Dalfen Industrial is one of the largest buyers of industrial properties in the United States, having closed on over $400 million in deals in 2019 with plans to add significantly to that total before year-end.
Dalfen’s Limited was founded in 1935 as a family apparel retail chain. It entered the Canadian commercial real estate business in 1970.
The Montreal-based company shifted its focus exclusively to commercial real estate in 1990, the year it formed Dalfen America Corp. as its U.S. investment arm. It sold most of its American portfolio in 2007 and, in 2010, elected to focus exclusively on industrial real estate.
When asked if that decision was the right one, president and chief investment officer Sean Dalfen immediately replied: “100 per cent.”
Despite selling almost $700 million in assets over the past three years, Dalfen Industrial still has well over $1 billion in assets under management.
“Winners focus, and by focusing on something you can be the master of that one thing,” Dalfen told RENX from his base in Dallas. “Our even more narrowed focus is that what we do is infill industrial.”
The real estate investment management company now seeks to acquire institutional quality properties in high-demand locations, with building attributes that cater to a broad range of industrial tenants, including an emphasis on the rapidly expanding e-commerce and fulfillment industry.
Dalfen Industrial has offices in Dallas, Cincinnati, Atlanta, Orlando, Denver and Montreal. It has approximately 15 million square feet of space in the U.S. and 300,000 square feet in Canada. For now at least, it’s focused exclusively on the U.S.
“The U.S. is a much larger and more diverse market than Canada,” said Dalfen. “The U.S. has so many metros that it gives us opportunities to find deals and select the best ones which meet the criteria that we look at.”
At the top of its target list these days are areas such as Texas, Denver, South Florida and Orlando, Atlanta, Nevada, Arizona, North and South Carolina, Cincinnati, Seattle and Salt Lake City.
“We’re not size-driven as much as we are location-driven,” said Dalfen.
Dalfen Industrial’s overall vacancy rate is less than five per cent, including new developments, according to its president. While there are assets exceeding 500,000 square feet in the portfolio, the average size is 100,000 square feet.
“Most people didn’t build larger infill because there wasn’t land,” said Dalfen. “But if we can buy 400,000 or 500,000 and it’s very infill, we’ll do it all day.”
Dalfen Industrial’s financing primarily comes from large American and Canadian banks, financial services holding companies and some local banks in certain markets.
It has a four-pronged investment strategy that has produced an internal rate of return of more than 26 per cent over the past 10 years, according to Dalfen.
“Our investors are our priority and we’d rather sit on the sidelines than buy bad deals. The kind of returns we’re seeing today are akin to what we’ve seen in the past.
“Our underwriting may be slightly different, but we haven’t sacrificed in terms of yields just because the market has been hotter. We’ve been more selective in what we’re doing.”
Dalfen Industrial’s value-added and opportunistic investment strategy is focused on acquiring well-located, investment-grade assets with solvable problems at a discount to replacement cost.
These properties allow the company’s asset management team and dedicated operating platform to quickly address issues and increase rents and residual values.
Dalfen Industrial takes a long-term view with its core-plus investments, primarily seeking stabilized, institutional-quality properties producing high levels of income with upside value potential through small vacancies or near-term tenant rollover.
“If a tenant rolls, we’re typically growing their rent from 10 to 35 per cent,” said Dalfen. “If they don’t retain the space, they aren’t able to profitably service that market.
“Real estate is their smallest supply chain expense, between three and six per cent of their overall costs. If they have to pay a buck more per square foot for their rent, it’s not a big deal if they’re able to get to their consumers faster and save on transport costs. And they have access to their workforce, so they would save on labour costs.”
Dalfen Industrial’s research-driven approach to investment involves a proprietary last-mile score. It’s comprised of different variables involving “demographic growth, population density, connectivity to the Internet, the workforce” and other factors to find the best indicators of whether a property is located in an ideal last-mile area.
The best locations are close to both a blue-collar workforce to staff warehouses and fulfilment centres, as well as a consumer base.
“On average, if workers have to drive 20 minutes to get to their warehouse in most markets throughout the country you have to pay them an average of one dollar more per hour,” said Dalfen. “That dollar more per hour translates, from a cost standpoint, to double the real estate expense.”
Dalfen Industrial’s development arm has approximately five million square feet of pipeline, including current projects in Dallas, Orlando, Cincinnati, Atlanta and Austin. Development accounts for about 25 per cent of overall business, according to Dalfen.
“Depreciation isn’t just a tax thing, it’s a real thing. Your property gets less valuable with age, so why pay way more than replacement cost for an older asset, when we can build perfection and you’re going to attract the best tenants and the highest rents?”
While Dalfen Industrial’s primary investment vehicle is its Dalfen Last Mile Industrial Fund IV, it also sometimes enters co-investment joint ventures with large-scale institutions on individual transactions and/or specifically tailored investment programs.
“We’ll co-invest with large institutions on deals that we feel are accretive to the fund, but to do them alone would be disproportionately heavy on one given investment,” said Dalfen. “Because we like diversification, we have the ability to participate but not take all of the risk.”
Dalfen Industrial has also taken advantage of the hot industrial real estate market to sell several properties at a profit, building its war chest for future acquisitions.
“We see big things for industrial going forward and we see a lot of value in rents increasing, but things happen in the world,” said Dalfen. “A trade war with China or a new election in the States can trigger a downturn in the entire market.
“We’ve taken advantage of a big demand for industrial and have been able to sell off properties and still buy new ones.”
Dalfen believes the niche his company occupies will enable it to comfortably weather any economic downturn.
He said when consumer confidence drops and lenders stop lending, retailers will go into survival mode, close underperforming stores and focus more on e-commerce.
“If there’s a slowdown, there’s going to be an uptick in rents, not immediately but shortly thereafter, because the demand will increase for industrial because there are only so many spaces that are very close to consumers.
“Your transport costs are 45 to 75 per cent of your supply chain costs. If you’re not close to your consumers, you simply aren’t profiting in e-commerce.”
With more manufacturers and wholesalers joining retailers and selling directly to consumers, they’re all vying for the same infill fulfillment space in which Dalfen Industrial specializes.
“If you need to ship something to somebody, it’s coming from an industrial building,” said Dalfen. “God’s not creating more land, as far as I know, so you’d have to demolish product, whether it’s dead malls or whatever else, in order to accommodate that new demand for industrial.”