David Denison, the former chief executive officer of Canada Pension Plan Investment Board, has recently taken the helm of Bentall Kennedy's board of directors, putting him back in the driver's seat when it comes to real estate.
Mr. Denison retired from CPPIB, which has a $20-billion real estate portfolio, last year. But during his tenure there the pension plan would team up with Bentall Kennedy from time to time, so it is an organization with which Mr. Denison has been very familiar.
Bentall got its start as a small Canadian construction firm about 100 years ago, and grew to become a major advisory and real estate services firm. It partnered with U.S.-based Kennedy Associates in 2006 and the two firms later officially joined forces, creating a North American platform. It advises pension funds, insurers and other investors about direct investments in office, industrial, retail, multi-family and hospitality properties. It also has property management and leasing services, in addition to is development business. The company is owned by its own senior managers as well as the California Public Employee Retirement System (CalPERS) and British Columbia Investment Management Corp. (bcIMC).
Mr. Denison, who is also a director of Royal Bank of Canada and BCE, recently answered a few questions about his new appointment and his thoughts on the current state of the real estate market.
You worked with Bentall Kennedy when you were at CPPIB?
We had done some investing with Bentall Kennedy. We had explored doing some development activity together in China, probably six or seven years ago. We spent a lot of time analyzing that market and trying to see whether it made sense for us to be primary partners in development activity. I actually decided not to proceed because the timing wasn't right from both our points of view, but it was a great experience working with them. Then more recently, toward the end of my tenure at CPPIB, we did a number of multifamily development projects with Bentall Kennedy.
Are you now competing against CPPIB in a way?
What I would say is co-opetition. CPPIB has invested alongside Bentall Kennedy and continues to do so, and there is a whole host of other pension plans that use Bentall Kennedy. The large ones, like CPPIB and bcIMC and OMERS and the Caisse and Teachers' all have strong internal capabilities in real estate, so they can do projects on their own, but often they want a partner. In particular, in the United States for tax reasons you typically do need a partner to work alongside you, so I think Bentall Kennedy is terrifically positioned to help even the large ones when they're investing outside of Canada.
The Real Property Association of Canada recently released a report that said industry executives are growing more anxious about the state of the market …
Real estate is a classically cyclical market, so it will go through some periods where pricing can get expensive and cap rates come down to low levels, and in recent years we've seen those trends. That's certainly the case in Canada, as well as in the United States, so I think it is a period to be careful and a little cautious about the kinds of investment one does. There are still clearly some opportunities and well-valued assets you can find, particularly the ones that have strong income. Those are the ones that I think will hold their value and have good returns.
What would be an example of those?
It could go across all asset classes, it depends on the actual nature of the asset. Retail – well-situated malls – tend to be very reliable and very stable performing assets because they have good underlying income streams. You could look at industrial properties as long as they have a really good tenant base, contractual terms that are solid, and the opportunity to raise rates over time. Part of the appeal of multifamily, particularly in the United States, is you're not locked into 10-year leases as you might be with a tenant in an office building.
What trends do you see emerging in this environment?
I think that there is more orientation toward developing properties to hold because it might be more challenging to get value from buying fully-completed and fully-occupied buildings. Most of those assets are fully priced. But if you're willing to take the additional development risk of working through a development cycle and bringing a property to market – and, particularly if you have a long-term orientation, continuing to hold that property for long periods of time – I think that's a particularly attractive opportunity. You need the skill sets, though, to work through the development cycle, and not all players have those skill sets.
I think you're also seeing a lot of interest in industrial assets. Those assets, again, are very good income generators, they're not enormously expensive to build, and they're not complicated to run once you've got them up and going.
This interview has been edited and condensed.