Is that dormant building site properly insured?

As Canada’s condominium market grinds to a halt, neighbours of properties collected by developers are reporting an increasingly common problem – site negligence.

Recent data releases from building industry advocacy groups show developers cancelling more than a dozen projects totalling several thousand units.

When projects become dormant, or are temporarily halted, issues around security, damage to existing structures, or the presence of squatters add up to problems for developers and property owners, says Peter Kennedy, Aon’s managing director, and regional commercial risk and national real estate leader. What’s more, vacant properties need to be kept free of debris to discourage dumping.

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“You need to declare the situation with respect to the project to your insurance company,” he tells Canadian Underwriter. “They would probably ask plenty of questions [about] what you’re doing, specifically about site security, how you [will] clean up the site, [and] how you’re protecting the site with hoarding placed around it.

“Checking on the property or having security [is important] from a liability perspective, for that developer [or] whoever is sitting on this [land].”

Owners are obligated to secure vacant sites, says Kennedy. He adds tools like miniature closed-circuit cameras are now inexpensive enough to be used in sufficient numbers to cover a site.

Shifting buyer demand

Higher interest rates have dampened demand for new condo units since 2022. Elevated interest rates make it less profitable for investors to buy units at pre-build prices and then re-sell them at a profit once a condo project’s complete, real estate analysts tell CU. Sources tell CU this is the case in Toronto’s condo market as well as those in Vancouver, Calgary and other Canadian cities.

Another factor reducing demand, says Kennedy, is a shift in buyer preference away from small 600-square-foot units and towards larger condos that can accommodate families.

“Buyers who’d initially purchased with the intention to flip found no market for those units now because they’re too small,” says Kennedy. In response, project owners are now “rewriting the whole structure” of planned condos to expand unit size to meet market demand.

Insurance considerations

For the actual end-product building, conversions at mid-point in construction are not too complicated from an insurance perspective, even if some changes are made to interior walls.

But insurance needs may need to be updated if changes are made to structural, mechanical, or electrical specifications – or if different amenities are selected, Kennedy says. And the builder or owner would need to add coverage for delayed startup in case rental income is lost.

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“You have three 600-square-foot units, versus two 900-square-foot units [on a floor section]. It’s still 1,800 square feet,” he says. “Instead of three bachelors, maybe you now have two families…there’s a few more people, but not radically any different.”

Such changes also aren’t generally a huge problem from an underwriting perspective.

“From [the standpoint of] a demographic shift, or a size shift, the underwriter is going to be happy that it’s…occupied,” he says. 

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“I think underwriters want to see a building built and occupied as quickly as possible. What they don’t want is something that’s sitting there. It gets very tough to insure projects as they get extended…and it’s expensive because you’re mid-construction, or whatever phase you’re at.”

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For stalled condo projects, expanding unit size can also help developers sell off the final 20% or 30% of units.

“It’s [not like] the old days [when] you get to the 60% threshold, and then you had two or three years during construction to…sell out the other 40%. You can’t count on that now,” says Kennedy.

“We have a client that’s a condominium developer, and they’re very good at the construction management [side] of condos. They basically pivoted to offering services to third-party rental builders, because they have capacity and they have the expertise. And there’s demand for that, whereas there isn’t demand for condos [right now].”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.