Good morning, and welcome everyone to DIR Investor Day 2024. We're excited to welcome our investors, analysts, and business partners today. I think everyone in this room would agree that today, the markets are much more enthusiastic about real estate generally, compared to, let's say, a year ago. We, as a management team, continue to be enthusiastic and optimistic about the industrial asset class, and specifically DIR's business. We hope to convey some of this excitement and enthusiasm to you all today. Today, we hope to address a lot of the topics and themes around our business that regularly come up in our meetings with investors and analysts. With that, we have an ambitious agenda to cover. We will start with an overview of the capital markets and the fireside chat with Michael Cooper.
We will, with the capital markets backdrop, we'll set the stage for the discussion today, followed by the perspective on the current state of the GTA leasing market by Colliers. We're then going to cover our long-term outlook on the industrial fundamentals, as specifically focusing on the urban industrial asset class. We'll talk about how these fundamentals drive our investment strategy. and today's presentation is all about growth, and we are excited to share our outlook for growth of the business and the scale of our platform that opens up new opportunities for us, and which we are starting to pursue on a new initiative front, for our occupiers. Lastly, we will illustrate how the organic growth revenue drives our, and impacts our overall returns. Please hold your questions to the end of each session, as we will have a brief Q&A.
To start off, I would like to invite Peter Senst, President of Canadian Capital Markets at CBRE, to provide a brief overview of the capital markets. For those of you who are not familiar with Peter, he leads CBRE's capital markets practice in Canada. With this, Peter has live market insights into global capital flows and investor sentiment across all major asset classes. Peter will then facilitate a discussion with Michael Cooper, the founder of Dream Group of Companies and trustee of Dream Industrial REIT. Peter and Michael will focus on general trends in public and private markets, capital markets, and how global investors think about Canada generally, and Canadian industrial market in particular. Peter?
Great. Thank you very much, Alex. Good morning, everyone. Nice to be here with you. I've got a total of five slides to get us started. Now, in my ideal world, it would have been 55, but I was cut back and, you know, we wanted to keep this content to a limited number of slides. But here's a great way to start the day here. So I just flew in late last night from New York. A lot of meetings down there, Sunday through into Monday. This is what everybody's focusing on. This is what you think of when you think of Canada. The biggest investors in the world love to drill in this kind of data. They love to get an idea for what we're thinking. But when you look at the big drivers in the G7, this is where Canada stacks.
So population growth, tick the box. Feels very good. Maybe, it, you know, very aggressive, some people would say. Our GDP growth, you can see where we stack up vis-à-vis the US We were on top last year, so we pulled back a little bit there, but still incredibly positive. And then the employment growth, you can see again, so we're leading the way. So the biggest investors follow this data, and it leads you to Canada. So when I look at a slide like this, 2017, 2018, 2019, those are the good old days. When you look at it, we could handle rate increases. What we couldn't handle was 500 basis points in such a short period of time. The relief is here. We're feeling it in our volumes.
The Q3 stats that will come out of our company in terms of trading volumes, it's returning. We're seeing big deals, industrial, office, around the world, multifamily. So we're just about to get into a more interesting period, I feel, and we just need a little bit more time just so we all see it, feel it, and believe it. So how does this play out for industrial? Well, look where Canada stands, our biggest cities, Vancouver, Toronto, Montreal. You can see some of the strongest markets in North America, and that's going to continue to play out. When you look at our national average asking rates, this is the number one question I get now, and it's all about: Well, what's going to happen here? Well, we were selling our assumptions on the way up, so 2021, 2022, 2023.
You were having to underwrite, you were having to pay aggressive, aggressive returns. Now, with this little adjustment, you get the chance to buy some softer assumptions. I think this is a really good time to be buying different asset classes, but especially industrial. And this will be something by the time we get to 2026 and into 2027, watch how strong Canadian industrial markets return to. So what's happening in the capital markets? You can see that the volumes have come off dramatically. So this is global, where we've gone from $1.5 trillion down to $700 billion. Little bit of an increase, but you can see that significant drop. So here's where we'll end as we get into this next phase of the presentation. Canada is very different. So what we've taken is our Q2 data.
We've doubled it to come up with a forecast for 2024 . Q2 was incredibly strong. So this is something where we saw a lot of great trading activity, volumes picking back up. Some of that had to do with capital gains, but this is something where, again, Canada's outperforming. You can see industrial at the bottom, performing very well. So this is probably a great kickoff just to carry on into our next phase. But, you know, if you ask me, how am I feeling, you know, about Canada real estate, especially industrial, optimistic, positive, and I'm looking forward to 2025 . Okay. All right, so fireside chat.
I think, you know, I, I get the privilege of speaking to Michael, talking about different things, and one of the things I always like to talk about when we're with market leaders is just where do you see us in the cycle? What's it feel like? Does this remind you of prior periods? But how would you, how would you respond to that?
You know, I've always heard that when people say this time is different, they're not very smart. I would say that for the last twenty-five years, everything's been very different than other cycles, and it continues. So I think right now what we saw is the third quarter was really the switching point when everybody got it, that inflation's under control. We had COVID. That was crazy. People spent a lot of money, but we got through it. Then we had inflation, and everybody got into a tizzy. So it's been four and a half years since the world shut down, and it's hard not to look at it and say, things went way better than any of us could expect, even though everybody is totally bummed all the time.
So I think that in the passage of time, people are going to say, "We had this plague, the world shut down, the government stepped in, and there was a bit of inflation, but it settled down quite quickly, maybe even transient, and we got on with things." So I just think the last 90 days, you look from 1 June to 13 September , interest rates are down by about a third. Inflation in Canada hit 2%. Clearly, people are more concerned about whether there's going to be a zero growth than they are about inflation picking up. The US are down to 4.2% unemployment yesterday. The economy is growing pretty good. It looks like inflation's coming down. To me, it's like all of those basics look better than imagined.
