Working Capital The Real Estate Podcast

Industrial Real Estate with Allan Perez | EP92

Feb 23, 2022

In This Episode

Allan Perez is a co-founder & Chief Executive Officer of CanFirst Capital Management, a private real estate equity firm. CanFirst invests on behalf of institutional and private high net worth investors and has raised in excess of $800 million of equity capital since its inception. Allan’s real estate career encompasses 40 years of senior executive positions with real estate organizations including The Prudential Insurance Company of America, Canderel Ltd., Dundee Realty Corporation and V&A Properties. His responsibilities included acquisition and disposition, development, marketing, leasing, e-commerce and asset management.

In this episode we talked about:

  • Allan`s First Steps in Real Estate Space
  • Investing in Real Estate from scratch
  • The Process of a Company Creation
  • Asset Class Identification
  • Deals` Structure and Scaling
  • Fund Modelling
  • Real Estate Market Changes Overview
  • Macroeconomic Forecast
  • Actual Industrial Trends
  • Segments of Real Estate which are worth Attention
  • Mentorship, Resources and Lessons Learned

Transcriptions:

Jesse (0s): Welcome to the working capital real estate podcast. My name’s Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. All right, ladies and gentlemen, my name’s Jesse for galley and you’re listening to working capital the real estate podcast. Our special guest today is Alan Perez. Alan Perez is a co-founder and chief executive officer of canned first capital management.

 

A private real estate equity firm can first invest on behalf of institutional private high net worth investors and has raised an excess of 800 million of equity capital since its inception Alan’s real estate career encompasses over 40 years of senior executive positions with real estate organizations, such as Prudential insurance company of America, candor, REL Dundee Realty, corporation, VNA properties, and others, his responsibilities included acquisition, disposition, development, marketing, leasing e-commerce and asset management.

 

And probably most importantly for me, Alan was my sessional professor as one of my courses in my MBA. I believe it was real estate finance, Alan, how you doing?

 

Allan (1m 15s): Great, Jesse. Thanks for having me here.

 

Jesse (1m 18s): Yeah, it’s been great. You know, one thing I have, I’ll always remember from that class and I assume, you know, sometimes memories, you know, you over time, you can’t remember if the, if they were actually true, but I’ve still told enough people that were when you first got started. I remember you saying it was basically a handshake agreement at a Tim Horton’s when you’re buying your first industrial site. I don’t know if that’s accurate if I got the right guy.

 

Allan (1m 44s): Yeah, yeah, no, it was, I mean, it was, it was roughly a 20 odd years ago when we launched the company, both my partner and I at the time were just starting out in this new incarnation and, you know, working out of our living rooms in our bedrooms and getting offices set up and got a call from a broker that we had done a lot of business with and said, you know, there’s this little building out by the airport. Not sure it’s for you guys, but do you want to come have a look at it?

 

So we went out on a, on a rainy midweek afternoon and drove around the building said, yeah, it looks okay. When went over to the Tim, Horton’s very Canadian thing to do sat down in the classic back of the napkin, sat there. And you know, no artist runs that point. We just penciled out a few things and said, yeah, this could make sense. And so that was really the first, the first transaction for our company.

 

And this was back in 2002, it was a $5 million deal. We raised $3 million in debt financing and raised another 2 million from friends and family and our savings and, and off we went.

 

Jesse (3m 5s): So take us back a little bit from when you first got into the industry. I think it was McGill university is where your Alma mater. And did you know at that time that you wanted to go into the real estate space? Was it, was it that early on?

 

Allan (3m 21s): No, I don’t think so. You know, it was, you know, it was an interesting time look, I think like all of us who went through a university days, you come out and some are fortunate enough to know that they want to do this or that for the rest of their lives. And then there were people like myself who really had no idea, you know, my, my father had, had been involved in real estate in different capacities. He had developed some residential properties in Montreal, which is where I grew up.

 

And so heard a little bit about it at the dinner room table as it were. I did a finance and marketing major at McGill. One of the courses actually that did really stand out for me, there were two of them. One was the equivalent of, I guess the finance 1 0 1 course, which can be at times a bit dry, but it was fortunate enough to have a professor that kind of really got me turned onto that. And, and the other was a, a real estate course with this professor who was an outside the box kind of thinker and had this infectious enthusiasm about the industry.

 

So, you know, it got me thinking a little bit about it, but to be honest, when I came out of Miguel, didn’t really know that that’s what I wanted to do, fell into an opportunity right out of McGill to join Prudential Prudential at the time was the world’s largest insurance company. I don’t know that that’s the case today, but more significantly from my perspective, as we entered the eighties, they really were on the verge of becoming, they did in fact, become one of the most active real estate developers in north America during that decade.

 

And, you know, in Canada, we were a small part of that, of course, but in the states they were building everything. You could imagine, office buildings, industrial buildings, business parks, shopping centers, residential, anything, and everything under the sun. And so historically in Canada, the company had been primarily a residential mortgage lender, as many insurance companies where they were morphing into becoming more of an equity based investor and developer in, in commercial real estate.

 

So I kind of arrived for truancy as it were at a time when there was a lot of transition in what the company wanted to do in Canada. And so I was really the beneficiary of being able to jump in at that point in time. And what was really interesting as from my perspective is that because of the company’s background in Canada, historically, they really didn’t have a big team of commercial real estate experts. So, you know, I really had the chance to jump into some projects and probably take on far more than I should have been taking on that, given my non-existent background in commercial real estate, because there weren’t a bunch of people who actually had that expertise in the company.

 

So it was really an exciting time to, to be there. And, you know, early on we were involved in, in, we built a suburban office building in Montreal. We, we developed some industrial product as well on the, on the loan side, there were a couple of foreclosures that we took back that we were working through. So it was really an interesting time. And, and, you know, as I said, I, I kind of fell into it. Didn’t know that this was what I was going to be sitting here talking about 40 years later, but I fell in love with the industry pretty early on.

 

Jesse (7m 3s): Yeah, fair enough. I mean, it seems like trial trial by fire is pretty, pretty common in our industry in general. So it makes sense now from the Montreal, I don’t think we’ve ever talked about that you grew up in Montreal. So for it makes sense that you had worked for Cantarell. Was that in Montreal as well?

 

Allan (7m 20s): Actually, it was not. So we got to know when I was at Prudential, we got to know candor quite well. They were, we had retained them on a number of projects to a property manager for us to help us build out spaces. So they became really an integral part of what we were doing at the time three years into my stint at Prudential, I was offered a transfer to Toronto. They had a, the company had a site in downtown Toronto that it wanted to develop a joint venture with another institutional investor.

 

And there were other projects on the books in Toronto and really not a whole lot planned for Montreal at that time. So they offered me the transfer and the relationship that we had developed with Canada REL survived that. So, and, and in fact there was talk of me potentially staying in, joining them in Montreal, but I thought, you know, what seemed like a great opportunity to go to Toronto, try this out. And so I moved at the end of 1983 and it was there until 1987, at which time I did join Kendra

 

Jesse (8m 28s): Right on. So it seems that from there you’re in Toronto and what these various roles prior to can first, I guess it used to be done D I assume, dream rate. And now today with the various roles that you had prior to starting or building out the, what you have today in the company today, I assume those, those roles influence the way that you make decisions today. If, if you could take us back to when you kind of made that move from working at a shop to starting to say, Hey, you know, we can start raising capital for our own investors.

 

Allan (8m 59s): Yeah. So one of my philosophies, and certainly I, I think it was, you know, maybe more by observing the industry as I was early on and, and learning the business was really trying to understand every facet of the business and become a generalist as opposed to really being a specialist in one, in any one area. And that was probably colored by the fact that when I looked at a lot of the senior people in the industry, they were really good quarterbacks.

 

You know, they understood every, every piece of the puzzle fit together. And I thought that’s pretty good and not necessarily the best around the table at any one discipline, but certainly able to dialogue and communicate and really sort of lead, you know, lead projects in a certain direction. So for me, I guess it’s something that maybe by osmosis sunk in. And so, you know, in my time prior to, to launching Ken first, I was able to really be involved in every facet of the commercial real estate project.

