Lender says it won’t relax construction loan standards for condo developers hit by sales downturn

A major Ontario condo construction lender says it won’t relax its loan criteria for developers despite a sharp drop in projects and industry calls for more support.

In the fourth year of the real estate downturn, developers have been shelving or postponing condo projects because mom-and-pop investors are no longer interested in buying preconstruction units.

Individual investors used to account for the vast majority of preconstruction condo purchases in the Toronto region. The lack of investors means that developers cannot sell the amount of units required to qualify for construction financing.

Lenders typically require 70 per cent of a project’s units be sold before they will provide the developer with financing to launch construction.

“The 70 per cent remains a good metric,” said Kevin VanKampen, head of business banking with Meridian Credit Union, the province’s largest credit union that has been providing condo developers with loans for at least two decades.

With condo prices falling, Mr. VanKampen said “that type of an environment would not be particularly inviting for lenders to take what some would perceive to be a bit of a speculative way of lending.”

Condo developers urge big banks to ease presale threshold for financing

Meridian and other lenders have maintained strict lending standards even as developers have called for relief. Several developers told The Globe and Mail in the spring that they have been urging lenders to make it easier to get construction financing because they are sitting on projects that cannot move forward.

On the resale market, the typical condo price in the Toronto region is down 7 per cent in September from a year ago, according to Canadian Real Estate Association data. The average price per square foot for preconstruction units is down 1 per cent year-over-year, according to condo research firm Urbanation Inc.

Mr. VanKampen said lowering the 70-per-cent threshold could create a scenario where financial institutions start accumulating a portfolio of unsold condo units if developers run into financial problems, which would represent more risk to the lender.

Currently, there are 5,127 newly-built condo units in the Toronto and Hamilton region that are unsold, according to Urbanation. That does not include the units that developers have had to take back because buyers have defaulted on their purchase.

The development industry has been looking for other ways to finance condo construction and says without a lower lending threshold, the market will remain stuck.

“If the threshold is not lowered, I expect new development to remain stalled,” said Shaun Hildebrand, president of Urbanation. “Projects will keep getting shelved because they cannot reach the presale level lenders require,” he said.

Condo developers outside Toronto feeling the biggest strain from market’s downturn, data show

One of the most recent cancellations was a condo project called M6 in Mississauga, west of Toronto.

The tower was launched in 2023 and designed to be 58 storeys with nearly 900 units. It was the sixth phase of a larger condo development with more than 5,000 residential units. The Globe and Mail previously reported that developers were unable to reach the sales threshold required to begin construction.

The lack of preconstruction sales has slowed condo home building. There were 4,150 condo unit construction starts in the Toronto region in the first six months of the year, according to Canada Mortgage and Housing Corp. At that pace, there would be 8,300 condo starts this year. That would mark the lowest level since 1998, when condo buildings were only starting to be built.

That downward trend is expected to accelerate given the dearth of new project launches, which occurs well before a developer can break ground on their building.

So far this year, there have been four preconstruction condo project sale launches, according to data from new home research company Zonda Urban. That compares to 101 launches during the real estate boom in 2021.

With individual investors gone, developers have had to rely on buyers who plan to live in the units. Those types of buyers prefer to make purchases after construction has started or when the building is completed. Coming up with 20- to 25-per-cent deposit is also a challenge.

At today’s prices, the average deposit would be $164,000 for a 500-square-foot unit. And constructing a condo building can take years.

Zonda’s vice-president of advisory, Jasmine Young, said there needs to be a financing model that doesn’t require buyers to commit so far in advance.

“To put down the 25-per-cent deposit for a home seven years from now is difficult,” she said.