So I think that what we've gone is, instead of having tremendous headwinds, now we have tailwinds, and what we've got to sort out is, you know, if the long bond's going to be at 3% and 3.25%, the overnight rate's going to be 2.5% to 2.75%. You know, like, when rates were 1%, we always said when that mortgage comes up, it's going to be, let's say, 3.25%. We never said it was going to be 1%. When somebody bought a house, and they got a 1.6% five-year mortgage, they never said, "I'm going to roll it over at 1.6." They said, "You know, it might be 3%." So now the five-year mortgage is just under 4% if you shop around.
You know, we can get apartment loans for 3.7, commercial loans for under 5. So I think what we've got to see is what do investors, whether it's in the public markets, whether it's individuals or private equity firms and sovereign wealth firms, what return are they expecting from the real estate? That, that's really unknown at this point. So I think the expected return, what the consensus is, we're still trying to figure out. So right now, the REITs are trading below NAV, and the NAVs are a lot lower than they used to be. So it's nothing like frothy, but we are adjusting, and it's looking more positive.
And I think what we saw both in 2022 and again this year is the guys in real estate thought it was going to be good forever, then they thought it was going to be bad forever, and the real estate guys have been really wrong. So it's not going to be good forever, and you can't sell condos at $1,800 a foot forever. Now, the condo guys think it's going to be five years before you can sell a condo. I, I suspect it's going to be much quicker. I think the economy is likely to do pretty good. I think we struggle with a lot of the policies. I don't know, I heard capital gains before. Somebody was talking about that. It hasn't been through Treasury Board. It's not law yet, and we could have an election before it gets passed. Tremendous uncertainty about all these policies.
All of this stuff together makes it hard to know. But I think the really interesting thing is, if you look at the deals that Peter and his peers have done, it's almost all foreign money buying from Canadians. So Canada is registering as a place to invest, and it's a. You know, we did a big deal with GIC, which, they'd owned a couple of hotels here before, but that was a huge entrance into Canada. We meet with a lot of people. You, you've said before that a lot of the-
Mm-hmm.
Global investors, that they're really curious about Canada. There's a lot of things happening with the pension funds, where they're not the same pension funds that they were three or four years ago. So I think we're sort of entering into a new age. It's undefined, but I'd be stunned if it's not pretty positive.
Yeah, it really feels like we had this run up to COVID, where real estate was really the best performing asset class. Then we had this COVID period. I just feel like in the last week alone, things have changed. Our trading patterns and volumes are just picking up again, and it even goes into office. We've... We're even doing Calgary office again. Like, it's, it's shocking. So if that can happen, industrial is a bit of an-
Not office.
Yeah, yeah, yeah.
Oh, that's amazing.
I feel like that. All right, so when you think about industrial, you've got to track a lot of the key themes, and you've got to plan for some of the variables in industrial. What comes to mind?
So, like, industrial has had everything going for it year after year after year, and it's been waves of things that are very supportive for industrial. So, you know, you know, online shopping was a big driver. Onshoring was a big driver. Now, there's a lot of policies that are really attractive to support industrial businesses from the federal government. So, you know, we've gone. I mean, for most of my career, rents were $4.75. Like, it didn't matter if it was the eighties, nineties, the aughts, it was $4.75. And now we're looking at 18 to 22, and, you know, somebody says, "Oh, I think interest rates are off 1%. Rental rates are off 1% from last year." Yeah, they're up 300% in the last 10 years, and they're sticking.
So what we're seeing is a bit of an adjustment, a pause, but it looks like the economy's growing. It looks like we need more logistics. We need more everything. I don't know, you guys came up with some numbers. They were kind of the same.
Mm-hmm.
I think they're below the trend line in vacancy. It's just not on fire like it was in 2019 to 2023. How could it be that tight forever? I think industrial is just settling in, but it's got a lot of positive attributes. I've never seen suburban office buildings being torn down to put up industrial buildings. That's kind of a change in priorities, but industrial is looking great.
Absolutely. Absolutely. So you mentioned earlier on some of this global capital looking at Canada. We spent a lot of time helping them come into Canada, but we see a lot of US private equity. We see the global sovereigns coming in. Where do you see that going? How does that evolve, and what do you think is next?
Canada is a relatively small market. We've had a lot of population growth, so I think we're about one-eighth the size of the US Like, we used to be one-tenth. I mean, it's really amazing what's happened. The economy, I know we bitch about it all the time. We bitch about Canada all the time. It's really pathetic, but when you sort of step away and start looking at the attributes in Canada compared to the attributes elsewhere, it starts to look really good, so I think that the... You know, when we spoke to a sovereign wealth fund 10 years ago, they would say, "Well, you guys, you have all these, capital-heavy sovereign wealth funds or pension funds, and they own all of Canada, and they pay a lot of money.
So, you know, we like Canada, but it doesn't make any sense to go there." And in the last few years. By the way, like, the Canadian pension funds were all over the world, buying a lot of stuff. They've all retrenched. I think they're struggling with how real estate fits into their portfolios. In fact, for many years, the real estate group was treated differently from all the other groups. And they, like, you have an Oxford, Cadillac Fairview, or even, you know, you had them, the real estate groups with their own boards. Now, there's been changes. Almost every pension fund has new managers. In almost all cases, they're reporting it to the chief investment officer, just like stocks and bonds and everything else, so that's becoming really normalized.
Real estate's becoming more of a normal asset class in the pension funds. The pension funds are fully invested, and they kind of don't have a lot of new cash that's going into real estate. It's hard for them to take cash out of the existing things. That has opened up the whole world's eyes that Canada is investable, and the pension funds are net sellers, not buyers. I think everybody is paying attention. One of the things that's interesting is people are surprised to see how low interest rates are in Canada compared to other places. They're used to the US plus something, and Canada is a US minus something. They're quite curious about that. It allows them to pay up and still get a decent return. But just like the public markets, everybody's trying to say, "So is 11% good?
