Investment is growing in alternative real estate sectors as the industry looks to diversify portfolios to increase revenues. Long-term care facilities, students housing, self storage and data centres are among the new assets worth a look.
But understanding alternative assets – what might work for your company – doesn’t happen overnight.
“It’s a journey of discovery,” said David Cervantes, senior vice-president of CBRE Limited. Cervantes moderated a panel session on the subject recently at the Canadian Real Estate Forum held at the Metro Toronto Convention Centre.
Among the challenges are site selection criteria and the gap or link between operators and the real estate companies that can help drive yields. The panel discussed how an operating company fits into their businesses – either through a third-party operator or directly into their company.
Investment in long-term care for the elderly shows promise as the age group that typically enters retirement facilities (86+) is projected to grow by about four per cent annually over the next 20 years, Lois Cormack, president and CEO, Sienna Seniors Living, told delegates at the forum.
She said supply is limited, with almost no new facilities built in the past 15 years in Canada. “Right now there are 30,000 seniors in Ontario waiting for a long-term care bed.”
Sienna owns and operates 70 seniors’ residences in Canada. It has a staff of about 12,000 providing care and services to more than 11,000 seniors.
Cormack said as an asset, seniors’ residences are attractive because of the “high barriers to entry and it is highly regulated. You have to have a very strong operating platform…Someone new can’t just come into the business…”
She told delegates there is a high demand for senior living in many Canadian cities with populations of more than 25,000.
Fengate Asset Management has a mix of real estate assets – commercial to multi-family – but it also has platforms in seniors and student housing. Its seniors’ portfolio is operated out of its private equity firm because it is its own operating business. “The real estate is just the infrastructure in which it works,” Jaime McKenna, managing director, group head, real estate, Fengate, told the packed seminar. McKenna said that Fengate currently has one on-campus student residence and is building two off-campus properties.
She said because Fengate brings on one asset at a time, “we wanted to be successful in the real estate before we addressed the operating company as a potential internal structure.” The company started by interviewing a property manager with experience in student housing, which allowed Fengate to focus on “buying good sites, building good buildings…and understanding and studying the business.”
When considering properties for data centres, a company’s top priorities include the abundance and cost of power in that jurisdiction and the supply of fibre, J.P. MacKay, vice president, urban data centres and special operations, Allied Properties REIT, told delegates.
Allied also needs to know that it can “directly connect” the building to its existing campus, “which immediately adds value…”
Allied Properties owns three network-dense data centres, including 151 Front St. in Toronto – Canada’s largest carrier hotel. “The benefit of owning it (151 Front St.) is we have unlimited (and exclusive) rights for fibre entry,” MacKay said.
Sienna’s Cormack said feasibility studies required to select sites for seniors’ properties cover such issues as the availability of a pool of skilled labour, including registered nurses and personal support workers. Large land parcels are integral to the developments because homes for the aged require parking for staff and visitors.
Cormack added that seniors’ projects are best built new. Retrofits of old buildings – even former seniors homes – can be complex and difficult to pull off.
At Fengate, McKenna said the operating company, not the property company, leads on site selection for senior residences because it determines the client market and staffing availability, “And then, we can assess the transit, roads and surface parking, etc.”
When VersaCold – Canada’s largest supply chain company that handles temperature sensitive products such as food – closed two of its “obsolete facilities” this year and turned back the buildings to landlords KingSett Capital and Ivanhoe Cambridge, it was a win-win situation for the operating and property side companies, Paul Campbell, CEO, VersaCold, told delegates.
“We were able to take the best-paying customers out of these facilities and insert them into our other facilities,” he said. The property side (Propco) was able to sell the old buildings and integrate industrial markets. VersaCold has 1,000 employees and 27 plants across Canada.
Campbell said a big issue with any property for VersaCold, which recently completed the largest freezer warehouse in Canada in Milton, Ont., is attracting labour. At the Milton site, public transit is poor and the building is near a new Amazon warehouse, a magnet for the type of employee VersaCold wants.
Fengate’s McKenna sees another potential asset to consider investing in – co-living residences. With affordability and density issues growing in many Canadian cities, the new market is gaining traction. “Anyone who figures out how to do co-living in such a way which appeals to adults who are out of school, I think will hit the goldmine.”
McKenna spoke about co-living developments that feature suites with moveable walls. “It’s really a design issue that we are trying to figure out.”
Don Procter is a contributing writer for REM.
