KingSett Capital has beat out some hefty competition to close one of the most significant real estate deals in the GTA in recent memory.
KingSett has acquired 21 strategically located industrial properties from Sagitta Development & Management for $461M, which is believed to be the second largest deal in the local sector’s history. Seventeen of the properties are located in Mississauga and were so coveted that KingSett was bidding against heavy hitters, including REITs and institutional funds, but unlike its competition, it was able to tap different funds to source the purchase capital.
“We can do a few things most others can’t do, if not anyone else can do, and that is having multiple funds participate in the same transaction. We can take a portfolio that’s quite disparate, buildings that are quite different from one another and don’t really share many characteristics, we can take that portfolio of disparate assets and marry them to various funds,” said Rob Kumer, President and Chief Investment Officer of KingSett Capital.
“The location is hyper-compelling. These are, for the most part, centre-ice Mississauga locations, but also the price is well below replacement cost. They’re just not building these buildings anymore. To buy land -- if you can find the land, which you can’t -- in these locations, you’d be paying $4-5M an acre, which, at 40% coverage, gives you a land cost per buildable square foot of $250. To buy this land and recreate what’s there would be $400-450 per sq. ft. We bought the buildings for $330 per sq. ft.”
The buildings are approximately 1.47M sq. ft and 99% leased, and while just over half of the tenants pay below-market rents, which create very tight cap rate conditions, the average lease term is below three years and will allow KingSett to capitalize on market rates fairly frequently. Industrial real estate in the GTA is arguably the hottest segment of Canada’s entire real estate market, with supply severely constricted and demand so strong that companies are advised to give themselves 18-month search buffers.
“In a land-constrained market and inflationary environment where creation costs are accelerating, that’s a pretty compelling value proposition,” Kumer said. “Part of the value proposition is buying things below replacement costs. A lot of the other buyers are focused on large bay distribution industrial, which have great operating fundamentals as well, but we’re focused on buying things below replacement cost in locations that are irreplaceable.”
That construction costs are increasing across the board is ameliorating the values of existing assets because the economics of tearing them down and building brand new, in many cases, don’t make sense Kumer added.
In the GTA, non-residential construction development charges grew by 54% between 2018 and 2021, while the permitting and approvals processes are slow and therefore expensive. A Building Industry and Land Development Association benchmarking study found that official plan amendments in Toronto take an average of 32 months, while receiving site plan approvals takes 30 months, and rezoning 25 months.
Then, there are the land costs -- even in the GTA’s remote reaches like Bradford, the approximate cost of an acre has swelled to $1.5M from $600,000 a few years ago. Diana Hoang, Founder and Managing Director of Spear Realty, says a lot of industrial landlords in the GTA realize they’re bargaining from places of strength and are trying to take advantage of conditions.
“A lot of owners are taking closer looks at the value of their buildings because this is definitely a high point,” she said. “To date, groups are saying, ‘Wow, this is the time to sell,’ and we’re seeing more product come on stream. More owners are definitely exploring the possibility now.”