Is 13% good? What are the returns I should make a decision on?" Now, you've seen a lot. What are you seeing in terms of what the foreigners are wanting in Canada, and also maybe pricing?
Yeah. Well, I would start with geopolitical tensions. Like, the kind of thing we don't have to talk about as a Canadian, like, there's not a lot of it going on here, but our Asian business has had disruptions, our European business had disruptions. We've had capital markets disruptions in the US, where credit's been so tight. So when you look at it, you say, "Okay, well, Canada looks really good." And a lot of the biggest groups have never been here. They've been over-invested in other parts of the world. So this looks like the time, because of what you just said, when the big Canadians, you're not bidding against them. Once upon a time, we looked like such a closed business. You couldn't get in. The Canadians always won.
This is the time where they'll come in, and you watch some of the next big deals that happen. But last year was a year of all billion-dollar deals. I think we're going to get back into that before long.
Yeah, OMERS was in the paper this weekend. I think it was OMERS, and they were talking about how they're not going to have their own private equity group in Europe. They're going to invest with others, and I think we're starting to see more opportunities for all players in real estate to partner up with pension funds in a way we didn't before, so I think there's a lot of changes, and can you... I mean, it's public. Like, TPG's done a bunch of deals in Canada. GIC obviously has.
GPIF, we put them into Vaughan Mills, so, I mean, not many billion-dollar mall sales last year. So it just, it continues to go on, right? Like, it's, it's you're coming, and if you're going to come to Canada, you don't wanna come for a small deal. You want something significant. So lots of activity, lots of time being spent, and we'll just see what's the next lightning strike. So you invest in a lot of different asset classes, and you're always looking at risk-adjusted returns. Where do industrial returns on a risk spectrum pan out versus the other asset classes?
Yeah, we talk about it a lot. I mean, basically, you know, we think you can do a lot, somewhere around a six cap or a six cap, reflecting a bit of roll over the market in the near term. And, you know, if we're using 3% growth, it's like a 9% unlevered IRR. And with current debt, you know, we're only using 35% debt. You know, you can still get to mid-teens, and that seems pretty attractive. Apartments are lower cap rates, lower interest rate, more debt, and, you know, they're probably 100 to 150 basis points behind industrial. And, you know, they're completely opposite in their nature. So tons of people need a place to stay. The apartments are going to be full. It's a question on the margin about the rents.
Big risk is political risk in terms of are they going to change the rules, which could have a shock to the value of those buildings? Industrial doesn't have that. It's probably more of a market asset, but it ranks pretty high on risk and return. So you get a higher return, and, you know, it's. I'm not sure how to measure risk with apartments. The surprise in our portfolio is we're getting big rents on retail, especially, like, from grocery stores, from the. You know, it used to be that you got low rents from the anchors and higher rents from the CRUs. Now we're getting really good rents from all the tenants, and it's very attractive, and it's been surprising. We're building small ones all over the place, and they're very good offices.
It's, you know, there's just not as much known, so I don't know how you measure the risk of them. So I think industrial wins, and it's industrial investor day.
It's funny how that happens.
Yeah.
If I was to stack the asset classes, I would say that industrial still sits at one A, but multifamily clearly is coming to a one B. Food-anchored retail might be one C, but everybody wants those three together. But industrial, if for all the calls I would get, for all the discussions I have, industrial is still the top. So here's an interesting one for you. So the disconnect between public and private valuations, how does that factor into the thinking on the Dream Office REIT DIR position?
A year and a half ago, we sold just under CAD 200 million of DIR units that had a tax cost, and we used that to buy back stock, and that basically reduced the capital in office by, like, 40% or something at market. You know, I think our shareholders wanted to have less office, but it's the market. Like, that was a way of us creating a buyer for stock. That worked out really well. We still have about another 13.5 million shares. What's not clearly understood is they have a zero tax basis. So just to make it simple, let's say it's worth CAD 200 million. I know that at least 65% that we identify holders of Dream Office are taxable, and some of them are people.
It matters because if you sold $200 million of stock within Dream Office, and now I guess the capital gains rate is about 18%. So that's $36 million of tax that the owners would have to pay. In a corporation, individual would have to pay $70 million. Now, we use it for our liquidity, so we have it on a line. So if we sold them all within the office REIT, you know, we'd probably gain liquidity of, let's say, $80 million. But if the stock was owned all by individuals, they'd have to pay $70 million to get $80 million liquidity. So I'm not sure if anybody thinks about that, but that's on our mind very much. We very much like Dream Industrial.
We think it's got, we just talked about it, lower risk, higher returns than office, which is great, and in office, we're going to see how things go, but we have a lot of places we'd look for liquidity before we'd look at the industrial REIT units, and we kind of look at them, like, in case of emergency, break glass.
Yeah.
So, you know, I think that sometimes the investors have all their ideas about things, and it's just sort of like, that tax is brutal, and Dream Unlimited owns 30% of the office REIT. So if we sold those, we got a cash tax bill. So we would look for other ways to increase liquidity in Dream Office before we'd look at selling the DIR units. But I'm not sure if people were aware of what the tax issues are. And we've got that, too, with... I'll give you an example. Adelaide Place we bought for CAD 212 million. It was a 7.2 cap, and we committed to it in December of 2009 . So it was up in value by a tremendous amount, way up. It could have been CAD 650 million.
Somebody says, "Let's say it's worth four hundred." I'm just making up numbers. Please don't divide it by 42 million, by 17 million shares. But if we sold it at what would be a fair price today, our tax base is the $212 million, minus maybe $40 million in land. So there's $160 million of depreciable property. That's probably close to $100 million less. So let's say we sold it for $400 million. We'd have $80 million of cost base. We'd have a hundred and, two hundred. We'd have $132 million of recapture, which is full ordinary income, plus another $150 or $180 million of capital gains.
So, like, the tax is driving a lot of stuff if you're actually a holder who's taxable, and I think people would be shocked how many of the owners of REITs are taxable. And I think if a management team is not looking at what happens to their shareholders when they make capital decisions, they're doing a disservice to their owners. There you go.
