Few would mistake San Francisco for New York or London, but in the eyes of Ivanhoé Cambridge, the City by the Bay has a lot in common with those two world class cities when it comes to the multi-residential market.
Those happy circumstances have led the Montreal-based company to sink an initial $50-million investment into a partnership with Veritas Investments, Inc. (Veritas) to acquire nine multi-residential properties.
The initial portfolio consists of 159 residential units in nine buildings scattered across a number of central San Francisco neighbourhoods including Lower Nob Hill, Noe Valley, Inner Mission, Alamo Square, Duboce Triangle, Westwood Park, Mission Dolores and Cow Hollow.
Ivanhoé noted that the expansion and relocation by major technology companies continue to draw the interest of large numbers of employees wishing to live in the heart of San Francisco, creating a favourable environment for the multi-family rental market.
The vacancy rate is low and demographic factors support long-term demand.
Start of something big
Ivanhoé expects its initial investment to grow from $50 million to as much as $1 billion over time, said Sylvain Fortier, executive vice-president of residential, hotels and real estate investment funds. That would put it on par with its apartment building holdings in New York. Ivanhoé has another $600 million to $700 million invested in London’s multi-residential sector.
Fortier expects the San Francisco investment to grow to about $200 million in a year’s time and close to $1 billion within five years.
Ivanhoé’s success in New York and Manhattan in particular has led to a renewed focus on the multi-family sector as a key investment.
“We tried to understand what had been the recipe there and it was all the good stuff that they show you in school,” said Fortier, “about high barriers to entry markets and having critical mass in gateway cities where you have certain jobs and industries that are always very healthy . . . going to cities where it is OK to rent and most people will rent by choice.”
Those criteria gave the company a short list of 10 cities (including Montreal, Toronto, Vancouver, Washington D.C., Boston and Los Angeles) to explore. Eventually it settled on San Francisco.
Interestingly, the company was not put off by the strong rental control environment in the West Coast city, given its positive experience with New York`s rent regime.
Ivanhoé sees the ability to steadily raise rents in properties since most sellers are small mom and pop owners who have often neglected to make capital improvements or taken the opportunity to maximize rents over the years.
“We don’t mind coming in and buying an asset with rent potential even though the rent in place return is not very high,” he explained. “We have seen that in New York. What is good about these assets is whether it is a good time or a bad time, your NOI is going up because you have got a gap to catch.
“If you are 15% below market (rent) when it comes time for renewal, if you are entitled to increase your rent by 1.5% you will be able to do it even if the market is getting softer.”
It’s an approach that will require patience to raise rents. The same holds true for building a portfolio in a city where buildings are generally smaller, low-rise, low-density affairs and ownership is scattered. That`s a perfect scenario for a big, patient investor like Ivanhoé, which is owned by the giant Caisse de dépôt et placement du Québec Quebec pension fund.
“The other city we have been pretty successful in over the last three years has been London. Similar to San Fran, you don’t have high density.”
Given the Ivanhoé list of 10 cities, Fortier envisions eventually balancing out the portfolio with holdings beyond New York, London and San Francisco.
“It could very well be that these three cities will be the main three cities that we are invested and then it would be a combination of other markets that complement the other third of our portfolio, the sum of maybe B.C., L.A. and Montreal.”
Over the past few years, the company has found the Toronto and Vancouver markets too pricey. It also explored the Boston market – “Even though I hate the Bruins,” joked Fortier, a Montreal Canadiens fan, but found that market small and scattered.
Curiously, given its Montreal home base, Ivanhoé has only one major multi-res holding in that city, the mammoth six-building, 1,000 unit Rockhill apartment complex in Montreal.
One other U.S. market that Ivanhoé will likely enter is Seattle, where it has a partnership with a U.S. firm in the office sector. The two companies are working on the development of a downtown mixed use property in that West Coast city.
“That one will be probably mid-density, not too big, about 200 units. Retail stores and then residential upstairs seems to be what is working right now,” he said.
Ivanhoé also owns two garden-style apartment complexes in the Culver City area near Los Angeles and is working on building two or three new garden style complexes to serve the sprawling L.A. area.