This is an HTML version of anarticle that ran in the April 2014 issue of RealEstate Forum. To see the story in its originalformat, click here.

Although an all-out merger between the US and Canada is notlikely, Canadians are taking a bigger chunk of the US commercialreal estate market.

|

Call it an invasion from the Great White North. Commercial realestate investors and developers—even Canadian banks—have a growingappetite to buy, build or lend against all asset classes in many USmarkets. Yes, what started out long ago with individuals scoopingup residential properties in warmer US climates has become afull-blown CRE trend that's gaining momentum faster than the wintersnow melts across the border in springtime. Some Canadians are evenjokingly referring to the US as “the 11th province.”

|

Canada is the number one foreign investor in US real estate,putting nearly $12 billion to work in 2013, according to AvisonYoung. One of the biggest deals last year was Canada-basedBrookfield Property Partners' $1.1-billion acquisition of Atlanta'sIndustrial Developments International. But GlobeSt.com headlinestell a broader story of deals large and small: Canadian REIT BuysVirginia Hotel Portfolio for $37M; Canadian Developer ProposesHotel; Canadian Buyer Grabs Publix Retail Center; Amazon.comFulfillment Center Purchased by Canadian Investment Firm; CanadianDeveloper to Build Dallas Res Tower; Canadian Fund Acquires 50Rental Homes—and the list goes on.

|

“For several years now, Canadian investors—both institutionaland private—have been gobbling up US commercial properties atbreak-neck speed,” says Dan Carlo, principal with Avison Young andmanaging director of the Toronto-based firm's Miami office.“Canadians, as a whole, have been the most active foreign investorsin US real estate every year since 2010, and were never far behindbefore that. In fact, Canadian investors represented nearlyone-third of the aggregate $90.6 billion that international buyersinvested in US real estate during 2010 to 2013.”

|

What's Driving the Invasion?

|

Headlines out of Canada suggest a myriad of factors is drivingthe invasion from the Great White North. The Toronto Globe andMail reported that Canada's commercial real estate market issoftening after outperforming expectations over the past fiveyears. Financial Times reports Canadian pension funds maybe overexposed in the sector as the market faces big declines.

|

Ciro DeCiantis, a partner in Deloitte's Toronto office who leadsthe firm's Canadian real estate practice, confirms that yields inCanada have compressed and there is the perception that incomegrowth in the near term will be flat. “The thought is that the USmarket is undervalued, there are strong markets and even secondarymarkets with good returns and potentials for income growth in theUS,” DeCiantis says. “The projected decline of the Canadian dollarto around $0.80-$0.85 is a strong motivator. Also, there is almostno product available in Canada.”

|

As Brian Ward, president of Colliers International's CapitalMarkets group in the Americas, sees it, capital flows and thedemand for prudent real estate investments are driving Canadianinvestors' appetites. “There may be some additional motivations,such as a recognition that the US dollar may continue to strengthenagainst the Canadian dollar over the next few years as we move intothe next phase of our monetary policy,” he says. “The US alsoappears to be showing more strong positive trends with employmentgrowth and wage stability.”

|

Avison's Carlo warns that it's risky to generalize themotivation of Canadian investors because there are innumerabletypes of investors—insurance companies, pension funds,high-net-worth investors, REITs, etc.—pursuing a plethora ofinvestment strategies. With that caveat, and in general, he saysCanadian investors have a “very favorable” view of real estate andthe US is an attractive, familiar market which still offersliquidity gaps. He says Canadians can fill these needs and “obtaina premium” over similar investments in Canada.

|

Mark Stapp, executive director of the Master of Real EstateDevelopment and Fred E. Taylor professor in real estate in the W.P. Carey School of Business at Arizona State University, offers agood reminder: It's not just Canadians that are taking interest inUS commercial real estate. That, he says, is because the US hassome of the best-defined, protected property rights in the world,and there are very few barriers to entry. Indeed, just about anyonecan buy US real estate, and stable political and monetary systemsmake it a safe harbor location.