 

And so, yeah, so if you look at the resume was acquisitions development, asset management, property management, leasing financing, you name it. And so we had a company called BNA properties in which I was a partner really was a sort of a boutique real estate investment development firm. And in 1997, we sold the company to what was then Dundee Realty corporation, which is a 400 dream office today and became part of that organization, which was in its very, very early stages.

 

So it was actually quite an, an interesting and exciting time to be part of that and spent four years there. And again, learnt a lot. The company was growing in leaps and bounds. And I think for me, it was, you know, I was just moving into my early forties as, as the, the new millennium began. And I think I was at that philosophic fork in the road where I had to decide, do I keep going on this path, which I’m sure it would’ve turned out wonderfully well.

 

And the company obviously dreams done fabulously well don’t or do I go out and try it on my own and see if I can make that work. Right. And so, and it really was, you know, w really was a conversation with my now partner who was also a trainer at the time with me. And we just got to chatting one day about what we both like to do going forward. And it sounded similar. And it really was about being able to focus on the parts of the industry that we most like, which was really raising capital, managing that capital and the capital and all the way through that, of course, being able to be actively involved in the deal flow.

 

Because I think for most of us or many of us in this industry, we’ve all got a bit of that deal junkie in us. And so, so for me, it was an opportunity to really marry up all the facets that I really liked about the industry. And for the first time, I guess at that point, not just take a job, but actually create a job for myself. And, and that was really the, the, the Genesis for, for health for came to be.

 

Jesse (12m 27s): That’s great. Do you feel Allen? Like my, my perception from talking with a lot of professionals in our industry, that there’s a lot of people that, you know, work in real estate know a lot about real estate, but then there’s a different type of individual that’s that entrepreneurial individual that wants to invest in real estate and even further start an investing business. Do you find that, that that’s true, that the ones that end up going off maybe, or have a little bit of a different breed or there’s a little bit more of an entrepreneurial bent to those types of individuals?

 

Allan (12m 56s): I think, you know what, by the very nature of the beast, I think you have to have that, you know, you have to have the ability to say, look, I’m going to start something from scratch. And I got, I, I walked away from a terrific job and a terrific organization and great, great people and, you know, had I stuck around there, I’m sure I would’ve had a great career and no regrets. I think you have to, you know, and listen to some people are hard wired that way and, you know, terrific.

 

And I know a lot of successful people like that, I think, yeah. I think you have to, if you have that, a little bit of that entrepreneurial bent and that little voice in the back of your head that says, you know what, let’s see if we can do this. I think that’s what spurs you on to take that leap of faith. And it is a leap of faith. You know, listen, I I’ll tell you when I made that move to sort of walk away from a pretty good job. And, you know, I kind of took solace from the fact that, you know, if it didn’t work out, I was probably still young enough that I could go back and get a real job.

 

And so, you know, that, that helped propel me to take that, but it is a leap of faith. Anyway, you cut it, you know, the day you walk out of that organization with a nice title on your business card, you walk away from that. And you know, what you don’t really know is will you be able to navigate and transact without that fancy title on your business card? And so, so I think that was a big part of it for me, was just being able to say, yeah, you know what?

 

We’re not that the, the edge of the cliff and be a jump now and, you know, close your eyes and hope it works out. So, but yeah, I think you have to believe, you have to believe in yourself obviously, but that’s kind of motherhood, but I think you have to also believe that you have an idea or a plan that is going to appeal to other people who will want to actually participate with you in that.

 

Jesse (15m 11s): So from that point, you, you and your partner, you move to, to create this company and invest what were next steps for you? Was it deciding which asset class you wanted to invest in? Was it, you know, let’s figure out roles and responsibilities who knows the investors, who does the deal? What did that look like?

 

Allan (15m 28s): Yeah. You know, listen, I, I, I wish I could tell you, excuse me. I wish I could tell you that it was a very formal process. You know, I think that the decision we had to make was what part of the asset class, excuse me, that we wanted to participate in a bit ironic in that. I think both of us came from a background, which was probably much more office oriented than it wasn’t gastrique oriented. But one of the things I think we’ve come to appreciate in our respective careers was that the office business was a really capital intensive business and was really what I call, you know, a big player business.

 

You have to have deep pockets to play that game. As we all know, I mean, you know, vacancy costs a lot of money to carry vacant space costs a lot of money to release and we capitalized. And what we were really looking to do was to build a platform, almost like a private REIT, where we could raise capital where we could make distributions to our investors while they waited, while we all waited for hopefully a happy ending. And, and we thought, you know what?

 

Industrial might be better suited to that because the, the volatility is more muted. Again, the costs of sharing vacant space cost of retenanting vacant space, much, much lower relative to the office space business. And I think we felt that the time there was probably less capital chasing that. So for all of those reasons, you know, we went in that direction. I can tell you, and I don’t know who it is, but I’ve told this story before someone early on said to us really industrial, not very sexy business, we said, that’s okay.

 

You know, we get it and we’re going to give it a shot and see what happens. So, and I can tell you that for the last five years, I wish it was still an unsexy business, but so that’s really how we got into it. Was we just sort of made that decision and said, yeah, let’s, let’s go in that direction and see what happens. So

 

Jesse (17m 38s): At the point where, you know, you identify, or you start to identify properties that you’re looking at, you mentioned kind of a, you know, a small version of a, of a public REIT. So the way that you structured these deals, was it kind of, was it a private placement style, limited partnership, general partnership structure when you first started out?

 

Allan (17m 58s): Yeah. So our, our first deal, so the deal that we talked about early on that the Tim Horton’s deal was just a one-off syndication. And, and at the time I think our aspirations were to really build a syndication business and go out and find a deal and do the deal, find another one. And on and on and on, we did that deal. And while we were doing that deal, we started a conversation with, with the, the head of a merchant bank who, with who, you know, we had a relationship newest in our previous lives and vice versa and said to us, you know, what are you guys up to?

 

And we told them and said, sounds interesting. Let’s do, why don’t you come in and we’ll meet and we’ll chat about what you’re doing and what happened. The next step was really quite fortuitous for us. And that was that they liked our business plan and their take on it basically was tell you what we’re going to take out of the money raising business for the next few years, we’re going to give you money and we’ll commit capital to you. They brought along actually another institutional investor that they had done work with.

 

And, you know, basically that was the origins of our first fund, which we launched in late 2002 and alongside their commitment. We also went to our private investors and said, it looks like we’re doing this. Do you want to be part of that? So, so the institutional investors effectively put up about $35 million. We raised $10 million privately.

 

And, and we were off to the races with our first fund of $45 million, which back then was quite a lot of money for us. So, you know, that was really the beginning of us getting into the fund business. And yes, so everything was done by offering memorandum and, and these were all limited partnerships that were set up and, and we were off to the races.

 

Jesse (20m 2s): So Allen, for, for those that aren’t as familiar with the, the fund model and how it works. I mean, the syndication is, is fairly simple to understand it’s typically closed ended. You’re you’re doing an asset specific raise. Oftentimes when you do the fund model or when you did the fund metal model at the time, was it something that you would have a rolling people that could join on a rolling basis? Was it something that you had a target in mind in terms of the raise and that this merchant bank really already hit that target and you were just kind of bringing on original investors, what did, what did that look like?

 

And it hasn’t changed the, to what you do today.

 

Allan (20m 39s): That’s a good question. I mean, look, we, you know, as I said, we, we did this $5 million deal. It got the ball rolling as it were. And, you know, we figured, well for this years, this is what we’re gonna do. We’re gonna do five and 10 or $15 million deals and then see where the world takes us. So when, when, you know, when these investors came along and said, you know, here’s $35 million, I can honestly say we had sat there and said, Jesus, is that a good numbers out of bad numbers are too high or too low. You know, when you’re, when you’re starting out and you go into the trough, it all looks good.

