CPPIB announces $1.1-billion joint venture with Dream to acquire warehouses

The Canada Pension Plan Investment Board is forming a $1.1-billion joint venture to buy domestic industrial properties with Dream Industrial REIT DIR-UN-T and Dream Asset Management Corp., seeking to tap into pent-up demand for smaller facilities close to big cities.

CPPIB will put up $1-billion of equity capital, with Dream Industrial adding $100-million, to buy “last mile” warehouses and distribution facilities located near major Canadian cities, which serve small businesses and consumers, playing a crucial role in e-commerce.

The joint venture is launching by acquiring 12 Canadian industrial properties for $805-million from Dream Industrial that cover a total of 3.6 million square feet of space in Ontario, Quebec and Alberta.

The partners plan to take on debt to buy a total of about $3-billion of industrial assets, with Dream subsidiaries acting as the asset manager and property manager, and providing leasing services.

CPPIB is the country’s largest pension-fund manager, with $777.5-billion in assets as of Sept. 30. Through the new joint venture, Dream expects to top $30-billion in assets under management, up from $28-billion currently.

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Large investors have doubled down on industrial and logistics properties in recent years. A surge in e-commerce stemming from the COVID-19 pandemic, combined with demand for faster delivery times, created a need for warehouses close to cities, at the same time that offices and retail properties such as malls were struggling.

Now, tariffs and trade tensions are creating a similar dynamic to what played out early in the pandemic. Renters of warehouses and distribution centres initially held off on taking new space to get their bearings. But now they are taking on new trading partners and redrawing trade routes to build “a bit more certainty within their supply chains,” CPPIB’s head of real estate, Sophie van Oosterom, said in an interview.

“Rather than very quick trade routes across the border, people will establish within borders to make sure that they are not dependent on, or not subject to, any of the tariffs that will come from back and forth,” she said.

Fast delivery times have been critical to businesses for years, but as industrial tenants look to move even closer to their customers, that “has impact on ultimate, total demand for space,” she said.

In recent months, CPPIB’s real estate team flagged the growth of e-commerce and a partial retreat from globalization as the two key themes driving the market. When they looked at where those dynamics created the best opportunities, “Canada, more generally, screened very favourably on a number of these major, key indicators,” Ms. van Oosterom said.

That was because there was very low vacancy in light industrial buildings; a growing population that still shops through e-commerce less than in other countries; and sticky tenants that supply local businesses, restaurants and consumers. There was also a lag in rents increasing, as well as a rising cost of new construction because of inflation that could make it possible to buy properties at attractive prices.

Dream Industrial’s shares were up 3.9 per cent to $12.66 on the Toronto Stock Exchange by midday on Wednesday.

But the past two years have been a challenging stretch for many REITs as higher interest rates put pressure on property values and drove up borrowing costs, and companies were slow to bring staff back to offices. In February, 2024, Dream cut its monthly distribution in half, and since then, its share price has struggled.

CPPIB and Dream tapped advisers to ensure that the initial transaction for 12 properties is “a fair trade on both sides,” Ms. van Oosterom said. The joint venture is already looking at another potential portfolio of properties, but “we’re not in a rush,” she added.

TD Securities, RBC Dominion Securities Inc., Colliers Capital Markets and CBRE advised the partners in the joint venture on the deal. Stikeman Elliott LLP and King & Spalding LLP provided legal advice.