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There’s an infinity pool at the Muskoka Bay Club, but not a lot of people around to use it.Fred Lum/The Globe and Mail

Peter Freed is sitting in the back of a golf cart that's trundling across his Doug Carrick-designed championship golf course set against the dramatic rolling hills of Muskoka, a region more than one major travel magazine has called one of the prettiest places on Earth.

It has been 13 years since Mr. Freed, head of Freed Developments, spread his wings beyond building sleek condos in downtown Toronto and headed north into rural Ontario.

He purchased 850 acres of wilderness near Gravenhurst from five different owners to create Muskoka Bay, a community of up to 1,000 luxury cabins along an 18-hole golf course. The plan was to capitalize on the aging baby boomer demographic, many of whom were thought to be looking to semi-retire on the golf course.

But in the years since Mr. Freed launched his grand plans, he has had to grapple with a number of disappointing realities. Baby boomers haven't materialized as the major force for buyers of vacation homes. Golf course communities have been steadily falling out of favour. Then the global financial crisis hit, crushing demand for recreational homes for years afterward.

Since he launched Muskoka Bay in 2002, Mr. Freed has poured tens of millions of dollars into buying land, building roads and infrastructure. A clubhouse opened in 2009 and the golf course now has 375 members. There are 70-odd homes sprinkled around the course, but much of Muskoka Bay remains the same slice of pristine Canadian Shield that he first set foot on more than a decade ago.

"If I knew what I knew today and I was starting from scratch, I wouldn't do it," he says. "It just takes a lot on all levels. Mentally, emotionally, financially. The works."

Canada's housing market barely blinked in the aftermath of a global financial meltdown, but the same can't be said for the market for vacation properties. Across the country, recreational property values soared in the mid-2000s in the midst of a speculative boom. Developers flocked to beautiful, but remote, reaches of the country and poured millions into ambitious megaprojects, such as luxury resorts and golf course communities.

Many properties were sold to investors as hotel-resorts with promises of big profits from renting rooms to luxury travellers. When demand dried up, investors fled, projects collapsed and prices for vacation homes plunged.

More than five years after the economic downturn, industry watchers say Canada's recreational market is only now starting to turn a corner. Properties that have languished on the market are finding new buyers, including foreigners attracted by the falling Canadian dollar.

Still, many also say the boom years are gone for good. To be successful, resorts must start catering to a new type of vacationer, one increasingly abandoning the rustic charms and traditional cottage life of fishing, skiing and golfing for urban-style amenities. Developers can no longer count on property speculators to support their projects. Today's buyers are people actually looking to use their vacation homes, many of whom are more discriminating and far more price-conscious.

The same forces driving renewed interest in vacation properties are putting developers at odds with small town governments keen to expand the tourism lifeline that keeps their economies churning, while protecting the rustic charms that made their communities so desirable in the first place.

Boomers and the bust

The story of the speculative boom and bust in Canada's vacation real estate industry reads much like that of the housing bubble south of the border. In the early and mid-2000s, easy credit, a seemingly insatiable demand for real estate investments and Canada's growing renown as a vacation destination inspired developers and investors to flock to resort communities with dreams of building vacation paradises, many of them offering thousands of homes built around expensive golf courses, ski hills and marinas.

With its reputation for million-dollar cottages owned by Hollywood celebrities and the Toronto business elite, Muskoka was a prime target. Several developers announced plans for resort hotels and vacation communities, many of them aimed at affluent travellers who wouldn't blink at dropping $1,500 a night on a weekend getaway in rural Ontario.

Among the projects was a $750-million development called Red Leaves, which included plans for a resort community featuring a golf course, marina, hotel and a village of up to 4,000 homes. Another, called Touchstone Resort, was a $75-million development on a coveted piece of Lake Muskoka waterfront, featuring luxury homes sold as fractional units. Similar to a time share, fractional ownership allows multiple people to own the same piece of property, which they can each use for a certain number of weeks a year. At the peak of the market, a one-eighth share of the most exclusive four-bedroom villa at Touchstone, entitling the owner to use it six weeks a year, was selling for more than $200,000.

"Before the market turned, we didn't have to do any work," says Muskoka-area realtor Heather Scott. "We were more order takers than we were helping people buy and sell properties. We were just writing deals."

On the West Coast, developers rushed into communities popular with wealthy Vancouverites and oil-rich Albertans. In the mountain resort city of Kelowna, B.C., builders erected luxury townhouses with granite counter tops and high-end appliances, with price tags to match. There were ambitious plans too in Ucluelet, on Vancouver Island's west coast, to transform a former wartime ammunition dump into a $600-million resort called Wyndansea, featuring 2,000 homes and a golf course designed by Jack Nicklaus.

"I probably wouldn't build a golf course in Ucluelet," says real estate broker Alan Johnson, vice-president of Specialized Assets, a division of Jones Lang LaSalle. "It rains 290 days a year. The winds are horrific."

