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Rapid migration to urban centres such as Nashville, Tampa and Dallas, seen here, has piqued interest from investors.

LAWRENCE JENKINS

Canada Pension Plan Investment Board will invest US$350-million in apartments in the U.S., an attempt to capitalize on the pandemic-fuelled real estate downturn and housing shortages south of the border.

The apartment investment is a joint venture with CPPIB’s latest real estate partner, Greystar Real Estate Partners LLC, which is headquartered in South Carolina and will front US$39-million for a 10-per-cent stake. CPPIB will hold the 90-per-cent stake.

CPPIB, which has $43.6-billion in office, retail, industrial and residential real estate in Canada, the United States, Britain, Australia, Brazil, China and India, has been expanding its multifamily housing portfolio. The arrangement, announced on Thursday, is similar to the pension fund’s other foray with Greystar, where CPPIB controls the majority stake in a joint venture to develop rental housing in Sao Paulo.

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“Multifamily can be quite lucrative, obviously depending on the asset and location,” said Roelof van Dijk, senior director of research for Colliers Canada. Apartment vacancy rates are generally higher in the U.S. than in Canada. But Mr. van Dijk said now is probably a good time to pick up assets and capitalize on coming changes and mobility trends in a post-COVID world, particularly given Americans are more mobile than Canadians.

The U.S. homeownership rate increased last year after declining in the years after the country’s housing bubble burst and the ensuing recession. However, rapid migration to urban centres such as Nashville, Tampa and Dallas has piqued interest from investors. CPPIB said the joint venture would develop mid- and high-rise apartments in urban centres and nearby suburbs in major U.S. markets, including coastal cities and other regions with strong population and job growth.

“It’s a good time to invest in apartments. Multifamily is seen as being less challenged compared to office and retail,” said David Bitner, head of global capital markets research for Cushman & Wakefield, a commercial real estate firm. Mr. Bitner expects rental rates to increase when the pandemic eases and the economy rebounds.

Real estate is a key component for CPPIB portfolio. It accounted for 9.5 per cent of CPPIB’s $456.7-billion assets under management, according to its most recent financial results. The fund’s other asset classes include public and private equity, government bonds and infrastructure.

During the pandemic, commercial real estate owners have been hit from ailing retail tenants and hotels. It is unknown how CPPIB’s real estate unit is performing, as the fund only discloses detailed results once a year.

The pension fund has already lost its investment in Neiman Marcus Group Ltd. LLC when the luxury retailer exited Chapter 11 proceedings in U.S. Bankruptcy Court last fall, but retained an interest in an online retail business that is expected to offset some of that loss.

In CPPIB’s fiscal year ended March 31, 2020, real estate had a return on investment of 5.1 per cent. That was in a period where commercial real estate markets were booming.

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Asked whether real estate would have positive returns this fiscal year, CPPIB president Mark Machin told The Globe and Mail in November that he hoped it would turn a profit, though he said the fund has been tough on real estate valuations.

CPPIB’s global real estate competitors have already signalled problems stemming from the health crisis. The chief executive of Ivanhoe Cambridge, the real estate company owned by Quebec’s pension fund, said it will post a loss this fiscal year and is trying to divest some of its Canadian shopping malls. Brookfield Property Partners’ parent company is trying to take it private after the real estate investment trust posted two straight quarters of losses and had to layoff one-fifth of its U.S. retail staff.

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