By Kerry Gold
April 25, 2022
Institutional investors are increasingly moving into the development space in the Vancouver region and are partnering with local developers to make it happen.
A panel discussion at the Vancouver Real Estate Forum on April 12 provided context for the increasing joint venture investment occurring in the region.
There are the fundamentals, for a start.
Metro Vancouver is constrained by land availability and demand has pushed prices upward in every asset class. At the same time, the province, which had a net migration of more than 100,000 in 2021, is undergoing a shift from a resource-based economy to technology and life sciences, according to moderator Jim Szabo, vice-chairman, capital markets for CBRE.
“I’ve lived through six or seven cycles and they are all different. This one is really positive for us,” said Szabo. “There are some headwinds blowing, but I think we will weather the storm better than most and we will probably be one of the best-performing markets, if not the best-performing market, in North America in the next couple of years.”
The quest for local knowledge
Investors seek out developers for collaborative relationships that could become long-term. Kathy Black, vice-president, development, for global investment manager Fiera Real Estate, said it has become more challenging to find existing properties, so her company pivoted toward development.
She said Fiera partners with local developers who are also collaborators and day-to-day development managers who understand the local environment.
“We don’t run our developments on our own, but we are relying strictly on strategic partnerships to do so. As we all know, development is such a local business, and a local game, you really have to know the ins and outs of municipalities, what the restrictions are, what the (official community plan) is allowing for . . . knowing when the enabling policies are coming out and expedite that timeline and take advantage of that.”
Jeff Fleming, executive vice-president, investments & development for GWL Realty Advisors, said its core investments have been assets that are under management, as in cash-flowing properties. GWLRA’s clients are looking at real estate as a “strategic position” within their portfolios, representing about 10 to 20 per cent, he said.
“There is a perpetual and chronic imbalance between supply of opportunities for investment and demand from investors,” said Fleming. “That has served to drive pricing, which is great if you own, but if you are trying to get in, it is challenging.”
Stronger financial returns
Seeking higher financial returns to investors, the firm has adopted a value-add strategy, said Fleming.
“That’s development in our case, and some of it is repositioning — whatever you need to do to add value, because the three to four per cent returns are closer to bonds, quite frankly. So at the end of the day, this is just a strategy within the real estate space to try to enhance those returns back to what the original intent was,” said Fleming.
Nick Macrae, senior vice-president of investments, Woodbourne Capital Management, said the American company moved into the Canadian market about 15 years ago, with a focus on residential development. Prior to joining Woodbourne, Macrae had been the senior portfolio manager, real estate, at the Healthcare of Ontario Pension Plan (HOOPP).
“We’re focused on residential, effectively as a private equity real estate firm, where we invest through closed-ended funds, usually 10 years in duration,” he said. “And, across the country, we are really focused on residential with a capital-R, looking at apartments, seniors housing, student housing and even some co-living as well.
“Being a closed-ended fund, we are in a higher-returning space, generally trying to target high-teens returns.
“That’s part of our approach and we execute in what I call a hybrid model, where five to six years ago we built out a management firm for property management of residential but we partner with developers . . . we co-develop and do some selective development ourselves, so investing across the spectrum.”
Sharing of expertise
PC Urban Properties Corp. principal and chief executive officer Brent Sawchyn said as a merchant developer who works with a myriad of asset classes he’s looking for truly collaborative capital partnerships. Underwriting the project is easy; it’s the partnership that takes time, he said.
“The partnerships we’ve taken on, the capital sources, it wouldn’t be the passive money per se, where they are never going to make a phone call. We welcome the collaborative approach, particularly in Vancouver, as the market gets more difficult.
“Not everyone always has the same answers and as a result we have reached out in different asset classes, finding out which different asset classes appeal to what particular capital partner — and
then finding a relationship and a partnership that works, that we feel comfortable with.”
Sawchyn has had particular success in the Vancouver market with the stacked industrial model, with more than 16 such projects in various stages.
“Those have worked quite well with one capital partner in particular, because they are in and out fairly quickly. I’d like to find more of them, but the land is getting a little more expensive,” he said.
“The industrial strata market can be in and out in 26 to 32 months, so it’s a value-add play that’s trying to generate a high (internal rate of return), moving in and out quickly. That is an opportunity fund, and those would be highly sought, I would think.
“And everyone is interested of course in multifamily, particularly in Vancouver . . . but again, those take a long time. We find there is a bucket of money for quick, higher-return stuff and then there is a bucket of money for stuff that takes a little longer and getting to that 2x and the various multiples.”
Risks and rewards
In terms of risk and returns, there’s been a levelling off between the different asset classes. Fleming said portfolios used to be structured around those differences.
“That’s somewhat disappeared. In Vancouver, we could be talking about an office building, an industrial building, an apartment building and we are pretty squarely in that three to four per cent range”
For the institutional investor, real estate returns should be higher than bonds and offer better stability than equities and long-term cash flow, he said.
“Everyone will have different answers, but I will go out on a limb and say seven to eight per cent IRRs, unlevered. We use very little debt, even in our development program, so everything I talk about is unlevered, generally.”
As for the division of investment, Black said they often put up 80 per cent of the capital, with the developer putting up 20 per cent. However, each deal is customized to suit the project and the partnership.
“Currently we have 38 active development projects, and they all have different structures, dependent on asset class, dependent on market, because we are diversified. We are not measuring each project the same way.
“There are structures to try to achieve that return for that specific market for that specific asset class. We have co-ownership type of ventures and (limited partnership agreements). We are very comfortable with both.
“But, we will always massage it specific to the project, so I wouldn’t say that there is a standard.”