 

Right? And so the one caveat though for us, which was important was we said to them, listen, you know, we have nurtured a group of private investors who are, you know, they were there on the first deal and we have undertaken to do more with them. We’re not going to turn our backs on them. And so, you know, as long as we can all cohabitate together, we will do this. And that was a condition of us doing the fund and, and the institutional investors agreed. And they said, listen, their only caveat was, you know, we don’t want 45 year investors calling us on a regular basis, as long as you can speak for them with one voice.

 

We’re good with that. And so we said, yeah, that was fine. So really what we had was we had two institutional investors, each of which was a separate limited partner. We had, I don’t remember how many private investors, but probably about maybe 30 or 40 all wrapped up in one limited partnership. So in fact that we have three limited partnerships, we were the general partner for each of them. And, and all three of the limited partnerships were rolled up into one master limited partnership of which we were also the general partner.

 

So we were really the voice for the privates and it was, and that’s really the model that we have continued to use for the last 20 years.

 

Jesse (22m 33s): Have you seen that market change over the, over the time that you’ve been in the industry? Because we see a lot in the states, I’ve had people on the show that have, you know, they, their perspectives exemptions are slightly different, but I think it’s kind of the same thing, whether you’re dealing with the sec or you’re dealing with Canadian securities, that, that model where you’re, you’re not in the public markets you are doing exemptions, is that changed over the last, whether it’s five years or from when you started started way back when,

 

Allan (23m 3s): You know, I think some of the, some of the laws, some of the rules have changed. I can’t tell you that it’s, it’s had a sea change effect on us. You know, I mean, these things change gradually over time and, you know, the documents get a little bit thicker each time you’re out raising capital because there’s that much more generally legal verbiage. But, you know, at the end of the day, you know, it’s still, it’s still a very similar model, you know, and again, we go to the offering memorandum route versus a prospectus route, and the latter of which involves the OSC, you know, much more stringent in terms of documentation requirements.

 

What you can say, what you can say, you know, involves more in the way of forecasts, all of which of course have to be audited. So it’s, it’s a different kind of game when you’re playing in that, in that arena, we have managed over the years to just continue running, you know, our model, the way we started out 20 years ago.

 

Jesse (24m 8s): And when you continue to go down that road or you technically exempt market dealers at that point, or are you guys, is that you’re not getting involved in that those types of securities at that point?

 

Allan (24m 18s): We’re not, we’re not, we’re not getting involved in those types of issues.

 

Jesse (24m 22s): Okay. I want to pivot to the darling of the industry, as we mentioned before, it seems to be industrial. You know, the last couple years has it, it’s just been crazy for both industrial and for multi Rez, we see an asset valuations increased quite substantially. I’ve seen just boots on the ground, net rents. When I first started only seven, eight years ago, compared to today, you know, it’s pretty wild when you’re like, wait, is that industrial? What, what are your, what are your thoughts over, over what you’ve seen over the last two years? And I guess in answering that, you know, you’ve been around for right now, 2008, 2001 93.

 

So you’ve, it’s not your first time seeing a change in the cycle. So how have you guys been digesting the last, the last couple of years?

 

Allan (25m 7s): Yeah, look, it’s a great question. And you know, I’m going to start by answering your last question first because, you know, we, we all know the, the four most dangerous words in any investment businesses. It’s different this time, you know, and I’ve, I’ve said this over the years and, and I still believe that any investment in any investment business in the world is cyclical peaks. The troughs change cycles change. They look different, they feel different, but at the end of the day, they’re still cyclical because if they weren’t, Evelyn would pile in and we all make a ton of money doing that.

 

So, but the issue really is that this cycle that we’ve been in to talking about 93 talking about 2008 and 2009, and in 2008, 2009, wasn’t even cataclysmic in Canada, right? I mean, there was a global financial crisis. The real impact up in Canada was debt markets seized up. And without debt markets, there was virtually no transactional activity during that period of time, but it’s not like asset values fell through the floor at that point. So we’ve had a pretty long and a pretty good run.

 

And if you’ve only been in this business 10 or 15 years, that’s all you’ve ever seen. And you start to think it’s a pretty good business. It is still cyclical and things will go up and things will go down. You know, look, we are clearly in unchartered waters, you know, in the industrial sector, e-commerce has been a huge, huge driver that was ramping up nicely up until 2020, and then absolutely exploded at that point.

 

And I’ve read, I read somewhere that in 2020, we had the equivalent of e-commerce growth, which was equal to the last 10 years of growth of e-commerce sector. So currently supply chains, as we continue to see it today, we’re not set up for this. They were not ready for this. And the great benefactors of all of that was really the industrial market or the great manufacturer was, and that market wasn’t ready for it and still is not ready for it because we keep falling behind in terms of supply and demand.

 

We’re not building space nearly quickly enough rents seem to go up weekly, monthly, you know, and this is now classic supply demand that we’re seeing, right? I mean, people say, well, how, how high our rent’s going to go? And I don’t have that kind of crystal ball, but when you look at the intersection of the supply and demand curve, it keeps suggesting higher and higher rents until something changes until supply catches up until demand cools down.

 

You know, the growth in e-commerce is not going to continue at the pace that we’ve seen in the last two years. People are going to start going back to stores and actually walking in and walking out with something as opposed to ordering it from, from home in their pajamas at 11 o’clock at night. So, so look, I’ve never seen this and I don’t think anyone in our business has ever seen this and the fundamentals have never been better, but it will change.

 

The thing about the industry that I think is somewhat comforting about that last statement is I don’t think it will change overnight, you know, in our businesses, as opposed to say the office building business, it’s easy to turn off the supply tab fairly quickly, but it takes six to nine months or 12 months if you’re building an Amazon multi-story facility to build a building. And so I think if supply were to get too far ahead of, of demand, you know, that tap would get shut off and, and mitigate any, any serious imbalances.

 

But look, the truth is if you look at, you know, this country, we have 1.5, 1.6 billion square feet of industrial space across the country vacancy rate today is somewhere between one to 2% equilibrium is generally considered to be around five. So we are a long way from equilibrium right now. And so, so I think there’s, there’s still some, you know, there’s, there’s runway for sure.

 

But if you’re a user, it’s a tough, tough time out there right now, because there’s nowhere to go and you don’t have a lot of leverage with your landlord.

 

Jesse (29m 41s): Yeah. Fair enough. In terms of like one thing for us, just trying to understand this where it’s kind of a, somewhat of a natural disaster, not a, not a pure recession as we’ve seen in the past. And I’m still trying to understand from just in brokerage and investment, how we are, you know, forecasting the next year, that the next two years where, you know, the question of whether you’re going to have more inflation with the interest rate, environment’s going to be like, I mean, without the crystal ball, if you, you know, looking forward, how are you planning for the fact that yeah, we might slowly come out of this and hopefully it’s not as anemic as it was in oh eight, you know, to, you know, 10 years on a recovery, but how do you see this playing out from a macro economic point of view or even just a national,

 

Allan (30m 26s): Yeah, look, I, I think that, you know, our markets are fairly efficient and, and so, you know, you have the demand drivers on one side and, you know, short of a major economic recession, which I don’t really see coming anytime soon. I think you’re going to have, you know, demand is going to continue to move along at a reasonable clip. I think it will really be incumbent on the development community.

 

And in many cases with the assistance of municipalities across this country, to be able to get more product to the market, there’s no shortage, there are no shortage of sites. There are no shortage of developers. There’s no shortage of capital for that, but it takes time and there is a lag there for sure. And I think that, you know, I think for the foreseeable future, that’s going to be the challenge. But I do think that, you know, over, over the next three to five years, I think you’ll see probably a more normalized environment, which, you know, probably a little bit unhealthy right now what we’re seeing.

 

I mean, you know, you talk about, you know, how, how you sort of deal with that going forward, look as an investor. When you, when you’re looking at cap rates dropping on a regular basis, you have to scratch your head and say, well, I don’t want to be caught without a chair when the music stops. And again, I’ve seen this movie before and I still got the scars, certainly from the late eighties, early nineties, which was, as I say to younger people like yourself, wasn’t, wasn’t a recession.

