NEWSLETTER :

Blackstone: Rising Rents Can Push Industrial Valuations Higher in Canada

After Paying Record Price for PIRET Properties, Private Equity Giant Predicts There’s Even More Room for Growth

Blackstone Group, the world's largest real estate private equity firm with US$120 billion in assets under management, shocked the market in 2018 by paying record prices for industrial properties in Canada.

And now the New York City-based firm said it is willing to pay even more to grow the portfolio it acquired for $3.8 billion when it purchased Pure Industrial Real Estate Trust in a deal announced in January. The deal, which was said to have been done based on a rate return of 4.8 percent, later saw Ivanhoé Cambridge team up with Blackstone in the venture, taking a 38 percent stake in PIRET.

Speaking at the Real Estate Forum in Toronto, David Levine, managing director of real estate for Blackstone, seemed to welcome his company's role as a disruptor in the Canadian industrial market.

"Thank you guys for giving me a cool nickname. Normally disruptor is associated with someone in tech," said Levine, whose Blackstone has gained a reputation for raising rental rates in the industrial market, which is welcome news for landlords.

He said a rising interest rate environment could reduce demand, but the institutional hunger for industrial property in Canada's three largest cities can counter any upward trend.

"People are raising money. A lot of people have dry powder," said Levine. "It's true rising interest rates are correlated with higher cap rates. The capital market can counteract rising rates. I'd also say if you are in a market with 1 percent vacancy rates and seeing double-digit rent growth, people can pay lower cap rates if they believe there will be future growth."

Levine conceded many questioned what Blackstone paid for PIRET, but now it appears its view of the Canadian marketplace was justified.

"We did get some questions about the cap rate we paid, but I think now, a year later, Vancouver had 26 percent year-over-year rent growth," said Levine, noting in Toronto industrial rents are now rising on a 10 percent annualized basis. "We don't think it can go at 26 percent forever, but we think there is room to rise."

Blackstone went into the market after studying fundamentals that seemed to make no sense to the firm, he said.

"Rent growth was effectively flat or ticking along at 2 or 3 percent [annually]," said Levine. We hadn't really owned here in a big way before and what we saw here was a country that had fantastic growth and was extremely stable and very favourable immigration. When you are adding a point and a half of population to major cities like Toronto and Vancouver, places where people who are coming are high-skilled labour, we got pretty excited."

Blackstone is interested in developing industrial space, but Levine acknowledge what others have long suggested about the Canadian marketplace; namely, it is tough to get land approved.

"Part of what we loved about the market and why we had so much confidence investing is it is so challenging to develop in the major three cities," he said, referring to Toronto , Montreal and Vancouver. "Look at some of the denser markets, I'm not sure there are tougher places to develop than Toronto or Vancouver, getting through all the entitlements and the time it takes."

On the cannabis front, which has driven industrial demand for space before and after recreational use was legalized, Blackstone won't be participating. Cannabis is still illegal federally in the United States, though some states have legalized it.