It's clear that the U.S. economic recovery isn't helping the country's residential housing market. The inventory of foreclosed homes available for sale is shocking.
But there is also a good chunk of commercial real estate on the market, and it's luring Canadian buyers south of the border. Some of it comes from bank auctions of reclaimed properties, but other buildings are simply owned by private equity funds that are selling off their portfolios' non-core assets.
Second City Capital Partners, with big names like Sam Belzberg on board, is one of the latest Canadian firms to make a play. It is in the midst of raising money for its second fund, and just closed on its first acquisition using funds already raised. The $16.5-million price tag for the St. Petersburg, Fla., property isn't massive, but Second City plans on buying more in other urban areas like Minnesota's Twin Cities, which have healthy, stable clients (like Cargill) but aren't top-notch locations like New York and Chicago.
Distressed U.S. commercial real estate is particularly appealing to those who can afford to buy right now because some of the assets are in great shape. It's one of the main reasons RioCan REIT ramped up its buying south of the border last summer. The REIT scooped up some of the best shopping centres in the U.S. dirt cheap because the owners had funding issues stemming from weak retail consumers. RioCan, however, has enough of a funding buffer to be able to wait until the U.S. economy recovers.
However, not all properties have tenants when they are sold. Some are in the midst of construction -- sometimes as much as 90 per cent completed. Second City also eyes this market because it has a partnership with real estate developer Bosa Properties, which can come in and finish the jobs.
Canadian firms have had some success financing these types of purchases because funding hasn't completely dried up for them. Conversely, the U.S. firms that are selling can't get access to leverage, which is crucial because they can't hit their internal rates of return without it. With no leverage, they have to use too much equity collateral.
Tim Kiladze