 

It was really a depression in real estate, the likes of which we’ve never seen before. I don’t see that happening now for a whole bunch of reasons, not the least of which is I think that the world is a different place today. And I think many in the real estate community are probably more conservative in their approach to, to development, to debt and to pricing expectations. And maybe what we saw in the late eighties, early nineties, but, you know, things will change.

 

And so for us, you know, the key is not getting too far over our skis when it comes to looking at opportunities. And, you know, I think when I, when I look back over the last few years of prices, we’ve paid for assets and you know, what looked like a ridiculously stupid place two years ago. Now it looks like a steal. Are we going to be saying the same thing two years from now? Don’t know

 

Jesse (33m 9s): They have the old, I should’ve bought five of those in terms of the, the actual trends of where, where you see industrial going. I’d love to get your thoughts on, on some of the, where you see tenants and with what the wants are today. That might be different from five or 10 years ago. But just in general, I, I questioned, you know, comes on this idea that, because we, you said before the supply and demand issue where we are looking for more development, we’re looking for fewer and fewer sites or buildings, do you buy into this idea that we’re going to see more repurposing or rezoning of existing sites from whether it’s retail to industrial office, you know, to industrial or even hoteling to apartment units?

 

Like, do you think we’re going to see that? Or is it, or is that more of a kind of a, you know, something you read in the news, but the practicality might not be there?

 

Allan (34m 2s): No, I, I think that’s real and I think it’s true. And it goes back to, you know, what you see in the appraisal reports, which is, you know, what is the asset worth on a highest and best use basis and what was highest and best use 10, 15, 20 years ago for a site might not be the same today. Look, when you look at suburban office space, as an example, you know, there’s lots of it out there, certainly in the GTA. I think last time I checked vacancy rates were in the teens.

 

You know, you have the whole trend of people not going back to their offices so quickly. Maybe now they will. But, you know, I think many are going to probably adopt some type of a hybrid approach to, to, you know, working, going forward. And so, you know, I, and so you have that as, as part of the backdrop where it might be an outdated retail property. And then on the other side of that, you have industrial rates that have slowly been creeping up, you know, where up until, I don’t know, five years ago and bounced around in a very narrow range for the preceding 20 years.

 

And all of a sudden everything changed. You know, we we’ve got a project just like that. As an example, in, in Meadowvale right now, we acquired the site last year. It had some older two-story walk-up office buildings. They were 70 odd percent leased, but likely not huge demand for that product going forward. And we really looked at it on the basis land value and what we thought would make for a terrific industrial site off a major artery close to the 4 0 1 close to the airport.

 

And so we’re moving forward. So there’s an example of a site that is being repurposed into what we believe will be a higher and better use. So, yeah, I, I think you’re going to see a lot of that. Look, I mean, there’s been talk of repurposing shopping centers to, you know, e-commerce fulfillment centers and logistics facilities and whatnot, which is what the economy needs and wants right now. You know, the challenge in some cases, if you’re not doing a tear down, is the bones that you’re working with and no different than, you know, looking at an old house and saying, I’m going to renovate it.

 

In some cases you might just be better off knocking it down and starting over again. And I think in some cases that may be what happens in some cases, it might be that it’s completely workable. I mean, I, I would say this, I haven’t seen a lot of that yet in Canada. I certainly have read about examples of that type of thing in the states. But yeah, I, I think that it’s, you know, you’ll see a lot more intensification on, on retail sites with industrial, with apartments and residential.

 

You look at, you know, arguably the most successful shopping center in this country at Yorkdale. And, you know, I believe that Oxford’s got significant multi-phase development activity planned for that site, which will make it even harder to find a parking spot, but, and I’m sure I’m going to get a call from Michael Turner over that one. So I think that’s what you’re going to see. A lot of this is, you know, look, if you’re in the industry as a, as a provider and deployer of capital, you’re trying to figure out where the demand is coming from, and that’s the demand that you’re going to be catering to.

 

That’s the demand you’re going to build to. So yeah, whether it’s it’s repurposing buildings, whether it’s intensifying sites or whether it’s just a complete knockdown and start over again, I think you’ll see all of that

 

Jesse (37m 37s): Right on. Well, Alan, I want to be mindful of the time there’s four questions. We ask every guest a kind of a rapid fire before we do that though. Is there an area that you’ve you feel in our market that people aren’t talking enough about or an opportunity, you know, whether, you know, throw it out, student housing, self storage, is there something that you don’t think is getting enough press right now?

 

Allan (37m 59s): Yeah, look, I think there, I don’t know about not getting enough press, but certainly, you know, in, in the commercial real estate space, you know, self storage is, has always been an interesting segment of that market. To me, I think it’s, it’s still in its early stages. I think it’s an industry that’s fairly fragmented in terms of ownership. You know, again, I, I, I think there’s probably a consolidation opportunity there and I think there probably going to be some good development in that space, because I think a lot of the trends that we’re seeing in the economy are going to lend itself to people wanting to have that kind of space and use that kind of space.

 

So, you know, I, I think there are segments certainly in our market that, that probably don’t get as much air time as some of the other ones.

 

Jesse (38m 57s): All right. Allen, look for questions. If you’re ready to go all through all that. Yeah. Okay. All right. What’s something, you know, now in real estate or in business that you wish you knew when you started out, maybe at that Tim Horton’s.

 

Allan (39m 12s): I know I should have watched all the other podcasts already prepare for discretions. Yeah. I think that, you know, look, if you’re saying well, in the benefit of hindsight, you know, I think that over the last 20 years or so, you know, clearly for the most part, we’ve been in an expansionary cycle. And so probably an aggregation strategy that, you know, in hindsight would have been more aggressive when I think back to all the deals that we’ve said no to over the years, kind of look at that and say, I wish I’d said yes a few more times, but you know, you’ll only have the information you have at the time to make the decisions.

 

But yeah, listen, if I had that crystal ball, I would have said no to virtually nothing.

 

Jesse (40m 11s): All right. Number two, for younger people coming into our industry from a mentorship perspective, especially, you know, given the environment we’re in right now, what would you recommend to those, to those individuals?

 

Allan (40m 22s): Yeah. So I think, look, the industry is in a great place and you know, there’s a lot of growth. There’s a lot of activity. There’s lots going on in the industry. The one thing I would say is this, you know, th that first job out of school might not be your dream job, but I’ve always likened the industry like any industry to a club and no different than trying to get into a club on queen street at midnight on a Saturday where she had people lined up a hundred deep and I’m like, what are they giving away in this place?

 

The whole, the whole thing is about getting into the club. Because once you get into the club, you can move around, but you got to get into the club. And so the analogy for me is for young people is, you know what? Getting into the industry, get into the club. That first job may not be your dream job may not be the one that’s going to make you independently wealthy, but once you’re inside, you know, get a couple of years of experience, build up your resume. And then before, you know, it, people are gonna know who you are, your phone’s going to start to ring, and you’re going to have opportunities to do other things, but you gotta get in the door first,

 

Jesse (41m 28s): What’s a book or a resource that, you know, has helped you over the years or something that you constantly are recommending to other people. I’ll say, I’ll say aside from real estate and financing investments from Peter Lindemann.

 

Allan (41m 45s): Absolutely. You know, that’s, it’s a great, great question. And if I have time to think about, I’d give you a great answer maybe, but what I would say is this, you know, it constantly amazes me when you look, when you read. And I read, I do read a lot of business books. I mean, I read a lot of different kinds of books, but, but sticking to the business stand for a moment. You know, one of my favorites is, was the big short.

 

And when you read books like that, which to me almost read like fiction, cause you sit there and say, how is this possible? How could people have done this? And I think to me, the takeaway there is, you know, we’re in business, we’re all out there trying to make a living. And I think doing the right thing, doing the ethical thing in the long run is always I think, going to work out.

 

But I think it’s also important to realize that there are a lot of bad actors out there and, and you can never just assume that people will do the right thing because often Greek gets in the way.

 

Jesse (42m 57s): Fair enough. All right. Here’s the real tough question. First car make and model.

