team is currently collaborating on listings for distressed sale properties in Gatineau, QC, Calgary, Vancouver and Ottawa, as well as a land portfolio in Florida.

“Lenders like the idea that we function as the single point of contact coordinating the CBRE platform and service, anywhere in the country or world,” White says.

Hands On Approach

Success comes from being hands-on in dealing with distressed sale properties.

On the day the call from the lender comes, a visit to the property ensures there’s no cause for concern: Is the site secured if it’s vacant, or if the building is empty? Is the property vulnerable to dumping or vandalism?

Czestochowski went out to a site one Saturday morning to find someone dumping construction debris on it. “This can happen if no one is properly monitoring the property.” 

He stopped the culprits in their tracks and called someone to come and secure the property.

Looking at the bigger picture, it’s worth knowing if there are ongoing applications for that site.

“If so, any lender or receiver should keep the process going and avoid any expiries of draft plans and permits,” Czestochowski says. “If some of these applications expire this could be detrimental to the property and reduce value significantly.”

Or are there leases rolling for that property? And is there anything with the building maintenance-wise that could be done to prevent costly damage?

“When you’re dealing with distressed sales situations,” Czestochowski says, “you have to be there full service for the banks, receivers and the lenders. And we are.”

“It’s really being a consultant for them and walking them step by step through the process and what they need to do,” adds White. “Keeping them up to date and doing things properly to avoid an improvident sale.”

Don't Stress the Distressed

It’s that kind of service that ensures a property’s sale will make a lender whole again.

“It’s great when all stakeholders get their money back plus fees and costs, and you have money left over for the vendor,” says Czestochowski. “That makes me happiest.”

“It’s an unpleasant situation, but as long as everyone is helped, kept informed and everything is transparent and there’s fair treatment, we should all end up pleased with the outcome.”