A unique opportunity in the industrial real estate sector, where it pays to be mid-sized

CanFirst on managing industrial real estate with strategic mid-scale investments

A unique opportunity in the industrial real estate sector, where it pays to be mid-sized

This article was produced in partnership with CanFirst Capital Management.

The demand for warehouse space in Canada has surged as businesses scramble to meet the increasing needs for their goods. Major corporations are actively expanding their footprint: Amazon leased close to 830,000 square feet in Burnaby, British Columbia, as of Jan. 24 2024, and leased an additional 100,000 square feet in Ottawa’s Hawthorne Industrial Park.

Fast fashion giant SHEIN, at the end of 2022, opened a 170,000-square-foot building incorporating warehouse and office space in Markham, Ontario. Purolator has been expanding, since 2021, with new facilities in Toronto to handle higher package volumes. Meanwhile, since 2018, the New York-based investment behemoth Blackstone has invested over $4 billion in acquiring warehouses and industrial real estate across Canada.

In this dynamic market, CanFirst Capital Management, a leader in commercial real estate, is setting ambitious goals for its CanFirst IncomePlus Real Estate Fund (CIPREF). In conversation with Wealth Professional, Vice President Corporate Development Michael Porto and CEO, Allan Perez, of CanFirst, recently discussed the strategic vision to grow CIPREF into a billion-dollar fund.

Growth strategies and market positioning

Known for its disciplined investment strategy and significant footprint in the industrial real estate market, the CanFirst IncomePlus Real Estate Fund boasts a compounded return of over 11 percent annually, since inception nearly six years ago. The Fund’s objectives are to provide a stable dependable return, preserve capital and grow the value of the capital.

Porto outlined the unique market position of CIPREF, noting, “We believe it’s a unique opportunity in the market where it pays to be mid-size.” CIPREF offers an attractive proposition by providing equity-market returns with bond-like risk, leveraging a strong track record and conservative investment approach. As a result, CIPREF is an attractive option to other fixed income investments.

Of the approach, Perez further details, “The primary goal of our core fund is to acquire stabilized assets that can generate consistent cash flow annually with minimal disruptions due to vacancies.

“Our focus is predominantly on properties that are typically leased to a single tenant. These tenants are reliable, financially stable, and often bound by long-term leases with structured rent increases. While no investment can be completely risk-free, our strategy aims to construct a portfolio that is as secure as possible, providing investors with confidence in uninterrupted cash flow. Currently, the average lease term within our portfolio exceeds seven years, which supports a steady cash flow without disruptions for that period.”

“In essence, the core of our strategy centers on acquiring high-quality, stabilized assets, ensuring a solid foundation for consistent returns.”

The Fund’s portfolio is currently positioned with 85 percent of its gross leasable within the industrial sector. The Fund’s holdings outside of industrial reflect the type of optionality the firm is always seeking. For example, their sole office property is a single-story, single-tenant facility leased to Allianz Global Assistance for the next 10 years.

This building, which was acquired by the Fund in 2021, presented a higher entry cap rate than industrial at the time and one that was backed by a very strong covenant. One of the characteristics of the property is that the site and building configuration provides the optionality to covert the building to an industrial use. If the tenant chooses to not renew their lease in 10 years, CanFirst can either seek another office tenant or look to convert the building to an industrial use.

Their latest acquisition in November 2023, however, was more indicative of a traditional transaction by the Fund. CIPREF purchased a warehouse distribution facility from Loblaws Companies Ltd. and subsequently leased the building back to Loblaws for 10-years with a rental rate that increases annually. CanFirst was able to lock-in 10-year fixed debt at a rate significantly below its entry cap rate, resulting in a cash-on-cash return that is expected to be significantly accretive to the Fund over the next 10 years.

The competitive edge of mid-sized funds

Addressing current market dynamics, Perez acknowledged the challenges posed by high interest rates and tepid GDP growth. However, he noted the strong fundamentals in the industrial sector and the potential for careful, strategic investments in contrast to the more challenged sectors like office and retail spaces.

The market has been slow to reward large, diversified real estate strategies, particularly those involving office and retail spaces due to their uncertain futures. This scenario has left many assets undervalued on the books compared to their potential market price. However, this presents a unique opportunity for CIPREF. With its robust portfolio, CIPREF can adopt an opportunistic approach, potentially acquiring these undervalued assets at favorable prices to facilitate strategic growth.

CIPREF sees a distinct advantage in being a mid-sized entity in today's market, capable of leveraging these conditions to expand effectively and deliver on its commitment to its investors.

Investors might find CIPREF an appealing investment option because the fund aims to deliver, over the long term, returns that are equal to or better than those of the equity market but with the lower risk typically associated with bonds. CIPREF’s nearly six-year track record supports this ambition, as it has not only met but significantly exceeded the performance of equities and public REITs.