11-06-2025
Builders taking on more debt as some in residential sector struggle
New Bank of Canada data show that Canada's chartered banks doubled the debt they have extended to real estate developers and builders in the last year, raising outstanding loan commitments to an unprecedented $85-billion.
The data reflect the financial standing from the first quarter of 2025, and the largest growth area of new lending comes from a subcategory called 'interim construction lending' that rose to $32.9-billion, up 383 per cent from $6.8-billion in the same quarter in 2024. Interim lending spiked to $25-billion in the second quarter of 2024 and has been above $30-billion for three quarters now. The latest number is the highest ever recorded by the Bank of Canada (which began tracking interim lending in 1994), and is more than double the previous record of $16.2-billion in the second quarter of 2022.
Industry experts say there are several factors contributing to this new leverage. Among them are a large number of residential real estate developers that have overextended themselves and taken interim loans – which are often more expensive than longer-term financing – as they attempt to resolve stalled projects.
'What everyone was doing was trying to recapitalize all their debt to a number where they could at least hold on,' said Steve Cameron, president and chief operating officer with Cameron Stephens Mortgage Capital Ltd., which specializes in 'mezzanine' or interim real estate lending, with $4-billion under management. 'It was this chaotic run to the noninstitutional lender for as much leverage as they can hold on, as tight as they can, while this market corrects.'
Mr. Cameron describes his fund and the banks as risk-averse. He said many lenders were caught off guard by the erosion of value in the condominium space, which has changed the underwriting math in many cases. 'They are very conservative, and on a lot of deals [the banks] were at 50-60 per cent loan-to-value (LTV). Now, they are waking up and saying 'Wow, these are actually more like 90-95 per cent LTV,'' he said.
The sheer scale of the lending could pose a risk, according to Fred Cassano, national real estate leader and partner at PwC Canada.
'The banks and other lenders have a much larger exposure to the real estate development market – more so than in previous years. If more projects run into trouble, bankers could face higher default rates and potential losses,' he said. 'I think it is concerning; we're starting to see a few more distressed situations. I wouldn't be surprised if we're going to start seeing more.'
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Despite this growth in debt Shalabh Garg, real estate and banking analyst with Veritas Investment Research, doesn't believe Canada's largest banks face systemic risk, not least because of the size of their overall loan books.
'The exposure at all the big banks is less than 1 per cent, except for National Bank – that's 4 per cent,' said Mr. Garg. He said disclosures from the big six banks show they hold about $30-billion of those development loans (Royal Bank of Canada has the largest dollar volume at about $13.9-billion). 'In my view, it's very manageable. If they write down that total book it will have some impact, but it's not going to lead to a decline in earnings per share,' he said.
Some new debt may also be aimed at assets that have growth potential, not just propping up stalled projects.
'Interim isn't just capturing residential. You can also fit interim lending into trying to improve your shopping centre,' said Christopher Wein, chief operating officer for Equiton Developments Inc.
He said there's been just as much growth in retail and industrial commercial real estate borrowing as in residential in recent quarters. 'Coming off the downward pressure on retail from COVID, a lot was either de-tenanted or left not in the best state. Large retail is saying, 'Let's do some construction around our retail and bring it back up to Class A.' I think there's a lot of creativity happening right now – especially in retail. People thought it was a dying asset class, [but] people innovate during down times. And banks are forward-looking: If they are increasing their lending and increasing their exposure, they see tailwinds are coming. Otherwise, it doesn't make sense.'
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According to Mr. Cameron, there are essentially two camps in residential development: those buying time with interim lending because they think the current market is a blip that could resolve in a year or two, and those who think it's a longer, more structural problem.
'Unfortunately, as far as I'm concerned, this is not a blip: this is a complete reset. It might be five years, it might be 10 years, but the condo market will probably not come back the way it was,' he said.
The hardest group to convince may be land developers, which Mr. Cameron describes as an almost genetically optimistic group. 'A lot of our clients, they are coming to the realization slowly that things have changed. It's a tough conversation to convince them that their $10-million investment is worth zero.'
Short of some difficult conversations with overextended residential developers, and possibly writedowns on non-performing loans, others believe there's still a way for the market to pull up, but likely only with political intervention.
'The government really needs to step in to get construction going again. Once construction starts, then you can refinance and pay off the interim lending,' said Mr. Cassano. 'Right now, no one's doing anything, and that's the worst thing that's happening. No one is breaking ground because the numbers don't work.'
