Neighbors to the North Emerge As Largest Foreign Investor In U.S. Real Estate

Canadian Investors Dominating Cross-Border Real Estate Investment Activity

February 20, 2013

As a handful of major deals this month attest, Canada continues to be the most dominant foreign investor in U.S. assets, with a total investment more than triple that of its nearest competitor country, according to Jones Lang LaSalle.

“Canada emerged from the recession in better financial shape due to its banks issuing recourse loans and suffering fewer hits during the mortgage meltdown versus other countries. These deeper pockets allowed Canadians to invest in U.S. real estate when values were most suppressed,” said Steve Collins, international director of Jones Lang LaSalle’s Capital Markets, who attended last week’s Association of Foreign Investors in Real Estate’s (AFIRE) annual Winter Conference in New York.

“For 2012, Canadian investment represented about a third of all foreign investment into the U.S., but this Canadian pipeline could slow as property values rise and our nearest neighbor realizes some of their gains,” said Collins.

Canadian pension funds accounted for the most significant cross-border activity into the U.S. in 2012, with the largest volume of activity reaching $2.11 billion executed by CPP Investment Board.

For three decades until 2005, Canadian pension funds were legally limited to a cap on the amount of investment they could deploy outside of the country. However with the elimination of the Foreign Property Rule (FPR), Canadian funds are now free to invest larger allocations.

Much of this investment activity has targeted retail space, with particular interest in coastal markets such as Seattle, San Diego and San Jose. While apartments, hotels and industrial properties have been the primary mix of deals so far in 2013 and newly formed Canadian REITs are emerging among the buyers.

Brookfield Acquires Quality Portfolio of Apartment Communities

Toronto-based Brookfield Asset Management Inc. this past week acquired a portfolio of 19 apartment communities with 4,892 units in North Carolina, South Carolina and Virginia for a total of $414 million from Babcock & Brown Residential.

This portfolio is concentrated in the Charlotte and Raleigh-Durham submarkets. According to the buyer, economic and population growth in the region is expected to yield superior occupancy rates and rental increases. The average occupancy of the portfolio is 92%. The portfolio is currently financed with individual non-recourse first mortgage loans which have been assumed as part of the transaction.

Fairfield Residential, an affiliate of Brookfield, has an existing geographic footprint in these same markets and will manage the assets in the portfolio.

Brookfield intends to invest an additional $30 million to maximize value in the portfolio by selectively upgrading and repositioning assets to increase rents and return on investment. This transaction will bring Brookfield’s growing multifamily portfolio to approximately 20,000 units throughout the United States.

‘Full Steam Ahead’

Another Canadian firm, American Hotel Income Properties REIT, launched its initial public offering last week raising nearly $86 million. Upon closing, the Vancouver, British Columbia-based REIT will acquire a U.S. portfolio comprising 32 hotel properties with 2,565 rooms in 19 states currently owned and operated by Lodging Enterprises for $127.5 million. Lodging Enterprises, an affiliated company, will continue to manage the hotels.

The initial properties are located near high volume railroad hubs and switching terminals across the U.S. The hotel properties have agreements with several of the largest U.S. railroad operators, Union Pacific Corp., Burlington Northern Santa Fe LLC and CSX Corp., as well as Canadian Pacific Railway Limited, to provide lodging accommodations for railroad employees under contracts stipulating guaranteed minimum occupancies, which provide the REIT with recurring revenue.

The initial portfolio will also provide a platform on which to expand the REIT’s portfolio and activities through a combination of organic growth, participation in strategic development opportunities, and accretive acquisitions, the company said.

Industrial Play

Earlier last month, Toronot-based Agellan Capital Partners Inc. completed its initial public offering this month for its Agellan Commercial Real Estate Investment Trust raising $155 million. It then rolled up a number of U.S. properties it controlled through other affiliates into the REIT.

On closing of the IPO, the REIT directly or indirectly acquired 47 properties containing 4.2 million square feet of gross leasable area. The bulk of the portfolio is in the U.S., 38 properties totaling 3.3 million square feet.

Besides a recovering U.S. economy, Agellan Capital said the current exchange rate environment provides Canadian investors with an attractive opportunity to acquire assets here.

“Over the past three decades, the Canadian dollar has, on average, traded at 80 U.S. cents, which is significantly lower than the prevailing spot exchange rate. Management believes that the buying opportunity created by the current relative strength of the Canadian dollar is unique relative to historical averages,” the company said in its IPO prospectus. The current exchange rate is more than $1.

“In addition, the United States real estate market has underperformed the Canadian market since 2007 and management believes that the United States market currently represents a relatively attractive investment opportunity. Over the last five years, there has been a significant disparity in property appreciation between the United States and Canada. In particular, commercial property prices in the United States still remain more than 20% below where they were prior to the recession of 2008/2009 while, in comparison, Canadian commercial property prices are currently at or above 2007 levels,” the company said.

Selling Canada, Buying U.S.

Dalfen America Corp. in Montreal announced this week that it sold its last remaining property in Atlantic Canada and has re-invested the money in Minnesota. Dalfen sold the Miramichi Business Complex, a single-story office building in New Brunswick largely leased to the government of Canada, and acquired the Cedar Street Business Center; a 67% occupied industrial building in the Minneapolis’ North Central submarket.

In early November, Northeast Bank foreclosed on the Cedar Street property, which was subsequently acquired by Dalfen America.

“While the rental market is extremely tight with only a 3% vacancy rate in the area, the owner/user market is even tighter,” said Robert Kurlender, director of acquisitions at Dalfen America. “There are no comparable high quality, free-standing user buildings for sale in the immediate area.”

Dalfen plans to offer the property for sale to an owner/user who can occupy either the entire building or a portion of it, benefiting from potential leasing cash flow and room to expand in the future.

Over the past 24 months, Dalfen America has closed on 43 buildings and 2.5 million square feet of land across the U.S. and Canada, making it one of North America’s most active buyers of opportunistic and value-added industrial properties and loans.