 

Allan (43m 4s): Well, that’s very funny. You should ask that question because we were actually talking about it yesterday and it was, it was, I’m trying to think of what context it came up in. It was, I think I was chatting with one of my kids about this. So my first car was back then. It was a Datsun, which I guess now is Nissan. Yeah, it was a, B two 10. And it was a sporty kind of car was not super expensive. I was just out of university, but what was cool about it?

 

Which back then was cool was it was a two-tone car. So the top half was black and the bottom half was great. And I loved that car. And sadly, I went away with a couple of friends and I left it for my sister who totaled the car. And thankfully she walked away without a scratch, but the car was district.

 

Jesse (44m 0s): That’s great. That’s the first, that’s it on the program. All right. Well, ladies and gentlemen, my guest today has been Alan Perez, Alan, thanks for being part of working capital.

 

Allan (44m 10s): Thank you.

 

Jesse (44m 20s): Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.

Transcript

ions:

Jesse (0s): Welcome to the working capital real estate podcast. My name's Jesper galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. All right, ladies and gentlemen, my name's Jesse for galley and you're listening to working capital the real estate podcast. Our special guest today is Alan Perez. Alan Perez is a co-founder and chief executive officer of canned first capital management.

 

A private real estate equity firm can first invest on behalf of institutional private high net worth investors and has raised an excess of 800 million of equity capital since its inception Alan's real estate career encompasses over 40 years of senior executive positions with real estate organizations, such as Prudential insurance company of America, candor, REL Dundee Realty, corporation, VNA properties, and others, his responsibilities included acquisition, disposition, development, marketing, leasing e-commerce and asset management.

 

And probably most importantly for me, Alan was my sessional professor as one of my courses in my MBA. I believe it was real estate finance, Alan, how you doing?

 

Allan (1m 15s): Great, Jesse. Thanks for having me here.

 

Jesse (1m 18s): Yeah, it's been great. You know, one thing I have, I'll always remember from that class and I assume, you know, sometimes memories, you know, you over time, you can't remember if the, if they were actually true, but I've still told enough people that were when you first got started. I remember you saying it was basically a handshake agreement at a Tim Horton's when you're buying your first industrial site. I don't know if that's accurate if I got the right guy.

 

Allan (1m 44s): Yeah, yeah, no, it was, I mean, it was, it was roughly a 20 odd years ago when we launched the company, both my partner and I at the time were just starting out in this new incarnation and, you know, working out of our living rooms in our bedrooms and getting offices set up and got a call from a broker that we had done a lot of business with and said, you know, there's this little building out by the airport. Not sure it's for you guys, but do you want to come have a look at it?

 

So we went out on a, on a rainy midweek afternoon and drove around the building said, yeah, it looks okay. When went over to the Tim, Horton's very Canadian thing to do sat down in the classic back of the napkin, sat there. And you know, no artist runs that point. We just penciled out a few things and said, yeah, this could make sense. And so that was really the first, the first transaction for our company.

 

And this was back in 2002, it was a $5 million deal. We raised $3 million in debt financing and raised another 2 million from friends and family and our savings and, and off we went.

 

Jesse (3m 5s): So take us back a little bit from when you first got into the industry. I think it was McGill university is where your Alma mater. And did you know at that time that you wanted to go into the real estate space? Was it, was it that early on?

 

Allan (3m 21s): No, I don't think so. You know, it was, you know, it was an interesting time look, I think like all of us who went through a university days, you come out and some are fortunate enough to know that they want to do this or that for the rest of their lives. And then there were people like myself who really had no idea, you know, my, my father had, had been involved in real estate in different capacities. He had developed some residential properties in Montreal, which is where I grew up.

 

And so heard a little bit about it at the dinner room table as it were. I did a finance and marketing major at McGill. One of the courses actually that did really stand out for me, there were two of them. One was the equivalent of, I guess the finance 1 0 1 course, which can be at times a bit dry, but it was fortunate enough to have a professor that kind of really got me turned onto that. And, and the other was a, a real estate course with this professor who was an outside the box kind of thinker and had this infectious enthusiasm about the industry.

 

So, you know, it got me thinking a little bit about it, but to be honest, when I came out of Miguel, didn't really know that that's what I wanted to do, fell into an opportunity right out of McGill to join Prudential Prudential at the time was the world's largest insurance company. I don't know that that's the case today, but more significantly from my perspective, as we entered the eighties, they really were on the verge of becoming, they did in fact, become one of the most active real estate developers in north America during that decade.

 

And, you know, in Canada, we were a small part of that, of course, but in the states they were building everything. You could imagine, office buildings, industrial buildings, business parks, shopping centers, residential, anything, and everything under the sun. And so historically in Canada, the company had been primarily a residential mortgage lender, as many insurance companies where they were morphing into becoming more of an equity based investor and developer in, in commercial real estate.

 

So I kind of arrived for truancy as it were at a time when there was a lot of transition in what the company wanted to do in Canada. And so I was really the beneficiary of being able to jump in at that point in time. And what was really interesting as from my perspective is that because of the company's background in Canada, historically, they really didn't have a big team of commercial real estate experts. So, you know, I really had the chance to jump into some projects and probably take on far more than I should have been taking on that, given my non-existent background in commercial real estate, because there weren't a bunch of people who actually had that expertise in the company.

 

So it was really an exciting time to, to be there. And, you know, early on we were involved in, in, we built a suburban office building in Montreal. We, we developed some industrial product as well on the, on the loan side, there were a couple of foreclosures that we took back that we were working through. So it was really an interesting time. And, and, you know, as I said, I, I kind of fell into it. Didn't know that this was what I was going to be sitting here talking about 40 years later, but I fell in love with the industry pretty early on.

 

Jesse (7m 3s): Yeah, fair enough. I mean, it seems like trial trial by fire is pretty, pretty common in our industry in general. So it makes sense now from the Montreal, I don't think we've ever talked about that you grew up in Montreal. So for it makes sense that you had worked for Cantarell. Was that in Montreal as well?

 

Allan (7m 20s): Actually, it was not. So we got to know when I was at Prudential, we got to know candor quite well. They were, we had retained them on a number of projects to a property manager for us to help us build out spaces. So they became really an integral part of what we were doing at the time three years into my stint at Prudential, I was offered a transfer to Toronto. They had a, the company had a site in downtown Toronto that it wanted to develop a joint venture with another institutional investor.

 

And there were other projects on the books in Toronto and really not a whole lot planned for Montreal at that time. So they offered me the transfer and the relationship that we had developed with Canada REL survived that. So, and, and in fact there was talk of me potentially staying in, joining them in Montreal, but I thought, you know, what seemed like a great opportunity to go to Toronto, try this out. And so I moved at the end of 1983 and it was there until 1987, at which time I did join Kendra

 

Jesse (8m 28s): Right on. So it seems that from there you're in Toronto and what these various roles prior to can first, I guess it used to be done D I assume, dream rate. And now today with the various roles that you had prior to starting or building out the, what you have today in the company today, I assume those, those roles influence the way that you make decisions today. If, if you could take us back to when you kind of made that move from working at a shop to starting to say, Hey, you know, we can start raising capital for our own investors.

 

Allan (8m 59s): Yeah. So one of my philosophies, and certainly I, I think it was, you know, maybe more by observing the industry as I was early on and, and learning the business was really trying to understand every facet of the business and become a generalist as opposed to really being a specialist in one, in any one area. And that was probably colored by the fact that when I looked at a lot of the senior people in the industry, they were really good quarterbacks.

 

You know, they understood every, every piece of the puzzle fit together. And I thought that's pretty good and not necessarily the best around the table at any one discipline, but certainly able to dialogue and communicate and really sort of lead, you know, lead projects in a certain direction. So for me, I guess it's something that maybe by osmosis sunk in. And so, you know, in my time prior to, to launching Ken first, I was able to really be involved in every facet of the commercial real estate project.

 

And so, yeah, so if you look at the resume was acquisitions development, asset management, property management, leasing financing, you name it. And so we had a company called BNA properties in which I was a partner really was a sort of a boutique real estate investment development firm. And in 1997, we sold the company to what was then Dundee Realty corporation, which is a 400 dream office today and became part of that organization, which was in its very, very early stages.

