Fortress Real Developments, with over $4.0 billion of development projects in 4 provinces, has seemingly burst onto the development scene, however the CEO, Jawad Rathore, jocularly points out that “Fortress is the overnight success story that was 14 years in the making”. Generating significant buzz as a keynote speaker at ULI’s Annual Trends event in November 2014, “Fortress” has showed little signs of slowing down with 15 projects slated to start construction in 2015 with a built out value ranging from $1.5 to $2.0 billion. The firm recently invited ULI members to their offices for an exclusive update on their business and an overview of trends in the housing and lending markets.
Fortress’ primary business involves deploying capital into development projects principally on the debt side. Fortress fills an important financing gap that was left by the financial crisis as conventional lenders reduced their lending ratios from 80-85% to 60-65%. Fortress projects are funded through syndicate mortgages offered by mortgage brokerages in Ontario (Centro Mortgage Inc. is the lead brokerage). Investors in the syndicate mortgage receive a fixed interest, and the repatriation of capital upon project completion. In turn, developers receive debt financing, an important element in their capital stack, often at expedited timeframes compared to conventional lenders (i.e traditional banks).
Ben Myers, Fortress’ nationally acclaimed real estate market analyst who was a key panelist at ULI’s recent Emerging Trends event, spoke to the influences and dynamics affecting the current market. Mr. Myers took direct aim at the headlines which claim the Canadian housing market is overvalued by 10 to 30% (as reported by Deutsche Bank, Bank of Canada, IMF, amongst others). “These studies are fundamentally flawed because they take overall averages of the entire Canadian market and inexplicably do not account for supply constraints.” Far from a contrarian, Mr. Myers polled the country’s top 40 housing analysts and 94% of the respondents indicated that these studies are not meaningful to predict future housing [price] movement. Moving onto the nation’s perhaps most controversial condo market, Toronto, Mr. Myers refuted the notion that Toronto is overbuilding as “it’s been well documented that the GTA needs 40,000 units and the market has only delivered 32,000 units (average of the last 5 years) and in effect we’re under supplying”.
Frank Margani, Fortress’ lending expert and EVP of strategy and development, provided insight into trends across the real estate debt landscape. According to Mr. Margani, residential mortgage arrears are at an all time low (0.28%), which has driven a number of financial lenders to increase their real estate debt allocations. Corroborating his insight, Mr. Margani referenced Equifax’s recent report that stated consumer debt defaults are at an all time low. Not only are lenders looking to increase their real estate lending portfolios in 2015, but Mr. Margani expects these lenders to continue demonstrating financial creativity by partnering with each other to form syndicates on larger developments, in addition to engaging in alternative lending structures such as “A/B” loan arrangements. Overall, it is clear that the drive for yield in an increasing low yield environment will continue to increase lender competitiveness for real estate financing opportunities.
Vince Petrozza, Fortress’ co-founder, also added in response to an audience question, that the recent decline in the Bank of Canada’s overnight rate will serve to drive greater deal flow, even in “oil focused” markets where projects are being financed today, but wouldn’t come on stream until [hopefully] the beginning of the next boom cycle. Put another way, these developers are betting that the oil sands will return and, in the interim, they are happy to receive a lower cost of capital.
With 2015 off to an unsettled start with oil and currency pressures dominating the economic picture, it appears real estate may again be a point of resiliency, somewhat assisted by lower interest rates. If this growth picture does sustain, it appears Fortress will be well positioned to benefit as their platform is expanding across all asset classes and geographies.