All right. I like that one. All right, so what are the dynamics in the public and private capital markets in Europe and the US compared to those here in Canada?
You know what? They kind of move alike, but not at the same time. So Europe's been very strong for industrial this year, and they've acquired, I think in Europe, they've done 10 billion of equity issues, 3 billion in industrial, and the values are strong. So I think that's pretty attractive. In the US, it's been going better, but again, I think, like, you know, we saw it here, the private markets were much stronger than the public markets were for the last 24 months. And that's why you saw a lot of sales from public companies to private. Now we're getting closer to NAV, so it depends on the individual asset, what you're going to do with the asset, how you're going to manage the asset. It's not as clear which one's higher value.
And I think in the US, there's a real backup in the open-ended funds for liquidity, a lot of redemptions. So it looks like apartments are doing really well in the States. It looks like industrial is doing pretty good in most markets. But the issue there is you've got billions of dollars trying to get out of the open-ended funds, so that, that's hurting the private guys. I think the public guys are doing pretty good. But right now, it's not as obvious that, like, private's paying up for everything, and public companies are trading like, bad stuff, you know? So I think it really depends on the market. But, in Canada, I think the public markets have been near dead. There's been a couple of signs of life, but, I don't think it takes a lot for that to change.
Yeah, I think that's going to be 2025. Like, I just feel it's all building into that kind of direction right now. And it doesn't matter whether I'm talking to a high-net-worth global, big institutions, open fund. Like, some of the funds are even trying to come back. And, you know, again, people saying, "I've got capital I want to deploy.
Like, you know when there's a house listed in your neighborhood, and they ask, like, a hundred dollars, and it doesn't sell, so then they raise it to a hundred and ten?
Yeah.
I think we're starting to see that a little bit from some sellers, where they feel like, "I would have sold it three months ago at this price. I didn't sell it, but now I want a higher price." So there's a lot of price discovery going on, but generally, it's much more favorable than it's been.
All right, so let's move on here. So there's been some changes at the Canadian pension funds, so we've been referring to that. What are the implications for the real estate markets? What would you? How would you approach that?
Yeah, it's great. I think about this sometimes. I kind of think, like, how much new capital does Canada need for real estate for things to get fixed? And I think it's more than $20 billion. It's probably not $50 billion, and it sounds like a lot. It's not that much money. I mean, these guys are big. So we did $6 billion with GIC. We did another deal with them. We've done deals with others. We're seeing other people do deals, a billion, 2 billion. I wouldn't be surprised if we see a couple of big deals. So, you know, the foreigners are bringing the money, and they're providing life to the flow of transactions. I think the issue for the pension funds is kind of what we're seeing a little bit with Dream Office.
I mean, Commerce Court West, that's a tough one. Like, a lot of these office buildings are tough, and I don't know what they hold them at. I don't know how they're going to sell them. Same with some of the big malls. Like, the malls are expensive to keep current, the big ones. So I think that the industry could get better and better and better, but it doesn't fix the issue. So I think the pension funds have some work to do still. I think there's been some trades of scale. I don't know who it is, but it's public. I think it might have been HOOPP or somebody. They took 14% off of their values of real estate.
They are. They're doing it over time, but they're grinding down the cost base, and we'll see when they let go. But I think it'll get straightened out. I just think. You know, I worry about Peter because he spent many, many years dealing with the logical buyers of real estate in Canada, and now it's not those people. So, you know, I know people say terrible things, everything's horrible. There's a lot of people who've made a lot of money, and a lot of people, like. I don't know if you guys know who Westdale is. They had something called Fabricland, where they sold cloth to people who made dresses since World War II. And they took the extra money, and they started buying apartments in Canada. They bought a lot.
And then, when Bob Rae became premier, they decided they'd go to Texas, and they bought 30,000 apartment units there. That's the history of Canada. People have a business, they make some money, they put it into real estate. Now, you know, some guys could have a tech business, and they decide to put a portion of that in real estate. So you're seeing there's a new group of buyers, and instead of them buying, let's say, a $10 million apartment building, these guys are buying $100 million assets. So the money in Canada for real estate is coming from different sources than it used to be, and then you've got the foreign buyers, and the same old, same old haven't been that active. So I think the REITs may surprise in terms of their appetite to be acquirers in the next year or two.
I don't think you'll see a surprise from the pension funds, but I think you'll see a lot of... The who owns what in Canada is going to change. And to be blunt about it, with our asset management business, we're trying to be a honest broker and put new money together with money that wants to get out. So I think that's going to be the theme over the next couple of years in Canada.
But I think it's unrealistic to think that every year is a good year. So in a business that's very cyclical, you've got to be prepared, you've got to be ready for a tough year or two. That's what... We've gone through that. Like, I think we're getting into a better stage. I do appreciate that you worry about me. That's very kind.
I do worry about you.
That's good. That's good.
You've got two Rolodexes now, the old one and the new one.
Yeah, so-
Or the old one you use for people who are sellers.
Right.
They used to be buyers.
We're always looking for money. Again, I would just say that the level of capital commitments building again, it's different. Versus 2023, it's like I can put you at ease. It's going to be okay.
Good. Good. Now, one thing that I think, I don't know if you guys have reflected. I see a couple of analysts have made some changes. But for Dream Unlimited, which isn't that big a company, we're going to save $9 million of cash in interest for 2025 compared to what we thought we'd have to pay in interest when we did our budget in 2024 for 2025. Now, a lot of people's loans, they have a debt service coverage, and interest rates come down, they can borrow more money. So I think we're going to see, just at the very base case, companies are going to be spending a lot less money on interest, and they're going to have a lot more borrowing capacity. That's a start. Now, we may see that cap rates come in a bit.
to reflect that, with the lower interest rates, you can get a pretty good return and still pay up a little bit. And the one we're waiting to see is what's going to happen in the housing market. And I remember hearing that, last year, when somebody's mortgage came up, on average in Canada, the monthly mortgage payment went up CAD 600. This spring, it had been reduced to CAD 300. And remember I said earlier, nobody has a 1.6% mortgage and thought that they would renew it at 1.6%? So I think that now we're probably down to, let's say, CAD 150 or CAD 200 more a month, and that's what people expected when they bought the property five years ago. So that wall of mortgages in 2025 and 2026, it's not a wall, it's gone.
