Q1 2025 Market Update from OZ Capital

As we close out the first quarter of 2025, OZ Capital remains vigilant in monitoring the evolving real estate landscape across Canada, with a particular emphasis on Ontario—our core lending market. The ongoing recalibration in property values, coupled with shifting macroeconomic conditions, has underscored the importance of disciplined underwriting and prudent lending practices.

Real Estate Market Observations

Condo Market Under Pressure

One of the most notable areas of concern continues to be the condominium market, particularly within the Greater Toronto Area (GTA). Over the past several quarters, we’ve seen sustained weakness across pre-construction and resale segments. A significant backlog of unsold units has accumulated, largely driven by a mismatch between historical pricing expectations and current market valuations.

Developers, having priced units during the 2021–2022 peak, now face a valuation gap that places many end buyers in shortfall scenarios. In numerous cases, purchasers are either walking away from deposits or resorting to high-leverage financing options, leaving them underwater at closing. This dynamic represents a key area of caution for our lending operations, while this new dynamic is concerning, with proper risk mitigation we have had success in helping borrowers reach a positive outcome from an otherwise difficult situation.

Broader Market Resilience with Caveats

Outside of peak transactions (2021-2022), the broader real estate market in the GTA has shown resilience. In the last 10-15 years, homeowners have built up substantial equity which has allowed them to unlock that equity in the current market. However, the weight of higher interest rates and declining rental yields has begun to compress investor returns, particularly for leveraged owners, or newer owners who recently entered the market.

Investor Cash Flow Compression

We differentiate between long-term real estate investors and short-term speculators. For the former group, shrinking cash flows—driven by stagnating or declining rents in certain submarkets—are starting to challenge debt service coverage and raise questions about long-term holding viability. We continue to monitor this closely, especially where rising operating costs and mortgage resets intersect.

OZ Capital Risk Mitigation Measures

In response to these shifting dynamics, OZ Capital has implemented several proactive measures to maintain portfolio strength and position ourselves for long-term opportunity:

1. Mark-to-Market Valuations

   
   

   All assets underwritten are subjected to rigorous, mark-to-market appraisals, ensuring our assessments reflect current economic reality—not outdated peak pricing assumptions.

   
   

2. Prudent LTV Management

   
   

   We remain steadfast in maintaining conservative loan-to-value (LTV) ratios. Our underwriting reflects both current valuations and downside protection, ensuring sufficient equity buffers are in place.

   
   

3. Enhanced Borrower Due Diligence

   
   

   In today’s environment, borrower strength matters more than ever. Our underwriting now incorporates deeper diligence into borrowers’ capacity to service debt, with particular emphasis on income verification, liquidity reserves, and the credibility of proposed exit strategies.

   
   

4. Sectoral & Geographic Risk Monitoring

   
   

   With traditional lenders tightening their credit boxes, OZ Capital continues to watch broader macro headwinds that could impact borrower performance. For instance, we are paying heightened attention to regions affected by industrial layoffs—particularly in auto manufacturing and metals, where tariff-related disruptions may signal longer-term stress.

   
   

5. Navigating the Private Capital Influx

   
   

   Private capital continues to flow into the real estate credit space, seeking yield amid limited opportunities in traditional fixed income. While this signals confidence and creates potential co-investment opportunities, it also increases competition and compresses pricing. We remain selective and disciplined, prioritizing structure and security over volume.

   
   

Closing Thoughts

While volatility has returned to segments of the Canadian real estate market, OZ Capital sees this as a period of recalibration rather than collapse, our outlook is that we are are approaching the bottom of this market. Cyclical downturns often create the best opportunities for those with patient capital and disciplined frameworks. Our approach remains rooted in prudence, data-driven underwriting, and a deep understanding of the markets in which we operate.

We look forward to navigating the remainder of the year with focus and resilience.

— The OZ Capital Team