When Wyndansea filed for bankruptcy last December, it owed creditors more than $100-million and was on the market for less than $8-million. (Mr. Johnson recently sold it to a Vancouver developer. The purchase price was not disclosed.) At Touchstone in Muskoka, units that had been on the market for $200,000 years earlier were being auctioned off in 2013 for $30,000. The Red Leaves resort development went into receivership amid $40-million in cost overruns.

There were simply too many high-end properties being built for the country's small and highly seasonal vacation-home market to absorb, Mr. Johnson says.

Many were built to appeal to investors, rather than actual vacationers, says Chris Fair of Resonance Consultancy, who does market research and branding for resort communities. That meant a glut of bachelor and one-bedroom vacation condos, not the three- and four-bedroom homes many families wanted.

Developers also discovered that building in the unsullied Canadian wilderness is not like building in the cities and suburbs, where most of the costly infrastructure already exists. It can take decades for a rural resort mega-project to turn a profit given that developers typically have to pour tens of millions into cutting down trees and blasting through rock to build roads and sewers and water treatment plants, all before they sell a single unit.

"No one has made that work, ever," Mr. Freed says. "So when you look at a market with something that has never worked, I guess you have to ask yourself why you did it in the first place."

Lenders and investors also shoulder some of the blame. Many were far too willing to lend huge sums to large projects in areas that couldn't attract enough immediate demand to justify the cost.

"I've done a lot of foreclosure work for a lot of the big banks and secondary lenders," Mr. Johnson says. "You look at how much money some of these projects have lost and I shake my head and go: A lot of these were bad ideas."

Year of the resort rebound

After seven years with virtually no new recreational property development across North America, many say the market is finally starting to turn.

Rock-bottom interest rates have made second homes more affordable. The falling loonie is encouraging Canadians to cash out of vacation homes they bought in the United States and buy something closer to home, leading to bidding wars for some properties in Muskoka. "That's actually a pretty big deal in our market," Ms. Scott says. "We don't see asking price or multiple offers very often."

In Whistler, B.C., a vacation home sold for $10-million in May, the highest sale price since 2008. The ski resort town, north of Vancouver, is home to Canada's most expensive listed vacation property, a 9,000-square-foot mansion on the market for $22-million.

Revenue per room at Canadian resorts, an important financial measure for the hospitality industry, is up 8 per cent this year, says Bill Stone of brokerage CBRE Inc. Average nightly rates are up 5.5 per cent.

"Leisure travellers, especially on the resort side, are willing to pay today," Mr. Stone says. "That's a fundamental change."

Lenders and investors are also coming back into the fray. By the end of March, the level of investment in Canadian resorts was triple what it was a year earlier, he says. "I'm calling 2015 the year of the resort rebound in the capital markets," Mr. Fair says. "It really is the first year we're starting to see significant investments from private equity funds and others that are coming back into the resort market."

But lenders remain far more cautious than in the past. Many are still reluctant to bankroll large recreational condominium and resort-hotel projects, particularly those far from major cities, preferring smaller developments of single-family homes and townhouses, which can be built and sold one at a time depending on demand.

Chinese buyers

Increasingly, demand for Canada's recreational properties is being driven by a relatively new force: Chinese tourists.

B.C. has long been a popular destination for Chinese tourists, but visitors from mainland China are now venturing farther afield in search of a more authentic Canadian experience. Organized tours are becoming popular, Mr. Johnson says, often featuring a visit to a farm or winery in the Okanagan, a day of fishing and a night at a lodge on Vancouver Island with a traditional Chinese dinner incorporating local Canadian ingredients.

Chinese investors are picking up on the trend, fuelling demand for resorts, hotels and marinas in smaller communities such as Richmond and Kelowna to cater to Chinese tourists. Mr. Johnson has sold several B.C. resorts, marinas, farms and private islands to Chinese buyers.

"The Chinese buyers see things that we don't see," he says. "In Canada, our development horizon tends to be three-to-five years. Chinese buyers will say back home in China we do 40-year deals. It's a legacy property that a company would have for a long time."

Often Chinese investors are looking at the soaring cost of buying and renting out a home in Vancouver's overheated market and opting to buy waterfront resort projects instead. That has driven up the prices of properties in some regions that historically were never popular tourist destinations. "I look at some of the prices that are being paid and I think they're being very aggressive," Mr. Johnson says.

Urban resort trend

Beyond foreign investors, Canada's recreational market is changing in fundamental ways. For the most part, the real estate speculators are gone. Today the market for vacation homes is being driven primarily by people who actually want to use their properties, not rent them out for extra income.

Many developers are also abandoning their original focus on the baby boom market and targeting young families instead. "We're actually quite surprised to see that in fact millennials aspire to own a vacation home more than any other demographic," says Mr. Fair, who surveys prospective buyers.

Younger Canadians have far different tastes than previous generations. For one, they're much more willing to travel farther for the ultimate vacation experience.

They are also eschewing traditional rustic cabins built around such time-honoured Canadian pastimes as fishing, skiing and golf in favour of modern architecture built around urban-style amenities, such as shops, bars and restaurants. Walkability, a major force driving urban redevelopment, is starting to matter to resort developers, Mr. Fair says. He predicts the next trend will be "urban resorts" – developments in major cities aimed at vacation home buyers.

