Sweet Deal: Fractional Investment Boosted the Purchase of This Candy Factory
As inflation and high interest rates continue to disrupt Canada's commercial real estate market, at least one asset class is continuing to perform at record-breaking levels: industrial. The ongoing imbalance between supply and demand means the Canadian industrial market is as tight as ever, with nationwide vacancy sitting at 1.5% and average rent growth at 15% year-over-year as of Q3 2022, according to data from LoopNet publisher CoStar.
That’s good news for the team at real estate investment management company Forge & Foster. The Hamilton, Ontario-based firm specializes in value-add plays on a range of income-producing assets in the southern Greater Golden Horseshoe (GGH) submarket, but lately it’s the industrial share of their portfolio that has been generating the best results.
“We’re very big into industrial, especially industrial in Hamilton,” said Braydon Kustra, vice president of investor relations at F&F, in an interview with LoopNet. “It’s very stable real estate through ups and downs, so that’s where our focus is turning. Our best acquisitions are all industrial.”
One of the company’s most recent deals is a perfect example of that focus: the purchase-leaseback of a sprawling, three-story, 280,000-square-foot (26,013 square meters) heritage brick-and-beam candy factory at the corner of Emerald and Shaw streets in Hamilton.
But while it may seem run-of-the-mill on paper, one aspect sets this deal apart from the others in Forge & Foster’s portfolio: the company is raising 300,000 Canadian dollars (US$222,643) of the factory’s $21.5 million purchase price from fractional investments of as little as $2,500 through a partnership with online startup BuyProperly.
Bringing Commercial Real Estate to the Masses
While BuyProperly’s portfolio mainly comprises multi- and single-family residential properties in the GGH and U.S. Sunbelt states, the company is increasingly seeking industrial assets to help diversify their offerings. Previous collaborations with Forge & Foster included two other industrial properties in Hamilton and Niagara Falls.
“It allows everyone to get into real estate, which I think is great.”Braydon Kustra, vice president, investor relations, Forge & Foster
“They knew we were looking for industrial investments,” said Khushboo Jha, CEO of BuyProperly, about the partnership with Forge & Foster. “So, when [the Karma Candy deal] came about, we had a conversation, and it met our due diligence checklist. The numbers make sense, and the tenant is in great financial shape.”
BuyProperly has signed an agreement with Forge & Foster to purchase $300,000 worth of Class-C shares in the four-year project, which it will raise from retail investors in a separate limited partnership through its website. Those investors can then either hold their shares for the full four-year term of the investment, generating a projected annual ROI of 31.8%, or sell them to other users on the site before the term is up.
For Jha, the value of BuyProperly’s business model lies in its ability to give people who can’t normally afford to buy commercial real estate access to lucrative deals that are typically reserved for accredited investors or their friends and family.
“This isn't a market that anybody has tagged. It’s a net new source of capital."Khushboo Jha, CEO, BuyProperly
“When you’re a regular salaried person sitting on post-tax limited cash, you want to be able to invest because that’s the only way to grow your wealth,” Jha said. She added that for most people, “you have no access [to CRE], even when you live in the community. You can see it coming up, but you have no mechanism for being part of it. So, we wanted to enable that.”
Kustra agrees that opening the door to new kinds of investors is a promising concept. “I think that fractional real estate and getting out to people who don't normally invest is really exciting,” he said. “It allows everyone to get into real estate, which I think is great.”
Collaborating with a fractional investment company also taps into a new source of capital for investment companies like Forge & Foster, Jha said.
“This isn't a market that anybody has tagged. It’s a net new source of capital,” she said. Jha also claimed that BuyProperly’s AI-enhanced platform streamlines the investment process, making raising capital less expensive and more efficient, regardless of the size of the investments themselves.
"It's just a win-win opportunity all around."Braydon Kustra, vice president, investor relations, Forge & Foster
Kustra agrees that the partnership is beneficial to both parties, not only in terms of sourcing capital, but also in terms of visibility.
“It's great because they help get our name out,” he said. “Just by being able to get these projects out to more people and open more investors’ eyes to invest in real estate, I think that's one of the biggest benefits of it. It's a holistic partnership where we're able to grow together. It's just a win-win opportunity all around.”
Finding Value in a Tight Market
Opening the door for new investors to put money into properties like the Karma Candy factory also comes with a certain “cool quotient”, said Jha. “I put in some of my own money because I just wanted to own a little bit of a candy factory for my sweet tooth.”
Built in 1911, the 3.5-acre (1.4 hectare) complex includes two units, 356 Emerald and 118 Shaw, and has been home to the American Can Co., the Allan Candy Company and, most recently, Karma Candy Inc., the only candy cane manufacturer in Canada, producing 1 million candies per day.
At $21.5 million, the off-market deal comes in at $78 per square foot, almost 50% below the southern GGH submarket average of $153 per square foot, and less than a third of the Canadian average of $280 per square foot, according to CoStar data.
“Being able to get such a large industrial building right in Hamilton was a fantastic opportunity,” Kustra said. “When we're able to find deals like this where we can maybe purchase them for a little bit under market value, then you know those are ones that we really want to capitalize on.”
The property includes both industrial and office units, and with M6 municipal zoning, it has the potential for medical, lab and restaurant use in addition to office and manufacturing. It also comprises the adjacent half-acre parking lot, which Forge & Foster intends to develop as a residential property.
The building and manufacturing facilities are in good condition, Kustra said, and a $150,000 capital expenditure budget has been allocated to provide small cosmetic improvements to the exterior facade and landscaping.
Karma Candy is set to lease back the entire property on a triple net lease at $7.25 per square foot for 356 Emerald and $5.00 per square foot for 118 Shaw, well below the market average of $8.75 per square foot for industrial space in Hamilton, according to CoStar data. Apart from bringing leases to market rates through built-in escalations, Forge & Foster also intends to explore severance and redevelopment opportunities for the unit at 118 Shaw.
“We're able to give this investment time and let the leases escalate,” Kustra said. “Because we’ve got a strong tenant that we know is going to be able to pay rent on time and is a successful company in their own right.”
Forge & Foster expects the property to have an approximate exit value of $35 million, or $130 per square foot, for an exit
Investing in Hamilton’s Future
Both Kustra and Jha emphasized their belief in the future of Hamilton as a thriving industrial market. Located just over on hour from Toronto, the city's strong manufacturing sector and its proximity to the U.S. border make it an attractive location for businesses in the automotive, steel and other manufacturing industries, and its thriving healthcare and education sectors also contribute to demand for industrial space.
“I think that Hamilton has a great future in the next 10-plus years,” Kustra said. “The partners at Forge and Foster have shared that vision for quite a long time, before it became as popular as it is today. There are so many amazing parts of Hamilton that I think people are starting to wake up to.”
“It's a well-developed location,” Jha agreed. “It's not like a lot of the newer neighborhoods where you have to drive 5 kilometers to get somewhere. Everything is right there.”