Canada’s wealthy raiders strike mammoth deals

But might the capital dry up as exchange rates become an increasing factor? Al Barbarino surveys the landscape.

Talk of Chinese investment into US commercial real estate steals the headlines, but it’s the neighbours to the north who continue to invest the most money in the US – and by a huge margin over the competition.

Canada, either alone or with partners from another country, invested a whopping $27.98 billion into US commercial real estate in 2015, according to data from Real Capital Analytics (RCA). That’s four times the amount that came from China ($6.97 billion).

In fact, as in several years past, it’s higher even than the $27.27 billion investment that US firms themselves invested into the US in 2015.

An exponential uptick in Canadian investment into the US in 2015 – from $12.6 billion in 2014 – was largely due to the country’s largest institutions, its developers and its pension funds, which struck several mammoth deals over the course of the year, starting with hundreds-of-millions of dollar deals and stretching into the multi-billions.

Ivanhoe Cambridge, the real estate arm of Canadian pension fund Caisse de Depot et Placement du Quebec, started the year off with a bang when it agreed through a joint venture with Chicago-based Callahan Capital Properties to buy a 42-story Manhattan office tower at 1095 Sixth Avenue, next to Bryant Park, from Blackstone Group for about $2.25 billion.

With more than $35 billion of assets as of December 31 across a portfolio consisting of shopping centres, office buildings and apartment properties in Canada, the US, Europe, Brazil and Asia, Ivanhoe has shown little to suggest it is slowing down along with the Canadian economy.

Nor have many of the country’s largest investors. In October, Ivanhoe made headlines again when it agreed through a joint venture with Blackstone to purchase ‘Stuy Town,’ Manhattan’s largest apartment complex, for $5.3 billion. The joint venture financed that purchase with a $2.7 billion 10-year, fixed-rate Fannie Mae loan originated by Wells Fargo, signing the agreement in December, as first reported in Real Estate Capital.

The deal also ultimately led, in January, to a 600 basis point fall in the retail CMBS delinquency rate – from 8.28 to 2.31 percent – thanks to the resolution of $3 billion in loans tied to the sprawling 11,232-unit apartment complex, Manhattan’s largest.

Hudson Yards: largest development of its kind in US history
Hudson Yards: largest development of its kind in US history

Among other major deals, and also in October, the Canada Pension Plan Investment Board (CPPIB) paid $350 million for a 10.6 percent ownership interest in a diversified portfolio of 722 US logistics properties including warehouses, business parks and light industrial assets, totalling 115 million sq ft.

The Canadian Edge

The Canadians have led the pack in US investment in every single post-recession year, except during certain years that their investment was eclipsed only by the US, the RCA data shows.

In 2013 and 2014 Canada invested (again, with or without partners) more than $11.3 billion and $12.6 billion into the US, while China invested about $3.2 billion and $3.5 billion, respectively. Norway actually out-invested China during 2013, 2014 and 2015.

There are clear geographic and cultural connections between Canada and the US that facilitate that scale of investment.

“They are right next door, we speak the same language, play the same sports, and many of our key business centres are just an hour plane ride away,” says RCA senior vice president Jim Costello.

“They have a high concentration of wealth without a high concentration of high quality commercial real estate,” he adds, noting a “tremendous upswing in the last five years resulting from what was a strong Canadian dollar and [accumulated] petro-wealth that had to be invested.”

As a result, Canada has been part of some major US projects. In one of the biggest and most well-known, Oxford Properties Group, the real estate arm of OMERS, one of Canada’s largest institutional investors, teamed up with Related Companies at Hudson Yards, where they are building the largest private real estate development in the history of the US.

The Chinese still reap much of the fanfare, due in part to the tremendous growth coming from that highly volatile economy in just a few short years, Costello noted. In 2012, when Canada invested $9.8 billion into the US, Chinese investment was just $358 million. The surge that followed was partly a result of loosened regulations from the Chinese government regarding foreign investment.

Chinese firms have made some high-profile purchases of their own, to say the least. In 2014, China’s Anbang Insurance Group agreed to purchase the Waldorf Astoria, perhaps America’s most famous hotel, for $1.95 billion, setting a record for the largest acquisition of a US real estate asset by a Chinese buyer.

It was so high-profile in fact that in September 2015 President Barack Obama broke with tradition and declined to stay at the hotel for a United Nations event, reportedly due to security and Chinese spying concerns.

But the Canadians continue to fly under the radar, while churning out billion-dollar deals.

In April, a unit of Brookfield agreed to buy Associated Estates Realty Corp., a US apartment landlord that had been under pressure from an activist investor, for about $1.7 billion. Including debt, the deal was valued at about $2.5 billion, the companies said.

Toronto-based Brookfield has been expanding its multifamily investing arm as US apartment rents climb, with deals including the purchase of about 4,000 units in Manhattan last year, a stat first cited by Bloomberg.

In another example, in December one of the largest industrial real estate transactions of the year, the Public Sector Pension Investment Board (PSP Investments), one of the largest Canadian pension investment managers, paid $3.15 billion for the acquisition of a 58 million sq ft portfolio of core industrial properties in a joint venture with Abu Dhabi Investment Authority (ADIA) subsidiary Henley Holding Company.

Trouble on the horizon?

But there’s trouble on the horizon for Canada, stemming from the declining value of the Canadian dollar and the price of oil, a commodity which had previously allowed the country to gain much of the wealth that it has pumped into US cities.

Analysts anticipate that the downturn in oil investment will continue to weigh on the Canadian economy, with the Bank of Canada indicating that capital expenditures in oil and gas are projected to fall 25 percent this year.

“Thanks to their vast oil sands they ran up a tremendous trade balance that had to be invested someplace, and it came mostly into the US,” Costello says. But, he adds: “Going forward, the Canadians will need to overcome falling oil prices to keep up the massive foreign investment.”

Ironically, the rapidly growing Chinese economy and its appetite for commodities is credited with helping to increase demand for Canadian resources, yet oversupply has sent the price of oil tumbling. The decline of oil prices has severely weakened the Canadian dollar relative to the US dollar, with the US dollar currently worth $1.40 against the Canadian.

Brian Ward: could be impediments ahead
Brian Ward: could be impediments ahead

The effects are being felt across the Canadian economy. A New York Times article put it into perspective in January, noting that the price of a head of cauliflower had more than tripled since last winter, rising from 2.50 to 8 Canadian dollars. The country’s gross domestic product meanwhile increased just 0.6 percent in the third quarter of 2015 following six months of negative growth.

In terms of real estate investment, “If you are a Canadian investor and you’re already invested and planning to leave your money in the US, you’re getting a huge lift on your investment,” Brian Ward, CEO of Trimont Real Estate Advisors, tells Real Estate Capital. “But if you’re entering the US as a Canadian going forward the changing exchange rate will cause some impediments.”

Looking ahead, “all of the big players will remain active in the US,” he adds. “The Brookfields of the world and the pensions will remain active, as they have diversification and deployment requirements.”

*RCA must allocate volume to one country when there are multiple foreign buyers on a deal. The data credits the furthest country away from the US. For instance, China would get the credit for a deal it completed jointly with Canada.