So I think, like, we're getting through so many things. There's so much savings on so many different levels, that I think that it's hard not to see why that wouldn't go into much better times. So I think that's really the takeaway, and it's happening for everybody at every level.
I think we're getting close to the time allocation here. Why don't we end on one of the things we all talk about, one of the things we all hear about, and it's AI and other tech, how it might be impacting real estate. What is it that you see as the opportunity? What's the risk?
So I have a lot of friends in tech, and they're telling me all the time how dumb I am 'cause real estate is not doing enough in AI. And they'll show me what they can do, and the answers they get for their questions are amazing. I say, "Okay, how much sublet space is there in Toronto?" Comes out in two thousand and seventeen, there was something. What's the big. The data is so terrible in our industry that it is an enormous impediment for AI to do anything special. So I think that's a. I mean, I don't even. I can't even describe. Like, I've got a buddy, who for 25 years has had incredible data in a biotech business that commercializes medicine, okay? So they have data on every project they've done and what's gone good and what's gone bad.
He’s able to take all of that information, and he uses AI as the project manager for all their projects. And because of the stuff that they’ve done, and they have the data, it prompts everybody, “Have you done this? Have you done this?” It looks at the billing hours compared to the time they put into it. It’s amazing what they can do. We can’t do that. We met with Microsoft a couple of weeks ago, and it’s coming, it’s coming. I think it’s going to be very, very slow in real estate. I’ve heard some people say, “Oh, they use AI to look at their customers for apartments, and it helps them screen them a little better.” Maybe. We’ll see. I think there’s a data issue.
I think sort of on accounting, legal. I think there's a whole bunch of areas that as AI becomes better, and real estate isn't any different, it's going to make a big difference. But I've kind of been shocked at how hard it is to use AI in a material way in our business yet. So it'll come, but I think real estate doesn't have the information to use AI well, as like some other industries do. So, you know, accounting, maybe legal, you know, we'll see about Argus and how we do the modeling. Wouldn't it be amazing if AI does the modeling, and everybody has exactly the same numbers?
Yeah. It'd make my job a little tougher.
Yeah.
You can worry about me for that one.
Worry about you for that one.
Anyway, I've really enjoyed that. You know, good luck with the day.
Thanks.
If there's any questions, I'm going to stay around and happy to answer any of them, so...
I think AI will be big. I just think it's going to take longer in real estate than it will in other industries. Yeah, if there's any questions, we're happy to answer any questions on any subject. Or we could exit right now.
Have the questions later.
Yeah. Thank you, everyone.
Wonderful. Thank you.
Thank you, Michael and Peter, for the insightful discussion. Before we invite our next guest speakers, I'd like to give a brief overview of Dream Industrial today and set the stage. Dream Industrial is one of the largest industrial platforms in Canada, with CAD 15 billion of owned and managed industrial real estate, representing 72 million sq ft across Canada, United States, and Europe. DIR's own balance sheet portfolio totals CAD 8 billion, and with additional CAD 7 billion being held within our private partnerships. About two-thirds of our business is in Canada, with the remaining third in Europe. We've grown our platform by roughly tenfold over the last decade or so through several strategic transactions over the past several years. Most recently was the acquisition of Summit Industrial, in partnership with GIC.
While we continue to look for opportunities to accretively grow this platform through a combination of existing ventures, establishing new strategic partnerships and, of course, accretively growing our balance sheet. With the growth of our business, our management team has strengthened considerably. We operate a decentralized but vertically integrated structure, with local operating teams who have deep knowledge of the respective markets. We have also built out big strengths in key disciplines across the industrial asset class, including development, asset management, and most recently, adding our focus on managing our large customers across the business. Our senior management team is all in the room today, and they'll be available after the presentation for any questions on the local markets. More importantly, though, not only has our platform grown in size, it has also delivered solid returns and growth organically.
This slide shows our track record of driving same-property NOI, and base rents have been the main driver of NOI growth as we prioritize rental growth over occupancy, given occupancy is always a much easier lever for us to activate. Most recently, the strategy allowed us to continue growing our same property NOI despite the negative pressure from occupancy rates, and we'll talk about occupancy outlook throughout the day. This NOI growth has translated into strong FFO per unit growth of 8% compounded average since 2022 . The main question that we're focusing on today is on the screen, is the near-term outlook for the business as we are looking to refinance $1.3 billion of debt in 2025 and 2026 at less than 1% interest rate.
Our goal for today is to demonstrate how our business is well-positioned, not only to refinance this upcoming debt, given our liquidity and access to capital, but also drive sustainable FFO per unit growth and cash flow growth over the near, medium, and long term, providing attractive and secure returns to our unitholders. In Michael's words, our overall industrial market may not be on fire, but our business has lots of drivers, and the opportunity set ahead of us is amongst the strongest in our history. And this outlook starts with our portfolio. Over 72 million sq ft of industrial assets that we own or manage are located across key markets in Canada, Western Europe, and the US
We have significant scale in major urban centers, including 10 million sq ft in Montreal, 7 million sq ft in Calgary, and 17 million sq ft across key markets in Europe. The Greater Toronto Area is our largest market, and to speak more about the GTA market, we have invited Graham Meeder and Colin Alves from Colliers today. Colin and Graham are industrial market specialists focusing on leasing, tenant representation, land sales, and investment sales. Their team is among the leaders in the GTA industrial, and they have consistently ranked among the top Colliers team in Canada and across all asset classes. They're here today to provide real-time insights on what they're seeing in the GTA industrial market, with a particular focus on the largest submarket in the GTA, GTA West. Colin and Graham?
