The Real Deal New York

Canadians get ‘loonie’ with NYC investments

For the neighbors to the north, it may be a record year for commercial real estate deals in Gotham

September 29, 2011
By Tom Acitelli

The Starrett-Lehigh Building

In December 2007, less than a year before the fall of Lehman Brothers and as the vise of the credit crunch was tightening, SL Green Realty closed on one of the biggest deals of the decade: $1.575 billion for 388 and 390 Greenwich Street, the 2.6 million-square-foot office complex then occupied largely by Citigroup.

But SL Green, New York’s biggest commercial landlord, did not act alone in the $598-a-square-foot purchase. It had a little help from some loonies, or Canadian dollars. The REIT’s minority partner on the deal, taking a 49.4 percent stake, was SITQ, the real estate investment wing of Caisse de Dépôt et Placement du Québec, a Montreal-based pension fund. (SITQ has since merged with Caisse’s other real estate subsidiary, and now goes by the name Ivanhoe Cambridge.)

Other Canadian firms have followed suit. Indeed, buoyed by a strong Canadian dollar (it’s been stronger than the U.S. dollar, at or near parity with it, since 2006) and drawn to steady returns in raucous economic times, these REITs and pension funds have become the biggest, busiest foreign investor pool in New York commercial real estate — beating out British, Middle Eastern, East Asian and other international commercial investors handily.

In 2011 so far, Canadians have accounted for $2.02 billion in investment in New York City properties and portfolios of at least $2.5 million each, according to research by Real Capital Analytics.

The burst of activity in the last couple of years might presage a further upswing, as the numbers show Canadians are well on their way to pre-recession investment numbers. In 2007, they poured over $2.05 billion into commercial real estate in the city; that number dropped precipitously in 2008 and stayed low through 2009 before increasing over thirtyfold in 2010.

Canadians, in fact, are on pace to have their heftiest year since at least 2001, investing in New York’s development sites and office buildings.

Sources say that Canadian bullishness stems from the fact that most Canadian investors are either REITs or the investment arms of pension funds, with mandates to look for steady returns. And, New York’s commercial real estate represents some of the steadiest returns globally.

“A lot of Canadians are yield buyers,” said Dan Fasulo, a managing director at Real Capital Analytics. “REITs need to deliver income, pension funds need income; they’re not necessarily the opportunistic buyers, like a Blackstone here. They’re more, ‘Just get me a 5 or 6 percent return and I’ll be happy.’”

Perhaps adhering to Canadian stereotypes, these investors have operated quietly, often as silent partners to a bigger New York name. The deals, though, have been quite loud.

Earlier this year, SL Green bought out SITQ’s then-45 percent stake in Viacom’s headquarters at 1515 Broadway in a deal that valued the tower at $1.21 billion. (The two had partnered to purchase the tower in 2002.)

The deals were loudest in 2010. In May of that year, the Related Companies closed on its bid to redevelop the 26-acre Hudson Yards on Manhattan’s Far West Side. The firm, led by Stephen Ross, originally took Goldman Sachs as its financial partner, but replaced the investment bank with Oxford Properties Group, the investment arm of the Ontario Municipal Employees Retirement System, which put up $475 million. The 50/50 partnership plans to build 12 million square feet of commercial and residential space.

That same month, SL Green executed two big Midtown moves with the Canada Pension Plan Investment Board (CPPIB). The landlord sold a 45 percent, nonmanaging stake in the McGraw-Hill Building at 1221 Avenue of the Americas to the CPPIB for $576 million, and bought a similar-size stake in 600 Lexington Avenue for $87 million, this time with the CPPIB.

Finally, in December 2010, Scott Rechler’s resurgent RXR Realty closed on the $400 million purchase of the Financial Times Building at 1330 Avenue of the Americas. That worked out to about $750 a square foot. RXR bought the FT Building from Otera Capital, the Canadian lender that had taken control of the tower the year before from the embattled Harry Macklowe. (Otera, which is part of the same parent pension firm as Ivanhoe Cambridge, paid $100,000 at a foreclosure auction and agreed to take on $250 million in debt.)

So far in 2011, there have been three big transactions involving Canadian financial muscle.

In June, the Canadian firm Brookfield Office Properties — which has quietly become the third-biggest commercial landlord in New York City, behind SL Green and Vornado Realty Trust — unveiled its $250 million redesign and redevelopment plan for the Winter Garden, the retail and public spaces in its World Financial Center.

A month later, RXR announced its $920 million purchase of the block-size Starrett-Lehigh Building in West Chelsea — its partner on the deal was the Public Sector Pension Investment Board of Canada. And, in August, H&R REIT, a Canadian open trust, bought Two Gotham Center, the Class A, Long Island City office tower, for $415.5 million.

According to an announcement at the time from H&R, the cap rate at Two Gotham Center will work out to 5.585 percent in the first year of ownership, and rents in the 100 percent-leased tower are expected to jump 8 percent every five years for existing tenants.

Most of the Canadian investors in this story declined to comment or did not respond to requests for comment, and RXR declined to comment on its partners.

But a spokesman for Ivanhoe Cambridge said that New York is an important market for it, and that it hopes to make more investments here, though he did not elaborate. Peter Ballon, the head of real estate investments for the Americas at the CPPIB, Canada’s biggest pension fund, which has 8.2 percent of its roughly $153 billion (Canadian) invested in real estate, said that it waited out the frothier prices of the pre-recession boom.

When the bust and recovery came, the CPPIB, like other Canadian vehicles, was ready to capitalize on lower prices — those May 2010 deals involving SL Green were the fund’s first foray into New York. A loonie that had been strong for years and a Canadian economy that largely escaped the global downturn helped.

“My understanding is that their pension systems are overfunded; sort of the opposite problem in the U.S., where they are underfunded,” said Andrew Mathias, SL Green’s president. “And they have large amounts of liquidity to invest in income-producing assets like real estate.”

Geography didn’t hurt, either.

“There is also a dearth of opportunities in Canada,” Real Capital’s Fasulo said. “It’s almost by necessity that some of these bigger Canadian players need to spread out geographically — there’s just a finite amount of buildings for sale in Toronto.”

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