Toronto-based Crestpoint Real Estate Investments Ltd. has acquired a 50 per cent interest in a 14-building, 4.4-million-square-foot industrial portfolio in and around Calgary.
Kevin Leon, the president of Crestpoint, told RENX in an interview the deal puts the company’s commercial real estate assets under management at more than $4.5 billion.
“Calgary’s industrial market remains strong as the city continues to establish itself as the major distribution hub for Western Canada,” he said. “Crestpoint is quite active in the industrial market right across Canada. With this acquisition . . . along with our partners . . . we have now over 24 million square feet in Canada.
“I don’t know where that ranks us, but I can tell you it ranks us definitely somewhere in the top 10 in the country. Probably in the top five in the country as far as industrial landlords.
“We’ve had a strategy since Crestpoint started to be long in the industrial sector. We believe it’s just good long-term cash flow. We obviously believe in the fundamentals in the business.”
Crestpoint in major Canadian cities
He noted Crestpoint is already well-invested in other major industrial markets such as Toronto, Vancouver and Montreal, where it is “extremely competitive” to acquire new assets. Leon believes there is opportunity in the Calgary area.
“Previous to this we probably have a couple of million square feet already, but we had room to grow our Calgary portfolio,” he explained.
“What’s really attractive here in Calgary is we’re getting brand new product, three of the buildings are just being finished, and the oldest product is 2008. It’s really high-functioning space.”
Leon said both the yields and the purchase price per square foot in Calgary are more attractive to buyers than in the other major Canadian markets.
Leon said he could not reveal the identity of the partner in the portfolio, nor the purchase price. But he did say the transaction worked out to about $120 per square foot.
The Calgary-and-area portfolio is near the Calgary International Airport, consisting of 14 class-A properties and 131 acres of excess lands. Thirteen of the buildings are located within two industrial parks, Stoney Industrial Centre and StoneGate Landing.
The other one is located in the CN Calgary Logistics Park in Rocky View County, just north of the other portfolio buildings.
Crestpoint said the portfolio is leased to a diverse roster of national and international tenants including Walmart, Whirlpool Canada and Kuehne + Nagel. All are new-generation distribution facilities.
“Brand-new” distribution centres
“They’re brand-new. The 4.4 million square feet includes a couple of buildings that haven’t been completely finished but they will be finished in the next couple of months,” he said.
“We do believe ONE Properties, who is the property manager and the developer, built really good products. We believe in them as a leasing manager.
“So, we think they’re going to be effective at leasing up the remainder of the portfolio and generating good long-term returns for the portfolio.”
Leon said the existing product is almost 100 per cent leased with the exception of one vacant 600,000-square-foot building finished earlier this year. A 500,000-square-foot building that’s just being finished has a small amount of pre-leasing.
“Our job and ONE’s job, obviously, is to attract some tenants and we believe that will be the case. . . . Just a great location, great buildings. But, we’ve got a little bit of work to do.
“What I found interesting about Calgary when I got into the business in the ’90s and early 2000s, I looked at that market and said – this is before I started at Crestpoint – there’s a lot of older product in this market.
“It seems like fundamentals are good just from a population growth, from an infrastructure perspective. All positives about Calgary. Obviously the oil and gas sector is extremely dominant in Alberta, but even back then I would say the distribution and warehouse was diversified more than the office sector in Calgary.”
Good new product available
In the last 10 to 15 years in Calgary, several developers have come into the market and developed good product.
“So you’re seeing a lot of demand and a lot of absorption in the industrial market in Calgary,” Leon explained, noting vacancy rates remain in the single digits. “I think we’re realistic to know that absorption, based on the new supply, could take us a little while to lease up all that space.
“But on the other hand, we think we have such a great location, great buildings and so we believe we’re going to be very competitive with anybody in the market.”
He said Crestpoint believes its yield will be around six per cent once the portfolio is fully leased.
He said the company expects to continue to grow its portfolio in Calgary in state-of-the-art distribution facilities.
According to commercial real estate firm Cushman & Wakefield, Calgary’s industrial market continued to demonstrate strong growth throughout Q2 2019.
While speculative construction slowed in 2016, it has rebounded this year. Calgary’s industrial construction completions totalled 2.2 million square feet in Q2 and four million square feet year-to-date. Another 6.4 million square feet are in the planning stages.
“Behind the demand for industrial space are e-commerce and the distribution sectors, as tenants continued to seek state-of-the-art distribution and warehouse space with greater efficiencies,” said the report.
“Calgary’s secondary and tertiary markets also experienced heavy demand, which resulted in tighter market conditions and rental growth.”
Calgary industrial vacancy dips
The overall vacancy rate declined 20 bps year-over-year, closing the second quarter at 7.3 per cent.
“Historically, Toronto, Vancouver and Montreal have attracted the majority of investors’ interest; however, Calgary’s tightening market fundamentals have proven the city to be a competitive market.
Investment sales remained strong in the second quarter of 2019 with cap rates ranging between five per cent and six per cent,” said the Cushman & Wakefield report.
“The industrial market is expected to remain competitive as Calgary continues to be recognized as the major inland port for Western Canada.
“While low oil prices and pipeline disputes will continue to hamper energy investment, the transportation and warehousing sectors are expected to continue to bolster demand.
“With the development pipeline remaining robust and tenants seeking out greater efficiencies, vacancy rates are expected to begin to increase in the second half of 2019 as the new construction cycle begins to exceed demand and older-generation product lingers on the market.”