Thanks for the introduction, Alex, and thank you, Dream, for including us in your investor day today. I'm Colin Alves, and this is my business partner, Graham Meeder. We're going to walk you through some of the GTA fundamentals and our observations from the trenches on a day-to-day basis. I'm going to kick it off with a couple of high-level observations, and then we'll jump into some of the more relevant data as we progress through our slides. Michael mentioned tailwinds. It's no coincidence that that's what we've been picking up on over the last quarter or so in our market. 2023 was a year characterized as a transitional year, a return to fundamentals, and I think on top of that, a reduction in tenant demand just because of some of the economic uncertainties.
As we fast forward into 2024, we've seen a pretty consistent increase in tenant activity, demand, and resulting leases, which I think is a positive sign as we close out this year. Average asking rents declined slightly Q4 last year and have followed suit the last couple of quarters. When I say slightly, it's about CAD 0.10-CAD 0.25 per sq ft. We've seen an increase in renewal activity, and I think the important takeaway here is it's often short term, and I think this just speaks to tenants wanting to get a better sense of where the economy is headed so that they can make that growth decision in the next 12 to 24 months. Supply remains low in core locations. It's tough to find infill sites.
There's been a return to core over the last twenty-four months, which has kept that supply extremely low, and as a result, rents have held extremely well. Spec construction, as it always had pre-pandemic, is back to leasing. Generally, post-completion, we see about 10% to 15% pre-leasing activity on speculative construction. Sublease availability, although, has increased, and we've heard a lot about that over the last, few months, still remains below the 20-year average. We've seen the return of 3PLs, CPGs, food and beverage. The large occupiers of space are now starting to take, the lead in absorption and a return of big-box requirements to the markets. And when I say big-box, that would be 200,000 sq ft and up in size. Amazon's been signing new leases throughout the US, and we're going to follow suit shortly.
I suspect there'll be a large announcement of a GTA lease signed probably by the end of this year. And Prologis, who are a bellwether in our industrial market, have been extremely active. We're tracking about $800 million in acquisitions that Prologis are currently underway on, most notably the recent sale of the RONA leaseback of a million sq ft distribution center in Milton. Above the bar, we're highlighting some of the recent transaction trends. Generally, I'd say landlords are aiming to maintain face rates by the reintroduction of inducements, whether it be cash allowances, free rent, fixturing periods. Again, how our market had operated pre-pandemic. And with these new data points that we're tracking in the market, we're actually seeing a return to the land market. There's a number of sizable land transactions that are currently underway.
Below the bar, this is our spec construction pipeline. You'll see the market delivered 13.7 million sq ft last year. Still got a bit of hangover space. But I can report that all of that, in general, is seeing very good activity, and with the return of these larger big box requirements, that 5.2 million sq ft is shrinking probably weekly at this point. This year, the market delivered about 12.6 million sq ft of new spec construction, GTA-wide. We saw some pre-leasing activity on that. And then as we look into 2025, we're tracking about 11 million sq ft. And this is something that Graham and I are updating on a weekly basis. We're staying in direct contact with all the developers and landlords in the GTA market, so we can rely on those numbers.
I think what's interesting to point out is if we look back to our January number, this was closer to 20 million sq ft. So we've seen that drop off significantly, and it's a combination of delays at the planning level, trying to secure your permits to move forward with the project. We've seen some pausing, some waiting for, you know, rental rate data points to support the development to go forward. And historically, most product is delivered in Q4 of 2024. So some of that's going to probably slip into 2026. Here's a North American perspective, and we're looking at our major peer markets in the United States, as well as the major Canadian markets. In terms of our overall inventory size, we rank sixth. We were displaced by Dallas during the pandemic due to their impressive building boom.
And if you tease out Northern New Jersey from Metro New York, we'd still probably sit in fifth place. Our vacancy rate year over year has moved slightly, considerably less than most major US markets, even except for Chicago. Our average rent year over year, you can see, has... And again, this is based on Q2 stats, so these have changed slightly since Q3. But Q2, we've basically remained flat, as I'd mentioned earlier, and we've got a conservative annual growth rate of 0.27%. And I don't think that's for lack of enthusiasm to develop, it's just the barriers to development in our city. And then the final column, our construction as a percentage of inventory, really hasn't moved. We're sitting at 1.8%. We've never been above 2% in our market.
We've always been a very conservative, very constrained market, and if you look at some of the US markets, if I was to rewind 24 months, most of them would be high single digits, right on the double digits. So significant supply increase in major US markets. Overall, we suggest that Toronto has some of the strongest fundamentals in North America. This graph, we're looking at, leasing and user sale activity. And you'll see today, we're currently sitting at about CAD 355 a sq ft on user sales throughout the GTA. We peaked roughly two years ago at just over CAD 400 per sq ft. And even with that decline, you'll see over the 2021 to 2024 period, sale prices are still up almost 80%.
Very similar story on the leasing market, where we peaked, just under $20 a sq ft, a couple of years ago, and we're now trending down towards, call it mid-$18. But again, during that same period, 60% rent growth. The bottom line denotes availability. You can see we swept across the bottom, an all-time record low of 0.66% in Q4 2021, and you can see a very gradual increase in availability to where we sit today at about 3.7%, which is still below our historical average of around 5%. So still some room to grow. Here's a historical and forward-looking look, forward look at our speculative supply pipeline, and you can see...
I think the important takeaway here is there's a lot of projects that are announced and talked about at the start of the year, and whether or not they come to fruition is a bit of a different story, and I think that tells a story here with what's actually delivered as of Q4. Again, some projects fall into the following year for various delays. Some are absorbed early on with some pre-leasing activity. But I think you'll see here, you know, a lot of optimism in 2024 and 2025, and then some delays. And again, I think it's mostly due to the challenges at the municipal level. And as we head into 2026, we start to see more normalized levels of spec construction. I'm going to turn it over to Graham.