 

So it was actually quite an, an interesting and exciting time to be part of that and spent four years there. And again, learnt a lot. The company was growing in leaps and bounds. And I think for me, it was, you know, I was just moving into my early forties as, as the, the new millennium began. And I think I was at that philosophic fork in the road where I had to decide, do I keep going on this path, which I'm sure it would've turned out wonderfully well.

 

And the company obviously dreams done fabulously well don't or do I go out and try it on my own and see if I can make that work. Right. And so, and it really was, you know, w really was a conversation with my now partner who was also a trainer at the time with me. And we just got to chatting one day about what we both like to do going forward. And it sounded similar. And it really was about being able to focus on the parts of the industry that we most like, which was really raising capital, managing that capital and the capital and all the way through that, of course, being able to be actively involved in the deal flow.

 

Because I think for most of us or many of us in this industry, we've all got a bit of that deal junkie in us. And so, so for me, it was an opportunity to really marry up all the facets that I really liked about the industry. And for the first time, I guess at that point, not just take a job, but actually create a job for myself. And, and that was really the, the, the Genesis for, for health for came to be.

 

Jesse (12m 27s): That's great. Do you feel Allen? Like my, my perception from talking with a lot of professionals in our industry, that there's a lot of people that, you know, work in real estate know a lot about real estate, but then there's a different type of individual that's that entrepreneurial individual that wants to invest in real estate and even further start an investing business. Do you find that, that that's true, that the ones that end up going off maybe, or have a little bit of a different breed or there's a little bit more of an entrepreneurial bent to those types of individuals?

 

Allan (12m 56s): I think, you know what, by the very nature of the beast, I think you have to have that, you know, you have to have the ability to say, look, I'm going to start something from scratch. And I got, I, I walked away from a terrific job and a terrific organization and great, great people and, you know, had I stuck around there, I'm sure I would've had a great career and no regrets. I think you have to, you know, and listen to some people are hard wired that way and, you know, terrific.

 

And I know a lot of successful people like that, I think, yeah. I think you have to, if you have that, a little bit of that entrepreneurial bent and that little voice in the back of your head that says, you know what, let's see if we can do this. I think that's what spurs you on to take that leap of faith. And it is a leap of faith. You know, listen, I I'll tell you when I made that move to sort of walk away from a pretty good job. And, you know, I kind of took solace from the fact that, you know, if it didn't work out, I was probably still young enough that I could go back and get a real job.

 

And so, you know, that, that helped propel me to take that, but it is a leap of faith. Anyway, you cut it, you know, the day you walk out of that organization with a nice title on your business card, you walk away from that. And you know, what you don't really know is will you be able to navigate and transact without that fancy title on your business card? And so, so I think that was a big part of it for me, was just being able to say, yeah, you know what?

 

We're not that the, the edge of the cliff and be a jump now and, you know, close your eyes and hope it works out. So, but yeah, I think you have to believe, you have to believe in yourself obviously, but that's kind of motherhood, but I think you have to also believe that you have an idea or a plan that is going to appeal to other people who will want to actually participate with you in that.

 

Jesse (15m 11s): So from that point, you, you and your partner, you move to, to create this company and invest what were next steps for you? Was it deciding which asset class you wanted to invest in? Was it, you know, let's figure out roles and responsibilities who knows the investors, who does the deal? What did that look like?

 

Allan (15m 28s): Yeah. You know, listen, I, I, I wish I could tell you, excuse me. I wish I could tell you that it was a very formal process. You know, I think that the decision we had to make was what part of the asset class, excuse me, that we wanted to participate in a bit ironic in that. I think both of us came from a background, which was probably much more office oriented than it wasn't gastrique oriented. But one of the things I think we've come to appreciate in our respective careers was that the office business was a really capital intensive business and was really what I call, you know, a big player business.

 

You have to have deep pockets to play that game. As we all know, I mean, you know, vacancy costs a lot of money to carry vacant space costs a lot of money to release and we capitalized. And what we were really looking to do was to build a platform, almost like a private REIT, where we could raise capital where we could make distributions to our investors while they waited, while we all waited for hopefully a happy ending. And, and we thought, you know what?

 

Industrial might be better suited to that because the, the volatility is more muted. Again, the costs of sharing vacant space cost of retenanting vacant space, much, much lower relative to the office space business. And I think we felt that the time there was probably less capital chasing that. So for all of those reasons, you know, we went in that direction. I can tell you, and I don't know who it is, but I've told this story before someone early on said to us really industrial, not very sexy business, we said, that's okay.

 

You know, we get it and we're going to give it a shot and see what happens. So, and I can tell you that for the last five years, I wish it was still an unsexy business, but so that's really how we got into it. Was we just sort of made that decision and said, yeah, let's, let's go in that direction and see what happens. So

 

Jesse (17m 38s): At the point where, you know, you identify, or you start to identify properties that you're looking at, you mentioned kind of a, you know, a small version of a, of a public REIT. So the way that you structured these deals, was it kind of, was it a private placement style, limited partnership, general partnership structure when you first started out?

 

Allan (17m 58s): Yeah. So our, our first deal, so the deal that we talked about early on that the Tim Horton's deal was just a one-off syndication. And, and at the time I think our aspirations were to really build a syndication business and go out and find a deal and do the deal, find another one. And on and on and on, we did that deal. And while we were doing that deal, we started a conversation with, with the, the head of a merchant bank who, with who, you know, we had a relationship newest in our previous lives and vice versa and said to us, you know, what are you guys up to?

 

And we told them and said, sounds interesting. Let's do, why don't you come in and we'll meet and we'll chat about what you're doing and what happened. The next step was really quite fortuitous for us. And that was that they liked our business plan and their take on it basically was tell you what we're going to take out of the money raising business for the next few years, we're going to give you money and we'll commit capital to you. They brought along actually another institutional investor that they had done work with.

 

And, you know, basically that was the origins of our first fund, which we launched in late 2002 and alongside their commitment. We also went to our private investors and said, it looks like we're doing this. Do you want to be part of that? So, so the institutional investors effectively put up about $35 million. We raised $10 million privately.

 

And, and we were off to the races with our first fund of $45 million, which back then was quite a lot of money for us. So, you know, that was really the beginning of us getting into the fund business. And yes, so everything was done by offering memorandum and, and these were all limited partnerships that were set up and, and we were off to the races.

 

Jesse (20m 2s): So Allen, for, for those that aren't as familiar with the, the fund model and how it works. I mean, the syndication is, is fairly simple to understand it's typically closed ended. You're you're doing an asset specific raise. Oftentimes when you do the fund model or when you did the fund metal model at the time, was it something that you would have a rolling people that could join on a rolling basis? Was it something that you had a target in mind in terms of the raise and that this merchant bank really already hit that target and you were just kind of bringing on original investors, what did, what did that look like?

 

And it hasn't changed the, to what you do today.

 

Allan (20m 39s): That's a good question. I mean, look, we, you know, as I said, we, we did this $5 million deal. It got the ball rolling as it were. And, you know, we figured, well for this years, this is what we're gonna do. We're gonna do five and 10 or $15 million deals and then see where the world takes us. So when, when, you know, when these investors came along and said, you know, here's $35 million, I can honestly say we had sat there and said, Jesus, is that a good numbers out of bad numbers are too high or too low. You know, when you're, when you're starting out and you go into the trough, it all looks good.

 

Right? And so the one caveat though for us, which was important was we said to them, listen, you know, we have nurtured a group of private investors who are, you know, they were there on the first deal and we have undertaken to do more with them. We're not going to turn our backs on them. And so, you know, as long as we can all cohabitate together, we will do this. And that was a condition of us doing the fund and, and the institutional investors agreed. And they said, listen, their only caveat was, you know, we don't want 45 year investors calling us on a regular basis, as long as you can speak for them with one voice.

