CanFirst Capital Management achieves milestones in real estate investment amidst market volatility

Last year stood as a testament to strategic resilience and foresight for CanFirst Capital Management. Amidst a landscape marred by economic uncertainty, rising interest rates, and inflationary pressures, the private real estate firm not only fortified existing operations but also achieved a significant milestone in capital raising—a feat that many found challenging in such turbulent times.

CEO Allan Perez highlights, “In 2023, our primary focus was on enhancing our existing operations and properties, ensuring efficient capital expenditure, and maintaining tenant satisfaction through lease renewals. Despite the challenging economic climate for fundraising, we successfully raised a significant amount of capital, a feat we take great pride in.”“

Looking ahead to 2024, our challenge lies in strategically deploying our substantial capital reserves. We aim to continue our prudent investment approach. The inflation rate's recent increase and the resulting volatility in the bond markets signal potential deviations from the anticipated interest rate cuts, highlighting the unpredictable nature of the current economic environment.”

Michael Porto, Vice President Corporate Development at the firm points out that despite a difficult 2023, “Our open-ended fund the CanFirst IncomePlus Real Estate Fund (CIPREF) exceeded it’s 9-10% annual return by delivering 10.4%, which we were very happy with as many of our peers struggled to meet their targets and some even posted negative returns.”

Strategies for mitigating risks and optimizing opportunities

When asked about strategies to mitigate risks in an uncertain economic climate, Perez emphasizes the importance of aligning interest rates with capitalization rates. The widening gap between buyers' and sellers' price expectations had slowed down market transactions, but their diverse fund portfolio provided a competitive edge. Their disciplined acquisition process was a crucial factor in avoiding overpayment for assets, especially in the industrial sector, which had seen a recent downturn.

“Currently, there is a noticeable reduction in capital compared to historical levels. This scarcity, while challenging for selling, potentially provides a competitive edge in buying due to a reduced pool of buyers.”

“Another critical point is the linkage of capitalization rates to bond yields, which are fundamental in determining commercial mortgage rates. Ideally, we'd like to see a decrease in these rates to better our position in the market,” Perez says.

Porto adds that their specific portfolio and CIPREF's strong performance was expected to continue, thanks to properties nearing market rent and a disciplined acquisition process. This strategy, coupled with a focus on industrial real estate, put them in a comfortable position heading into 2024, despite the broader uncertainties. He maintains, “We can sit back and be really opportunistic heading into 2024, we've got no assets that we need to sell or want to sell.”

Industrial real estate continues to be the darling of the sector

Perez elaborates on the diversity within their holdings, encompassing ecommerce fulfillment centers, logistics facilities, manufacturing centers, and warehousing. He emphasizes the firm’s strategic avoidance of highly specialized manufacturing facilities due to the challenges in repurposing such buildings for future tenants.

This specific type of industrial facilities Perez says, “Are often custom-built to suit the unique needs of a specific tenant, which contradicts our central investment philosophy. We prefer to focus on more generic buildings with versatile layouts, considering their potential for reuse by the next tenants.”

“The challenge with highly specialized facilities is finding a perfect match for a unique space once the original tenant vacates, akin to searching for the exact round peg for a round hole. Recognizing that every lease eventually expires, we have chosen to steer clear of such industrial spaces.”

When it comes to the commercial real estate sector, there is no doubt the haunting presence of vacant office spaces linger. The industrial sector however continues to maintain attractive vacancy rates. Institutional fund managers and private investors alike favor this sector, drawn by its lower entry price points and relative stability compared to other real estate categories.

Porto says, “Our journey began over two decades ago with a focus on industrial expertise, which remains a core strength of our firm. Our open-ended fund, while still heavily invested in the industrial sector, also offers the flexibility to explore other areas.”

“This positions us uniquely, like having a blank canvas. If market conditions change, we have the adaptability to shift our focus to different sectors, unlike some of our peers. For example, those heavily invested in office spaces are in a difficult position, particularly with the lack of buyers for office properties.”

Establishing a competitive edge

Launching the firm 22 years ago and focusing on a particular sector within real estate, proved to be the winning decision. Perez notes, “With time, our firm has established itself as the premier manager for industrial real estate in the country, attracting a diverse range of institutional and private investors.”

Porto echoes the sentiment adding, “Historically, our firm's competitive advantage has been in occupying a unique market space. We specialize in investments that are too large for private investors yet too small for the major institutional investors in Canada. This strategic positioning has allowed us to carve out a niche, leveraging opportunities that are often overlooked by others in the field.”

While many real estate investment funds are trying to shift to the industrial space, CanFirst is already there.

Article written by Manal Ali for Wealth Professional Magazine