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Silver lining brightens real estate gloom

|Written By Daryl-Lynn Carlson

Meagre holiday sales and manufacturing layoffs notwithstanding, the Canadian economy remains markedly stronger than its  United States counterpart.

Things are not critical yet,’ says Steven Pearlstein.

So say lawyers whose practices are largely focused on facilitating real estate transactions both residential and commercial; they are for the most part collectively relieved the subprime market implosion ravaging the sector south of the border has had a relatively mild impact here.

If at all, any detectable downturn in business serves as means to sharpen one’s skill set and exert adaptability rather than languish with a depleting client list.

“Things are not critical yet,” asserts Steven Pearlstein, a real estate law specialist at Minden Gross LLP. “We will see declining house prices and there is a glut of condos that are coming online. If people don’t have jobs this inevitably results in a decreasing [of] the volume of purchases and sales.”

But he points to the economic malaise 15 years ago that in Canada had a significant impact on the real estate market, spawning the emergence of insolvency as a dedicated practice area of law.

In the current downturn, which hasn’t been officially labelled a recession, perhaps the most noticeable change has been an evident dearth of lenders, says Pearlstein.

“In the commercial market, banks are lending but more strictly enforcing their lending criteria,” he says.

Mortgage-backed securities are no longer a source of funds as a result of market conditions south of the border, and many of the other traditional real estate lenders are sitting on the sidelines as a result of asset allocation requirements, he says. “So it feels like people aren’t lending.”

Pearlstein says he expects it will be another year before such lenders resume activities in real estate investments although that’s not necessarily going to have a detrimental impact to any measureable degree.

Even foreclosures aren’t poised to ravage the market as severely as they have in the U.S.

Pearlstein recently delivered a continuing education seminar for lawyers on mortgage enforcement and observes “in Ontario it hasn’t gone crazy yet. Historically, there are a lot more defaults than there used to be, but I think overall it’s not that huge a factor just yet.”

He doubts that mortgage defaults will ultimately become a driving force behind an economic implosion as it did during the 1990s, although Pearlstein doesn’t dismiss the impact soured real estate deals could have cumulatively over the coming year.

At another continuing education session hosted by the Ontario Bar Association scheduled for June 9, Pearlstein will preside as chairman in a discussion entitled Restructuring Distressed Real Estate.

The program will address significant changes in the law and practice that have occurred in recent years, and moreover will prepare lawyer attendees with analysis and strategies to properly advise clients and guide them to take the appropriate steps to meet their concerns. 

“As the flow of real estate transactions has decreased it is even more important to broaden your practice and gain the potential to generate new files in this expanding area,” Pearlstein writes in an outline describing the session.

In this vein, he emphasizes the need for lawyers to be adaptable and enhance their expertise

beyond basic property conveyance.

“Lawyers, even those who have experience in real estate, really don’t have that multi-discipline ability to think on both sides and see how they fit together,” he says referring to insolvency and restructuring.

Douglas Klaassen is a partner at Stikeman Elliott LLP’s Real Estate, and Structured Finance and Financial Products groups and has morphed the focus of his practice to adapt to market changes over the years.

Although he began doing basic real estate work, he soon migrated to concentrate on commercial transactions, then commercial mortgage lending and in recent years became one of the first lawyers in Canada to plug into mortgage-backed securities and mortgage securitization.

Amid the current downturn, Klaassen again retooled his practice in a move back to more traditional real estate work.

“Diversification is important,” he says. “The tendency towards specialization can only go so far and the broader range your skill set is the better off you’ll be.”

He too is optimistic that the economic impact of world financial markets won’t be as detrimental to Canada’s economy as in the U.S.

“Unlike our American friends, I think the impact of this recession will be relatively benign in this country compared to south of the border,” says Klaassen.

He notes that U.S. lenders are moving towards recourse lending and lower leverage “which is what Canada has been doing for the last 100 years.”

There are also opportunities for the emergence of private lending funds, such as the new KingSett Canadian Real Estate Income Fund LP, that will fill the gap of other lenders who are either currently sitting on the sidelines or tightening their credit requirements.

“Someone is going to have to come in and take their place and whoever comes in and sets this up is going to see a tremendous return,” says Klaassen.

“We look like a safe haven compared to other countries. Going forward I think Canada will continue to be viewed as a good place to invest and I expect there will be renewed interest in that” once current market apprehensions subside.

In sum, Klaassen says the downturn ultimately will have an upside in the long term and his prognosis for real estate is optimistic. “There’s no systemic Canadian real estate problem.

The bad news is that our major trading partner has a systemic real estate problem and until they work that through and decide how much damage that’s done to their economy, we’re not going to know what consequential impact that will have on the Canadian economy. But I think it’s going to be an interesting year.”

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