BGO is embarking on a new national value-add commercial real estate strategy and has closed on the acquisition of its first two industrial properties for the portfolio in Montreal.
The global real estate investment management firm, which has its Canadian headquarters in Toronto, sees a large runway for the strategy particularly with current market conditions. Managing director and portfolio manager Chetan Baweja told RENX BGO has already identified potential acquisitions which top $1 billion in value.
“The rapid rise in (interest) rates over the last year initiated a repricing of assets which will hopefully allow us to deploy capital at an attractive basis at a lower point in the economic cycle,” Baweja wrote to RENX in an email exchange. “In addition, we are seeing a real increase in motivations for market participants to sell good quality assets to fulfill a wide variety of liquidity needs.
“As a result, we’ve been assessing a large and growing pipeline of opportunities for the strategy which now exceeds $1 billion in total potential investment.”
Baweja declined to say how much equity BGO is hoping to raise for the strategy – which is being added to its existing complement of investment strategies.
The Montreal industrial acquisitions
The first two properties acquired for the value-add strategy are 5400-5490 and 5550-5750 Thimens Blvd. in the Saint-Laurent Industrial Park on Greater Montreal’s West Island, just 1.5 kilometres from the Trans-Canada Highway.
The small-bay properties comprise approximately 236,000 square feet of space and sit on a 12-acre rectangular parcel of land.
“Proximity to the Trans-Canada Highway is a significant demand driver for Montreal industrial occupiers as the location provides distribution access throughout the island of Montreal, the broader Quebec/Ontario markets and the U.S. border,” Baweja wrote. “The portfolio is also minutes away from Montreal-Trudeau International Airport.”
The property is 95 per cent leased to a range of industrial tenants in the wholesale trade, logistics and transportation, retail and construction sectors.
The buildings are certified BOMA Best and BGO said they have been well-maintained by the previous institutional manager.
The value of the transaction was not disclosed, but Baweja wrote “we were able to acquire the asset at an attractive basis that we believe is well below replacement cost.”
Enhancing value of the properties
BGO intends to employ several strategies to enhance the value of the assets.
“Based on BGO’s deep experience in the Montreal industrial market (we manage close to four million square feet of industrial properties in Montreal, including a number of properties in the Saint-Laurent submarket), we believe there is a significant gap between in-place and market rents in the portfolio,” Baweja wrote.
“We intend to carry out value-enhancing capital improvements and implement a proactive leasing program to drive outsized income growth in the portfolio.
“The improvements will include upgrades that will benefit the existing tenants in the portfolio and continue to attract high-quality tenants at market rates. For example, we see an opportunity to convert under-utilized units and spaces into more functional, industrial warehousing space.”
In-place rents for most of the units are also below current market rents, offering opportunity for additional revenues on renewals.
BGO's new value-add strategy in Canada
The value-add strategy will target mainly Canada’s three largest urban markets, but will also seek investment properties in other major centres.
“BGO’s value-add platform has a primary focus on Canada’s largest markets: Greater Golden Horseshoe, Greater Montreal and Greater Vancouver,” Baweja wrote. “We are focused on these markets given they benefit most from immigration (and) highly educated workforces and are global centres for business and innovation.
“Our secondary focus is on markets benefiting from high population growth and strong local economies like Ottawa, Calgary, Edmonton and Victoria.”
The fund has a strong focus on industrial and multifamily, but Baweja said it will invest in value-add opportunities across all sectors, including alternatives such as data centres and student housing.
“In both the industrial and multifamily sectors, we see strong, long-term demand drivers and a clear shortage in supply, which presents significant opportunities to reposition/upgrade aging existing product, while targeting new development in areas where supply/demand imbalances are most acute,” he wrote.
“Severe shortages in supply are structural in nature due to the challenging regulatory obstacles surrounding development, land scarcity and increased construction (and) financing costs.
"When you layer on record levels of population growth and sector tailwinds, such as continued growth in e-commerce penetration, this explains why Canada has been witnessing historical lows in availability in both the residential and industrial sectors.
“Vacancy rates in the rental market are at their lowest in over 20 years and if you rank North American cities based on industrial availability, Canada’s cities make up the top six spots.
“In industrial, this creates opportunity to target under-utilized sites in prime locations that are suitable for repositioning or expansion.
"In multiresidential, we believe the affordability crisis that has resulted from these structural drivers creates a significant opportunity for us to help fulfill a need for better quality 'missing middle' housing in Canada’s largest markets as well as surrounding areas that are seeing spillover growth from the largest urban centres. “
BGO is a global real estate investment management advisor, real estate lender and provider of real estate services. It is a part of SLC Management, the alternatives asset management business of Sun Life.
BGO serves over 750 institutional clients with approximately $83 billion US of assets under management (as of June 30, 2023) and expertise in the asset management of office, industrial, multiresidential, retail and hospitality property.
It has offices in 28 cities across 14 countries.