Imagine a time marked by aggressive lending practices, sharp value adjustments, a severe liquidity shortage, and high borrowing rates. While this could describe the 1990s, it also fits the reality of 2024. The turbulence in Canada’s commercial real estate industry from three decades ago is increasingly viewed as a blueprint for what we are witnessing today and what we can expect moving forward.

Today’s rapidly rising interest rate environment, paired with substantial losses in loan portfolios, prompts a crucial question: could this time be different?

There are similarities between the two periods, but there is good news. The current situation isn’t expected to last as long or be as severe. Unlike the 1990s, we’re facing modern-day supply shortages, driven by record-high immigration and steady employment rates, which are propping up both Canada’s ownership and rental markets.

Looking Back to Move Forward

Reflecting on the past, the 1990s saw a flood of defaults, many in the residential sector, including single-family mortgages. Today, defaults are concentrated in densely built condominium and large-scale projects, with rising concerns about the office sector. While these market conditions are unsettling, there are lessons from the 1990s that can help navigate this challenging environment.

Avoiding Defaults: Lessons Learned

Liquidity was tight in both eras, and property values have decreased dramatically in recent times. To avoid falling into default, developers and borrowers must learn from the past and act swiftly. Defaults can happen when developers struggle to repay loans that were issued when their properties were valued higher. With rising costs and shrinking equity, some projects can’t be completed, leading to significant financial trouble.

A key mistake developers make today is mismanaging capital. Many are spreading themselves too thin, overseeing multiple projects at once. When one project runs into budget overruns, resources are shifted to cover it, causing a chain reaction of financial stress. In these cases, developers should consider halting or stabilizing one project instead of pouring more money into it. This approach could prevent a total collapse.

For lenders, navigating this scenario involves recognizing when borrowers face challenges beyond their control due to market conditions. Working with experienced professionals to reassess the project and its economics can often lead to solutions that minimize losses for all involved.

The Role of Loan Servicing in Troubled Times

Loan servicing can be crucial in these situations. Professionals in this field collaborate with developers, lenders, and investors to find ways to get stalled projects back on track. They evaluate the status of troubled projects, partner with builders, and determine the costs required to complete them. By working together, they create customized solutions that ensure stakeholders are paid and financial losses are minimized.

While default management services have become more sought after, not all firms are equipped with the expertise needed to manage these situations effectively. A strong team with a proven track record in navigating complex problems is key to successfully resolving defaults.

What Borrowers Can Do Now

If you’re a borrower with a strong reputation, the odds may be in your favor. Lenders will likely still be willing to work with you, and by partnering with them early, you can develop a plan to weather the storm. There’s a good chance of recovery if you act wisely and leverage existing relationships.

For those fortunate enough to have liquidity, holding on may be a sound strategy. Interest rates are expected to fall, which will likely improve your financial position. While it’s true that we may not have reached the peak of defaults yet, early indicators suggest things will start looking up soon.

Looking at Opportunities in Major Cities

Even though defaults are widespread, larger cities like Toronto and Vancouver are where the most significant opportunities lie. Projects in urban centers offer a better chance of success because property values in these densely populated areas are more resilient. If you have the capital and expertise, now might be the time to consider acquiring distressed projects at a discount, as prices will rise once interest rates drop.

Final Thoughts

For anyone facing financial difficulties, it’s essential to seek help from professionals with the experience and knowledge to guide you through these challenging times. The lessons from the 1990s can provide valuable insights for the present.

If you’re in a position of strength, there are plenty of opportunities to capitalize on today’s market conditions. With the right strategy and trusted partners, you can emerge from this period in a stronger position. Remember, it won’t stay like this forever—better times are ahead.