|

“Canadians see this as an easy place to invest in a cultureessentially the same as their own, with ease of access,” Stappsays. “The strength of the loonie to the dollar had made US realestate a very good value for Canadians. The loonie has loststrength compared to the dollar over the past six months, butCanadian real estate is also expensive by comparison, so the valuesfound in the United States are good. The combination makes this agood place to invest. Plus, they get to winter here. Also, Ibelieve that Canadians have some favorable tax policies regardinginvestment properties.”

|

Canada Picks Its CRE Darlings

|

Canadians are hungry for US real estate for many reasons—andinvestors have their favorite product types. In today's market,multifamily is the darling but a close watch on Canadian commercialreal estate investments shows that the appetite runs the gamut fromoffice to industrial to retail and beyond.

|

Colliers' Ward still sees multifamily leading the way. He pointsout a noteworthy market dynamic. When you compare Vancouver toSeattle, or Toronto to Boston in terms of the number of peopleliving in the city, he says, the US has a ways to go—but it appearsthere is a strong trend in that direction. He also believesCanadian investors are looking for stronger yields in relation torisk.

|

“Multifamily pricing has become very aggressive, and may startto cause investors to pause without a clear sense of rent growth,”Ward says. “However, the data suggests that even with current newsupply, there is not enough product to meeting coming demand. Forthose that feel multifamily is too expensive, I would expect themto move toward yield opportunities in office, industrial, retailand hotels, to the extent value in those asset classes exists.”

|

Indeed, Anthony Cocuzzo, a partner from Deloitte's Torontooffice who leads the company's Americas regional real estatepractice, insists multifamily is no longer the commercial realestate darling among Canadian investors. As he sees it, multifamilywas the safer play in a tumultuous market but investment is flowingto opportunities with higher capital appreciation and income growthin a recovering market.

|

“Multifamily has seen significant upward pressure on valuationsas investment has poured into that asset class during theuncertainty of the last several years,” Cocuzzo says. “Canadianinvestors are looking at office and retail to capture rebound inthe US economy, as well as industrial—primarily logistics anddistribution—assets located near major transportation hubs oradjacent to metropolitan areas to capitalize on continued rise ofonline retail and the repatriation of manufacturing.”

|

From Carlo's perspective, Canadian investors often look to theUS for opportunities unavailable to them back home. Very large,“fortress” malls are a good example of that. He says the few suchmalls that do exist in Canada are owned by a very small group ofplayers. For his part, Stapp has a simple answer to the questionabout what product types are satisfying Canadian investor hunger:all types. “There are larger investors buying everything from landto hotels, and small investors buying single-family homes,” Stappsays. “In a market like Phoenix, Canadians accounted for more than90% of the foreign buyers of single-family homes over the pastseveral years.”

|

Canadian Investors Span the US

|

Although Canadian snowbirds flock to condo investments in warmerclimates, the bigger picture of Canadian capital flowing into UScommercial real estate seems to have no boundaries. Carlo suggestsCanadian investors are, in some measure, US geography agnostic.

|

“We see them active in virtually every NFL city, in coastalmarkets, and even in such places as the Dakota flatlands, wherethey are investing in development spurred by the success offracking there,” Carlo says. “Also, we have seen them activelypursuing demographic trends in the US population. For example,following the aging Baby Boomer population by investing in seniorhousing and medical office buildings or following the large agecohort now making its way through college by investing in studenthousing.”

|

Deloitte's DeCiantis tends to agree. He's not sure if one regionstands out more than others, but he has noticed large institutionsfocusing on core markets like New York. Of course, that's nothingnew. “I think yield is the first filter, then evaluated againstlocal economic fundamentals compared to long term economicperformance in that region,” he says. “I also think Canadianinvestors are more willing to look at secondary USmarkets—primarily the REITs—because there is more potential forupside and some secondary US markets have similar economicfundamentals to major Canadian cities.”

|

At the end of the day, Ward says Canadians are no different thanany other sophisticated global investors. They want markets ingeographic proximity to their home turf—such as Seattle, Chicago,Boston and New York. They also look for coastal markets that offerthe best opportunities for strong real wage growth and demonstratedmultiple exit strategies, such as San Francisco, SouthernCalifornia, Washington, DC, and South Florida. “I am seeing moreCanadian investors going global like many US private equity funds,”he says, “and are now aggressively competing for product in the UKand Western Europe.”