Such trends don't bode well for many Canadian resort communities. Shifting vacation preferences have already dealt a devastating blow to several smaller bed and breakfasts, guest ranches and fishing resorts in B.C., Mr. Johnson says. Smaller operations in out-of-the-way locales are struggling to turn a profit. He estimates 70 to 80 per cent of the province's coastal fishing resorts have shut down in recent years.

Mr. Johnson chalks it up to several factors. House prices have soared in many markets, making it difficult for homeowners saddled with huge mortgages to afford a second property or a costly trip to a high-end resort. High gas prices have made RV road trips less appealing.

Vacationers today also have far more options than they did in the past. "Everybody worries about airline travel," he says. "But I can go to Hawaii for $400 return. For me to fly to Anahim Lake [a remote B.C. community] to go to a guest ranch, it's $700 return."

Muskoka and myth

John Klinck bristles at the notion that Muskoka is seen by many as a Hamptons of the North.

"There's the myth and then there's the reality of Muskoka," says the chair of the local regional government, the District Municipality of Muskoka. "We would rather be viewed for what we are and not this misconception that this is the land of the rich and famous."

While Muskoka remains the playground of wealthy cottagers, the vacation property bust reverberated deeply through the region.

The slowdown in new development trickled down through Muskoka's economy, where many residents make a living in construction, home renovation and tourism services. Since roughly 2009, social assistance usage has been rising faster in this region of 65,000 residents than anywhere else in the province over the past several years, local officials say.

"We have far too many children leaving because of the absence of opportunity," Mr. Klinck says.

So signs of a potential rebound in the resort sector are welcome news. Older resorts, many built around renting rustic cabins, are looking to sell or redevelop to cater to a younger, more amenity-focused demographic. Projects like Peter Freed's Muskoka Bay are looking to expand, while those like Touchstone Resort have found new owners who are working to revive moribund development plans.

Local officials say they are open to supporting new development plans. "Our attitude is how can we make it happen," Mr. Klinck says, "because we've got to strike while the iron is hot."

Yet they are also keen to avoid the mistakes of the past by rebuilding the region's tourism industry in a way that can bring more year-round traffic and more services and stable employment for local residents.

Opposition from local residents and established cottagers has made it all but impossible to create any new resorts and marinas along the region's coveted lakefronts, so the municipality is focused on preserving the existing commercial developments along its shorelines, making it difficult for developers to create purely residential developments on the waterfront.

To prevent any more waterfront from being turned into yet another private enclave of wealthy summer residents, local zoning requires that all new waterfront development contain some rental accommodation. That is forcing developers back into the hotel-resort model, which requires buyers to rent out their summer homes for at least part of the year.

Not surprisingly, some developers are fighting back against requirements to build such products, which proved disastrous to many during the last vacation property downturn.

"Something about me as a capitalist is against it," says Gil Blutrich, head of Skyline International Development, which owns several resorts in Ontario. "I'm buying real estate and now you're telling me that I need to take my suitcase and take my kids and leave because some planner had a vision? It created a situation where you were completely dependent on the financial performance of the hotel."

Mr. Blutrich profited handsomely from the downturn in the vacation sector, scooping up resorts north of Toronto at a fraction of what they had cost only years earlier. He purchased the century-old Deerhurst Resort in Muskoka in 2011 for $26-million only a year after the previous owners poured nearly $90-million into upgrades ahead of hosting a G8 summit.

He recently put Deerhurst back on the market to help finance a $500-million resort community development he is proposing to build on adjacent land. (Skyline is reportedly asking $55-million for the resort.) Local officials have been amenable to his Deerhurst development plans, Mr. Blutrich says, but he has run into stiff resistance for a grandiose master-planned resort community he's proposing on land Skyline purchased in 2006 from Canadian Pacific Railway in Port McNicoll, a former industrial community on the shores of Georgian Bay.

So far he has sold 60 waterfront lots, pocketing three times what he paid for the entire site, but in the nine years he's owned the property he has yet to get approvals for a single building.

"At one end you're pouring money in," he says. "But if you have nothing to sell there is a limit of how much my shareholders can wait and say let's continue to pour money into this."

The long game

More than a decade into his Muskoka odyssey, Mr. Freed is circumspect about his future plans.

It may take another 10 years, he says, before his Muskoka Bay golf course reaches its desired 700 members, up from roughly 375 today. He recently formed a partnership with a group of Canadian investors who purchased the struggling Touchstone Resort in 2013 and is rebranding the two properties under the name Freed Resort Communities.

Mr. Freed will manage and develop Touchstone, where he is planning to build a new dockside restaurant and another 66 units on the property, and guests at both resorts can share amenities. He's also planning a new condo development at Muskoka Bay.

But far from his original vision of 1,000 homes, Mr. Freed says he'll be happy to sell 25 or 35 homes a year in Muskoka.

"It feels like there's just so much potential here that's just starting to show itself," he says. "But you certainly need a long-term view. Any developer who thinks they can come in here and sell 100 homes or 200 homes and be in and out in two or three years, I hate to say it, but they'd be out to lunch."

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