While vacancies are still largely below their roughly five per cent ‘equilibrium’ level, Perez is optimistic that this will remain a landlord’s market for the foreseeable future. The near-zero vacancy rates we saw post-pandemic, he says, weren’t healthy, but the levels we’re at now appear to be healthy and in balance.
The speed at which industrial units can be constructed, too, means the sector can adjust quickly to interest rate fluctuations. Projects can begin and end well within the timeframe of an interest rate cycle, meaning builders can select the right moment when financing is cheap and demand is high. They can elect to hold back when rates rest higher.
While those traits may make industrial attractive in the long-term, Perez sees short-term opportunities despite the macro-level plateauing of rent increases. Income levels are strong, even if they’re not growing, but there are also significant arbitrage opportunities that he sees on the market now. Buildings with leases signed five years ago are coming up for renewal at far higher rents. Perez says that he and his team at CanFirst are actively securing these arbitrage deals and securing deals at near double the rental rates that some tenants had locked in five years ago.
Because of the fundamental agility that Perez sees in industrial real estate, he doesn’t see major risks emerging from the sector itself. Rather, he notes that industrial tends to be as strong as the underlying economy. Canadian GDP growth numbers have been anaemic for a few quarters now and if that trend doesn’t reverse he sees a potential for further demand erosion. However, if an investor is more constructive on the Canadian economy, Perez sees a stronger case for industrials.
Within the broader universe of industrials, Perez highlights a few distinct areas that his firm prefers to focus on. In their growth funds, they typically acquire underperforming assets where his team can unlock value. In their income fund, for example, they look to secure strong tenants for a property — such as a recent 10-year deal with Loblaws to tenant an Edmonton distribution centre. Both funds, they note, have outperformed their target benchmarks on a total returns basis.