|

The Canadian Investment Impact

|

Beyond the big dollars Canadian investors are making into UScommercial real estate, what's the big picture impact? And is therea downside? According to Ward, it's clear that Canadian investorsare creating more competition for US buyers—but so are otherforeign investors.

|

“This is not a foreign capital issue,” Ward says. “It is aglobal capital issue, including both domestic and offshoreresources. The mentality for commercial real estate investment haschanged fundamentally, even with the 2009 market correction, andglobal investors now see real estate as a core component of theiroverall investment strategy into all asset classes.”

|

Carlo sees no downside in the rush from Canadian investors. Byand large, he says, Canadians are stable, patient, andsophisticated investors. He looks at the surge of Canadian capitalas a reaffirmation that—notwithstanding the issues our countryfaces—the US remains a global beacon for investment safety andstability. Carlo does admit Canadians are driving competition butfeels it has helped buoy prices on existing properties and spur newopportunities.

|

“The US real estate market is of such a size that there is amplespace—if not a need—or foreign capital to play a meaningful role,”Carlo says. “Foreign capital has been a market stabilizer. Similarconcerns of being too dependent on foreign capital were raised inthe 1980s when Japanese investors were taking major positions inprominent US properties such as Rockefeller Center in New York. Weseem to have come out from that 'over-dependence' just fine.”

|

How Long Will the Invasion Last?

|

According to Royal Bank of Canada, Canadians purchased, onaverage, between $15 billion to $19 billion each year worth of UScommercial real estate property in the last five years. AlainForget, vice president of sales at RBC, says Canadians are takingadvantage of the perfect storm.

|

“We've seen strong Canadian currency versus the US dollar, lowinterest rates, a soft real estate market, and a strong Canadianeconomy,” Forget says. “Canadians own now more than $50 billion inreal estate assets in the state of Florida alone.”

|

Most commercial real estate industry watchers see the Canadiancapital invasion as a long-term trend—one that has existed for along time and one that will continue. In terms of the current levelof elevated investment activity, DeCiantis says it should alsocontinue, but he notes a few caveats.

|

“It should continue as long as yield differential exists betweenCanada and the US, and as long as there continues to be a lack ofproduct available in Canada,” DeCiantis says. “It should continueas long as there is an expectation that there will be a softeningof the Canadian dollar, creating impetus to acquire now andincrease US holdings.”

|

Ward agrees that this is a long-term trend—unless. He predictsthat a shake-up in the global capital markets could cause investorsto shift to alternative investment strategies or rebalance theirportfolios. As he sees it, the potential for misalignment betweenreal estate, which has traditionally been a long-term investmentclass, and the need to generate returns that are not consistentwith that fundamental, remains an issue for all globalinvestors.

|

“As long as global investors understand that real estategenerally involves a long-term investment thesis, I see little nearterm change in strategy,” Ward says. “Also, keep in mind that muchof the capital driving this market is equity, and not necessarilyhigher-leveraged debt. When there is a correction, theramifications for—and reaction by—equity will be different than ifit were debt.”

|

Avison's Carlo sees Canadian demand in US real estate remainingstrong for the foreseeable future. He notes an X factor: howquickly US real estate prices recover from the Great Recessiontroughs and return to replacement-cost levels. At that point, hesays, we can reasonably expect Canadian capital—as well as thatfrom other global players—to taper its US allocation and reallocateelsewhere. He predicts that emerging markets such as Mexico andBrazil should be the beneficiaries of such a potential pivot.

|

“The reality for Canadian investors is that their domesticmarket is highly concentrated in a few industries and, for the mostpart, in the hands of the largest domestic players,” Carlo says.“So, foreign investment is a portfolio imperative. The US offersthe largest and most familiar investment alternative and, as such,can reasonably be expected to continually receive large amounts ofinvestment across all real estate asset classes from Canadianinvestors.”

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.