A new division of Concert Real Estate Corp. has made its first acquisition as the company hunts for growth in a frenetic commercial real estate market.
After nearly 30 years of developing properties – with roots building rental housing in British Columbia – Vancouver-based Concert recently opened its doors to new investors, looking beyond its 19 pension-plan owners for capital. The company's resulting commercial real estate fund is now making its first investment: a warehouse and distribution facility in Brampton, Ont., purchased for $158.3-million at auction.
The deal highlights Concert's efforts to adapt amid an accelerating commercial real estate market in which land and asset prices in many parts of the country have climbed as an increasing number of foreign investors open their wallets. All categories of commercial real estate – from office property to hotels and retail – saw an uptick in transaction volume in Canada last year, according to data from real estate service firm CBRE Group Inc. CBRE noted that foreign capital was particularly active in the Canadian market in 2016, with buyers coming from China, Europe and the United States.
"It's very, very competitive and – in the industrial area particularly if you think of [British Columbia's] Lower Mainland and to a certain extent Toronto – you're really dealing with a constrained availability," said David Podmore, CEO and co-founder of Concert, noting that there were many bidders for the Brampton warehouse property, whose tenants include Winners and HomeSense parent TJX Companies and outdoor gear retailer Mountain Equipment Co-op.
Grappling with a low-interest-rate environment in recent years, institutional investors have increasingly turned to real estate for higher returns in their hunt for yield, and development of new property has picked up significantly in the years since the financial crisis.
As land has become more expensive – especially in Toronto and Vancouver – the economics of Mr. Podmore's preferred investment in apartment buildings has become less feasible.
"Land prices have gone up to the point where it's very difficult to build rental housing," he said.
These shifts in the property market have prompted Mr. Podmore and Concert's board of directors to alter their strategy. Starting this year, the company hit pause on the 30-per-cent annual dividend it had been paying to its owners with a goal to reinvest that cash into new developments. To grow the business even faster, Concert hived off $1-billion of its office and industrial assets into a new fund, CREC Commercial Fund LP, and opened it up to new investors, attracting 14 pension funds and other institutions on top of new investment from some of its existing backers.
Concert's pension ownership means that the fund has to act more conservatively than some investors, and favours buildings that will generate predictable cash flows and are insulated from vagaries of economic cycles. To that end, the fund has also expanded into building infrastructure through public-private partnerships, such as elementary schools in Saskatchewan and Alberta, and Ontario Provincial Police regional headquarter buildings.
Mr. Podmore said he would rather build structures from scratch, but sometimes a finished asset comes on the market that's just what the fund is looking for. That was the case with the warehouse in Brampton, which is close to rail lines, the Toronto airport and a city from which to draw labour. As a bonus, it's on a large parcel of land with 38 feet of clearance from floor to rafters.
"With the value of industrial land going up I think you're going to see a trend toward what I would call more vertical industrial," he said.
Still, Mr. Podmore is quick to note that he isn't giving up on apartments. "You might have a low return for some time, but it's the most stable asset class and it has really significant potential to increase in value over time, particularly as rents rise."