 

We're good with that. And so we said, yeah, that was fine. So really what we had was we had two institutional investors, each of which was a separate limited partner. We had, I don't remember how many private investors, but probably about maybe 30 or 40 all wrapped up in one limited partnership. So in fact that we have three limited partnerships, we were the general partner for each of them. And, and all three of the limited partnerships were rolled up into one master limited partnership of which we were also the general partner.

 

So we were really the voice for the privates and it was, and that's really the model that we have continued to use for the last 20 years.

 

Jesse (22m 33s): Have you seen that market change over the, over the time that you've been in the industry? Because we see a lot in the states, I've had people on the show that have, you know, they, their perspectives exemptions are slightly different, but I think it's kind of the same thing, whether you're dealing with the sec or you're dealing with Canadian securities, that, that model where you're, you're not in the public markets you are doing exemptions, is that changed over the last, whether it's five years or from when you started started way back when,

 

Allan (23m 3s): You know, I think some of the, some of the laws, some of the rules have changed. I can't tell you that it's, it's had a sea change effect on us. You know, I mean, these things change gradually over time and, you know, the documents get a little bit thicker each time you're out raising capital because there's that much more generally legal verbiage. But, you know, at the end of the day, you know, it's still, it's still a very similar model, you know, and again, we go to the offering memorandum route versus a prospectus route, and the latter of which involves the OSC, you know, much more stringent in terms of documentation requirements.

 

What you can say, what you can say, you know, involves more in the way of forecasts, all of which of course have to be audited. So it's, it's a different kind of game when you're playing in that, in that arena, we have managed over the years to just continue running, you know, our model, the way we started out 20 years ago.

 

Jesse (24m 8s): And when you continue to go down that road or you technically exempt market dealers at that point, or are you guys, is that you're not getting involved in that those types of securities at that point?

 

Allan (24m 18s): We're not, we're not, we're not getting involved in those types of issues.

 

Jesse (24m 22s): Okay. I want to pivot to the darling of the industry, as we mentioned before, it seems to be industrial. You know, the last couple years has it, it's just been crazy for both industrial and for multi Rez, we see an asset valuations increased quite substantially. I've seen just boots on the ground, net rents. When I first started only seven, eight years ago, compared to today, you know, it's pretty wild when you're like, wait, is that industrial? What, what are your, what are your thoughts over, over what you've seen over the last two years? And I guess in answering that, you know, you've been around for right now, 2008, 2001 93.

 

So you've, it's not your first time seeing a change in the cycle. So how have you guys been digesting the last, the last couple of years?

 

Allan (25m 7s): Yeah, look, it's a great question. And you know, I'm going to start by answering your last question first because, you know, we, we all know the, the four most dangerous words in any investment businesses. It's different this time, you know, and I've, I've said this over the years and, and I still believe that any investment in any investment business in the world is cyclical peaks. The troughs change cycles change. They look different, they feel different, but at the end of the day, they're still cyclical because if they weren't, Evelyn would pile in and we all make a ton of money doing that.

 

So, but the issue really is that this cycle that we've been in to talking about 93 talking about 2008 and 2009, and in 2008, 2009, wasn't even cataclysmic in Canada, right? I mean, there was a global financial crisis. The real impact up in Canada was debt markets seized up. And without debt markets, there was virtually no transactional activity during that period of time, but it's not like asset values fell through the floor at that point. So we've had a pretty long and a pretty good run.

 

And if you've only been in this business 10 or 15 years, that's all you've ever seen. And you start to think it's a pretty good business. It is still cyclical and things will go up and things will go down. You know, look, we are clearly in unchartered waters, you know, in the industrial sector, e-commerce has been a huge, huge driver that was ramping up nicely up until 2020, and then absolutely exploded at that point.

 

And I've read, I read somewhere that in 2020, we had the equivalent of e-commerce growth, which was equal to the last 10 years of growth of e-commerce sector. So currently supply chains, as we continue to see it today, we're not set up for this. They were not ready for this. And the great benefactors of all of that was really the industrial market or the great manufacturer was, and that market wasn't ready for it and still is not ready for it because we keep falling behind in terms of supply and demand.

 

We're not building space nearly quickly enough rents seem to go up weekly, monthly, you know, and this is now classic supply demand that we're seeing, right? I mean, people say, well, how, how high our rent's going to go? And I don't have that kind of crystal ball, but when you look at the intersection of the supply and demand curve, it keeps suggesting higher and higher rents until something changes until supply catches up until demand cools down.

 

You know, the growth in e-commerce is not going to continue at the pace that we've seen in the last two years. People are going to start going back to stores and actually walking in and walking out with something as opposed to ordering it from, from home in their pajamas at 11 o'clock at night. So, so look, I've never seen this and I don't think anyone in our business has ever seen this and the fundamentals have never been better, but it will change.

 

The thing about the industry that I think is somewhat comforting about that last statement is I don't think it will change overnight, you know, in our businesses, as opposed to say the office building business, it's easy to turn off the supply tab fairly quickly, but it takes six to nine months or 12 months if you're building an Amazon multi-story facility to build a building. And so I think if supply were to get too far ahead of, of demand, you know, that tap would get shut off and, and mitigate any, any serious imbalances.

 

But look, the truth is if you look at, you know, this country, we have 1.5, 1.6 billion square feet of industrial space across the country vacancy rate today is somewhere between one to 2% equilibrium is generally considered to be around five. So we are a long way from equilibrium right now. And so, so I think there's, there's still some, you know, there's, there's runway for sure.

 

But if you're a user, it's a tough, tough time out there right now, because there's nowhere to go and you don't have a lot of leverage with your landlord.

 

Jesse (29m 41s): Yeah. Fair enough. In terms of like one thing for us, just trying to understand this where it's kind of a, somewhat of a natural disaster, not a, not a pure recession as we've seen in the past. And I'm still trying to understand from just in brokerage and investment, how we are, you know, forecasting the next year, that the next two years where, you know, the question of whether you're going to have more inflation with the interest rate, environment's going to be like, I mean, without the crystal ball, if you, you know, looking forward, how are you planning for the fact that yeah, we might slowly come out of this and hopefully it's not as anemic as it was in oh eight, you know, to, you know, 10 years on a recovery, but how do you see this playing out from a macro economic point of view or even just a national,

 

Allan (30m 26s): Yeah, look, I, I think that, you know, our markets are fairly efficient and, and so, you know, you have the demand drivers on one side and, you know, short of a major economic recession, which I don't really see coming anytime soon. I think you're going to have, you know, demand is going to continue to move along at a reasonable clip. I think it will really be incumbent on the development community.

 

And in many cases with the assistance of municipalities across this country, to be able to get more product to the market, there's no shortage, there are no shortage of sites. There are no shortage of developers. There's no shortage of capital for that, but it takes time and there is a lag there for sure. And I think that, you know, I think for the foreseeable future, that's going to be the challenge. But I do think that, you know, over, over the next three to five years, I think you'll see probably a more normalized environment, which, you know, probably a little bit unhealthy right now what we're seeing.

 

I mean, you know, you talk about, you know, how, how you sort of deal with that going forward, look as an investor. When you, when you're looking at cap rates dropping on a regular basis, you have to scratch your head and say, well, I don't want to be caught without a chair when the music stops. And again, I've seen this movie before and I still got the scars, certainly from the late eighties, early nineties, which was, as I say to younger people like yourself, wasn't, wasn't a recession.

 

It was really a depression in real estate, the likes of which we've never seen before. I don't see that happening now for a whole bunch of reasons, not the least of which is I think that the world is a different place today. And I think many in the real estate community are probably more conservative in their approach to, to development, to debt and to pricing expectations. And maybe what we saw in the late eighties, early nineties, but, you know, things will change.

