Canada's largest institutional investors are flocking to the U.S. commercial real estate market, elbowing aside competitors for prominent properties in cities such as New York, Chicago and San Francisco.
The investment hit a new high in 2015 as Montreal-based Ivanhoé Cambridge and a partner bought a landmark office building called Three Bryant Park in New York City for $2.2-billion (U.S.) – a deal set to be the largest U.S. acquisition of a property ever made by a Canadian investor, according to data from Thomson Reuters.
Managers of institutional capital from around the world are seeking opportunities to buy into the buzzing U.S. market, and Canadians are leading the charge. Canada poured $12.1-billion into the U.S. commercial real estate market in 2014, the most since 2006, data from real estate research firm Real Capital Analytics shows. This was close to double the amount bought up by the second largest nation of investors, China.
And if the most recent bid of Ivanhoé, the real estate investment arm of pension plan manager Caisse de dépôt et placement du Québec, is any indication, then 2015 is poised to be another hot year for real estate deals in the U.S.
Ivanhoé, the real estate investment arm of pension plan manager Caisse de dépôt et placement du Québec, has been most successful in buying properties in New York, and now has more than 5.5 million-square-feet of the city's real estate in its portfolio, says Adam Adamakakis, executive vice president of US Investments at Ivanhoé. Since New York has more office space than all of Canada combined at about 400-million square feet, Mr. Adamakakis said there's room to grow even further. Ivanhoé has more than $40-billion (Canadian) in global assets.
The more deals Ivanhoe does in the U.S., the more it builds scale and its reputation as a serious investor in the market. "We feel it allows us to have a pulse on the market and see all the leasing deals going on. It allows us to get operational efficiencies," said Mr. Adamakakis. "I think another benefit of it is we get to see the deal flow and… that we can be very agile and respond quickly to opportunities."
The United States isn't alone in drawing investors' attention. There's a lot of capital looking for investments in "core quality properties in the most dynamic markets in developed countries," said Richard Clark, chief executive of Brookfield Property Partners LP, in a quarterly call with analysts in November.
Other Canadian pension funds have also been actively seeking real estate investments of late as a way to generate predictable returns amid a low interest rate market. Canada Pension Plan Investment Board recently committed to a $234-million joint venture to build a residential, office, retail and hotel space in the city of Suzhou, China, for example. And Ontario Municipal Employees Retirement System's real estate unit, Oxford Properties Group, has invested $5-billion in London since 2008.
"We had been exploring the sale of interests in a number of stabilized office properties in the U.S. and the U.K. In light of market demand, we anticipate strong interest among institutional investors for these assets and are targeting raising over $1-billion of equity from this initiative," Mr. Clark said on the call.
Ted Willcocks, global head of asset management in real estate at Manulife Financial Corp., said investors face stiff competition for assets. In December, 2014, Manulife partnered with German insurance and asset management giant Allianz SE to invest $1-billion in two office buildings in Chicago and Washington.
"It's challenging to buy property at proper investment returns right now," Mr. Willcocks said in an interview in December. "Certainly in California – L.A. and San Francisco in particular – it is very difficult to get reasonable real returns given the high pricing expectations."
Ivanhoé Cambridge has also been picky to find the best risk-adjusted returns for investors.
"We had looked at a number of very large transactions last year in the U.S. and decided to pass on many of them," Mr. Adamakakis said. When Three Bryant Park came up, Ivanhoé deemed it to be one of the top five high-quality assets in New York City, and a rare opportunity to lock in a cornerstone investment for its growing portfolio. The property also has a very stable cash flow, he said, and high quality corporate tenants that include Verizon Communications Inc. and MetLife Inc.
For Ivanhoé Cambridge, the purchase of Three Brant Park represents the continuation of its strategy to sell down assets such as hotels and one-off assets and the recycle that money to buy office and residential buildings in key cities in Canada, the U.S., Europe, Brazil and Asia.
Ivanhoé's U.S. expansion plan is focused on nine key cities with dense urban centres, and the group is behind many of the largest U.S. real estate deals of the past decade. Ivanhoé partners with real estate private equity firm Callahan Capital Partners on many U.S. deals and credits the company with helping Ivanhoé move quickly and deploy capital in a market outside its Canadian comfort zone.
Ivanhoé says its partnership, and purchases concentrated in cities such as New York, have made it a more competitive investor.
"Having the critical mass and the people – the boots on the ground – we believe enables us to have our finger on the pulse of what's going on in the leasing markets and address that from a renewal and new tenant standpoint, but also more importantly from an investment standpoint," Mr. Adamakakis said.