Yeah, thanks, Colin. So here we're talking about the GTA West. So the GTA West represents approximately 50% of the 850 million sq ft of industrial square footage. And to Michael's point, I think the future for industrial is bright. Here is a good long-term view of the GTA profile, and we've seen steady compression in availability really over the last 15 years. I'd echo you know the time of COVID was a blip in time. Like, you had supply chain shortages, you had material delays, you had lack of entitled land, and just all barriers against you to try to get space out of the ground. Couple that with just tremendous appetite. The supply chain was broken.
We were ordering our product at home, not at the retail stores, and we had to get it to the consumer. So the likes of the Home Depots and others had to go out and execute on large industrial deals, and that brought our vacancy levels down to an unsustainable level. We'd be out there on tour with clients, asking them to find... or they were asking us to find space. We couldn't find it. Like, there just was no space available. That couldn't sustain. So sub 1%, we're now finding ourselves with supply coming out of the ground. As Colin mentioned in the previous slide, that's starting to balance. So that 5% availability rate, that would put us on par with our 10 to 15 year average. That doesn't concern us at all.
We're starting to bring down our supply side, so that's going to bring down our availability rate, and we'll also start to level off our rental rates. I think long term, we're conservatively optimistic. We'll start to see rents climb for the back half of next year. We're also tracking very closely the sublet market. So over COVID, you'd go to your landlord, you'd ask to sublet the building. The landlord would say, "We're not going to allow you to sublet the building. We're going to terminate your lease." And the reason why they'd terminate your lease is they would double the rent. So there were no sublets over that period of time. So when I see this uptick in sublet activity, that's not a worry for me. There's always been sublet offerings in our marketplace. It's about 15% of the overall total.
We're now at about 5 million sq ft in sublets, which, again, is something that we can deal with. We've seen pretty good demand as of late. Some of the sublets with Amazon, they've been now using them. We've also seen a number of our 3PL, third-party logistics clients, starting to take those spaces off the market. So the pace of those sublet offerings has started to slow down. A lot of our clients are starting to ask us about carbon zero. Colliers, we have our own carbon zero mandate to go carbon zero by twenty thirty. Here are some household logos that you'd recognize with their carbon zero declaration. Approximately 40% of Fortune 500 companies are now have made a declaration to go carbon zero.
This graph just shows it broken down by industry type, and if you look at the blue bars, that's pre-2030 is their target. So technology, healthcare, bio, food and bev, all very high in terms of implementation on carbon zero. And the so what of all this is, you know, the development community have to be prepared to start offering carbon zero buildings to accommodate these clients. There's going to be a return to core and also a flight to quality. Another way we're looking at carbon zero is based on the geographies. So the darker shaded countries would be having the higher density of companies within that Fortune 500 base focused on carbon zero. So it's really being led by Scandinavia, it's being led by Western Europe, and also largely by North America.
This is our attempt to paintbrush the market going east to west. So again, about an 850 million sq ft market, so we're talking about a large geographic area. We track Oshawa as kind of the easterly boundary, as far west as Burlington, Milton, Halton Hills as the westerly boundary, that comprises the 850 million sq ft. We've also added in Guelph, KW, Cambridge in here, as well as Hamilton. And, you know, moving east to west, you can kind of see the breakdowns of the submarkets. Again, the west represents about half of the market. You get into the inner parts of Toronto, there's been a flight there, as well as a flight towards Durham Region. You've got strong labor, you've got strong demographics, good transportation.
If you're servicing Eastern Canada, getting a head start in the morning with driver logs is also important. So you're seeing more growth out in through that Durham Region. You're getting some good growth in around Hamilton due to the labor attributes there and also lower costs. But overall, we're bullish. Pretty much right across the board, you're either going to be in the mid-teens to the high teens rent-wise, and we see that staying put. This is really tracking modern construction of 100,000 sq ft or larger.
And here's who's leasing space. As I'd mentioned earlier, we've seen an uptick almost month over month, pretty consistently throughout this year, on absorption of space. This chart here is showing you, a combination of new spec leasing, as well as second-gen leasing. There's a number of companies that the room would probably recognize. And again, it's the return of the 3PLs, the CPGs, food and beverage, and other, household names that we would all be familiar with. You'll also see a fairly diverse, geographic spread, where there were some concerns in some of the peripheral markets earlier this year. That seems to be abating. We're seeing good leasing activity in Durham. We're seeing good leasing activity in Burlington, where there were some concerns about an oversupply situation.
But we're starting to see that space absorbed, so all in all, a very good story.
On the food and bev side, we've got the third largest cluster, right, for North America, so that's been a pretty active sector. E-commerce has been tremendously active, very busy sector, but I would also say Toronto is a big distribution hub. Like, we're the largest market, two times as big as the next market. If you're setting up a distribution center in Canada, 100%, it's like, well, not 100%, but high likelihood is going to be in Toronto. If you've got two, then it's a matter of Toronto, plus maybe one in Western Canada. Is that Calgary or is it Vancouver, but it's really a, an e-commerce distribution hub.
To close it out, this page describes the activity levels we've been seeing on both the end user and capital markets on the buy/sell side. On the left-hand chart, I think the important and interesting takeaway, at least in my mind, is you saw very little sales volume. So number of sales in the second column were very low during 2020 and 2021. Obviously, some uncertainty in the economy. You know, people didn't know where to peg values at that time, but you can see since then, it's been a very consistent growth story in just the number of sales and the total sales volumes, and even during the last couple of years as we've entered into a higher interest rate environment, it really hasn't slowed, and I think that speaks to the conviction in our industrial sector in the GTA.
The breakout on the top right-hand side of the page denotes the profiles of these buyers, and you can see 2022, 2023, and 2024, overwhelmingly, it's the private capital markets that have been buying real estate, and that would be a combination of high net worth, private equity, family offices, and so on. They have been extremely aggressive, again, because they feel that this is an opportunistic sector to participate in. We've also seen a significant number of new entrants into the market from the investment community that never played in our space pre-pandemic.