 

And so for us, you know, the key is not getting too far over our skis when it comes to looking at opportunities. And, you know, I think when I, when I look back over the last few years of prices, we've paid for assets and you know, what looked like a ridiculously stupid place two years ago. Now it looks like a steal. Are we going to be saying the same thing two years from now? Don't know

 

Jesse (33m 9s): They have the old, I should've bought five of those in terms of the, the actual trends of where, where you see industrial going. I'd love to get your thoughts on, on some of the, where you see tenants and with what the wants are today. That might be different from five or 10 years ago. But just in general, I, I questioned, you know, comes on this idea that, because we, you said before the supply and demand issue where we are looking for more development, we're looking for fewer and fewer sites or buildings, do you buy into this idea that we're going to see more repurposing or rezoning of existing sites from whether it's retail to industrial office, you know, to industrial or even hoteling to apartment units?

 

Like, do you think we're going to see that? Or is it, or is that more of a kind of a, you know, something you read in the news, but the practicality might not be there?

 

Allan (34m 2s): No, I, I think that's real and I think it's true. And it goes back to, you know, what you see in the appraisal reports, which is, you know, what is the asset worth on a highest and best use basis and what was highest and best use 10, 15, 20 years ago for a site might not be the same today. Look, when you look at suburban office space, as an example, you know, there's lots of it out there, certainly in the GTA. I think last time I checked vacancy rates were in the teens.

 

You know, you have the whole trend of people not going back to their offices so quickly. Maybe now they will. But, you know, I think many are going to probably adopt some type of a hybrid approach to, to, you know, working, going forward. And so, you know, I, and so you have that as, as part of the backdrop where it might be an outdated retail property. And then on the other side of that, you have industrial rates that have slowly been creeping up, you know, where up until, I don't know, five years ago and bounced around in a very narrow range for the preceding 20 years.

 

And all of a sudden everything changed. You know, we we've got a project just like that. As an example, in, in Meadowvale right now, we acquired the site last year. It had some older two-story walk-up office buildings. They were 70 odd percent leased, but likely not huge demand for that product going forward. And we really looked at it on the basis land value and what we thought would make for a terrific industrial site off a major artery close to the 4 0 1 close to the airport.

 

And so we're moving forward. So there's an example of a site that is being repurposed into what we believe will be a higher and better use. So, yeah, I, I think you're going to see a lot of that. Look, I mean, there's been talk of repurposing shopping centers to, you know, e-commerce fulfillment centers and logistics facilities and whatnot, which is what the economy needs and wants right now. You know, the challenge in some cases, if you're not doing a tear down, is the bones that you're working with and no different than, you know, looking at an old house and saying, I'm going to renovate it.

 

In some cases you might just be better off knocking it down and starting over again. And I think in some cases that may be what happens in some cases, it might be that it's completely workable. I mean, I, I would say this, I haven't seen a lot of that yet in Canada. I certainly have read about examples of that type of thing in the states. But yeah, I, I think that it's, you know, you'll see a lot more intensification on, on retail sites with industrial, with apartments and residential.

 

You look at, you know, arguably the most successful shopping center in this country at Yorkdale. And, you know, I believe that Oxford's got significant multi-phase development activity planned for that site, which will make it even harder to find a parking spot, but, and I'm sure I'm going to get a call from Michael Turner over that one. So I think that's what you're going to see. A lot of this is, you know, look, if you're in the industry as a, as a provider and deployer of capital, you're trying to figure out where the demand is coming from, and that's the demand that you're going to be catering to.

 

That's the demand you're going to build to. So yeah, whether it's it's repurposing buildings, whether it's intensifying sites or whether it's just a complete knockdown and start over again, I think you'll see all of that

 

Jesse (37m 37s): Right on. Well, Alan, I want to be mindful of the time there's four questions. We ask every guest a kind of a rapid fire before we do that though. Is there an area that you've you feel in our market that people aren't talking enough about or an opportunity, you know, whether, you know, throw it out, student housing, self storage, is there something that you don't think is getting enough press right now?

 

Allan (37m 59s): Yeah, look, I think there, I don't know about not getting enough press, but certainly, you know, in, in the commercial real estate space, you know, self storage is, has always been an interesting segment of that market. To me, I think it's, it's still in its early stages. I think it's an industry that's fairly fragmented in terms of ownership. You know, again, I, I, I think there's probably a consolidation opportunity there and I think there probably going to be some good development in that space, because I think a lot of the trends that we're seeing in the economy are going to lend itself to people wanting to have that kind of space and use that kind of space.

 

So, you know, I, I think there are segments certainly in our market that, that probably don't get as much air time as some of the other ones.

 

Jesse (38m 57s): All right. Allen, look for questions. If you're ready to go all through all that. Yeah. Okay. All right. What's something, you know, now in real estate or in business that you wish you knew when you started out, maybe at that Tim Horton's.

 

Allan (39m 12s): I know I should have watched all the other podcasts already prepare for discretions. Yeah. I think that, you know, look, if you're saying well, in the benefit of hindsight, you know, I think that over the last 20 years or so, you know, clearly for the most part, we've been in an expansionary cycle. And so probably an aggregation strategy that, you know, in hindsight would have been more aggressive when I think back to all the deals that we've said no to over the years, kind of look at that and say, I wish I'd said yes a few more times, but you know, you'll only have the information you have at the time to make the decisions.

 

But yeah, listen, if I had that crystal ball, I would have said no to virtually nothing.

 

Jesse (40m 11s): All right. Number two, for younger people coming into our industry from a mentorship perspective, especially, you know, given the environment we're in right now, what would you recommend to those, to those individuals?

 

Allan (40m 22s): Yeah. So I think, look, the industry is in a great place and you know, there's a lot of growth. There's a lot of activity. There's lots going on in the industry. The one thing I would say is this, you know, th that first job out of school might not be your dream job, but I've always likened the industry like any industry to a club and no different than trying to get into a club on queen street at midnight on a Saturday where she had people lined up a hundred deep and I'm like, what are they giving away in this place?

 

The whole, the whole thing is about getting into the club. Because once you get into the club, you can move around, but you got to get into the club. And so the analogy for me is for young people is, you know what? Getting into the industry, get into the club. That first job may not be your dream job may not be the one that's going to make you independently wealthy, but once you're inside, you know, get a couple of years of experience, build up your resume. And then before, you know, it, people are gonna know who you are, your phone's going to start to ring, and you're going to have opportunities to do other things, but you gotta get in the door first,

 

Jesse (41m 28s): What's a book or a resource that, you know, has helped you over the years or something that you constantly are recommending to other people. I'll say, I'll say aside from real estate and financing investments from Peter Lindemann.

 

Allan (41m 45s): Absolutely. You know, that's, it's a great, great question. And if I have time to think about, I'd give you a great answer maybe, but what I would say is this, you know, it constantly amazes me when you look, when you read. And I read, I do read a lot of business books. I mean, I read a lot of different kinds of books, but, but sticking to the business stand for a moment. You know, one of my favorites is, was the big short.

 

And when you read books like that, which to me almost read like fiction, cause you sit there and say, how is this possible? How could people have done this? And I think to me, the takeaway there is, you know, we're in business, we're all out there trying to make a living. And I think doing the right thing, doing the ethical thing in the long run is always I think, going to work out.

 

But I think it's also important to realize that there are a lot of bad actors out there and, and you can never just assume that people will do the right thing because often Greek gets in the way.

 

Jesse (42m 57s): Fair enough. All right. Here's the real tough question. First car make and model.

 

Allan (43m 4s): Well, that's very funny. You should ask that question because we were actually talking about it yesterday and it was, it was, I'm trying to think of what context it came up in. It was, I think I was chatting with one of my kids about this. So my first car was back then. It was a Datsun, which I guess now is Nissan. Yeah, it was a, B two 10. And it was a sporty kind of car was not super expensive. I was just out of university, but what was cool about it?

 

Which back then was cool was it was a two-tone car. So the top half was black and the bottom half was great. And I loved that car. And sadly, I went away with a couple of friends and I left it for my sister who totaled the car. And thankfully she walked away without a scratch, but the car was district.

 

Jesse (44m 0s): That's great. That's the first, that's it on the program. All right. Well, ladies and gentlemen, my guest today has been Alan Perez, Alan, thanks for being part of working capital.

 

Allan (44m 10s): Thank you.

 

Jesse (44m 20s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one. Take care.