Lastly, the bottom graph here is showing our total sales volume, which you can see a significant uptick over the last few years, number of sales as well, and the average sale price, which has declined in lockstep with the increase in interest rates.
But if we see a decrease in interest rates, that should propel, you know, further increases on sale values as, you know, buyers start to purchase more and more demand for industrial product. I'd also say just the finding access to land, the barriers on building makes those replacement levels extremely high. So buying existing, you know, we can see that long-term trend continuing.
That's it. Thank you very much.
Thank you.
Are there any questions? We'd be happy to answer.
Yes.
On one of the slides you had showed Toronto rating very strong from a developer perspective, yet versus the US markets, yet our rent growth may be lacking. So I'm just wondering if you would agree with that dynamic?
It's a great question. I think from a fundamental basis, the consumer spending levels in the US are much higher, and I think that helps to drive rent growth in certain markets. If I was to put up a chart denoting where rents have either grown or fallen in the US, it's a complete mixed bag. It's all over the place, whereas two years ago, it was very consistent throughout every major market. So it's really market-to-market dependent. And again, as I'd mentioned earlier, we just tend to be a more conservative market, both from absorption levels and from development perspective.
Yeah, I think we've taken a bit of a breather, and, you know, we will see rent growth again, kind of late half of next year.
Colliers actually surveyed 200 industry professionals a couple of months ago, just to get their thoughts and forecasting as we head into 2025. The consistent, I think, response was that there will be rent growth. It could vary somewhere between 2% and 4%, and I think that's a pretty conservative outlook.
Yes.
What about the peak vacancy rates? Do you expect rents to start growing in the second half of next year? Do you see vacancy getting in the first half of next year as well?
Yeah, I think, Q1, Q2, during that time frame, we will see peak vacancy, and I think vacancy will start to decline after that. There are constraints in the development pipeline, as we've mentioned, and I think that, you know, with these economic tailwinds, we're going to continue to see greater and greater absorption levels as we close out this year.
Yeah, we're getting a handle on our supply, right? Big time. So I think that will level things out, and that will level our vacancy, and then we'll start to see rent growth for that last half of the year.
You guys mentioned that Amazon's back in the market. I guess, how deep is that demand? Is that a one-off transaction, or is there more behind that?
I think what we've observed over the last couple of months is they had about 1 million sq ft of sublet space in the market. That's now off, and they're using it. So that sort of kicked things off. They're in the market currently for about 800,000 sq ft, and this would be net new space. So that transaction will likely take place in the next couple of months, we suspect. And they continue to survey the market for other requirements in different size categories. So anywhere from 200,000 to 1 million sq ft is where Amazon is currently doing their due diligence.
They're also looking at buying and building for themselves in certain spots.
What about, like, Temu? Have you seen any of the, like, Chinese e-commerce players coming to the market?
Typically through 3PLs, right? Their first entry into Canada is levering someone else's infrastructure and presence here. So we understand they're being serviced by a 3PL. And the requirement that Colin was mentioning, the 800,000 sq ft-er, that's also likely going to be a 3PL bid managing an Amazon requirement. Anything else? Excellent. Thanks, everybody. Great.
Thank you.
Thank you. Thank you.
Thank you, Graham and Colin, for your insights, and now we are on to the main part of the agenda. The market is understandably focusing on the near term. Occupancy changes, changes in asking rents, the inflection point in that vacancy rate. These metrics are important. However, as a long-term investor, what we are focusing on is structural supply and demand trends, and how these trends affect performance of our asset class in the private market context. Private capital markets and such as our private partners are also focusing on these trends, not just quarter over quarter, but over the long run. In the next few slides, we'll provide our perspective on some of these trends, and I'll pass the discussion to Bruce, our Chief Investment Officer, to focus on these drivers and our investment strategy.
Thanks, Alex. Let's start with Canada, and we'll start with the supply side. Canada's always been a supply-constrained market, especially compared to the US As you can see on the charts on this slide, the recent inventory growth in the top six US markets has outpaced DIR's top three Canadian markets, which is Calgary, Montreal, and Toronto, by over 500 basis points or over 550 million sq ft since 2019. Even with a modest increase in supply, industrial inventory per capita in Canadian markets has been essentially flat in the top three markets over the same period, well below the 10% increase we've seen in these six US markets. Obviously, in terms of drivers for industrial demand, Canada's experienced the same trends as the US
We've got an increase in e-commerce, a focus on supply chain resiliency, and even reshoring, to some extent, especially lately. But when we started looking at the data, our expectation was that we would see a similar increase in industrial space per capita, and that's just not been the case. The fact that that metric is flat in Canada supports our view that Canadian markets are not structurally oversupplied. Our robust population growth has continued to drive demand, and we have a very strong runway ahead as Canada continues to lead all G7 markets in terms of population growth and, you know, be near the top in terms of economic growth. And structural constraints on supply and drivers of demand continue to impact the market dynamics. Most market participants focus on net absorption as a measure of demand.
We think that net absorption is a metric that is most meaningful when viewed over longer periods of time, as in any given quarter or even a year, the numbers can be skewed considerably by things like the level of pre-leasing of new supply and perhaps the amount of subleasing. This slide sort of illustrates these long-term trends. For the five years leading up to the pandemic, the GTA market absorbed an average of 10 million sq ft annually. Absorption spiked by close to 30% during the pandemic and immediately thereafter. When higher interest rates dampened demand, there was an increase in sublease space coming to market, as well as higher direct vacancy as new supply continued to be delivered.
So traditionally, we see that when occupiers see their businesses slowing, they'll put some of that unused space on the market because it's essentially a free option for them. And as Graham and Colin commented, we're already starting to see some absorption and not just absorption, but this space being pulled back as demand increases. As you can see on this chart, when we remove the sublease vacancy availability from the equation, we see that net absorption of direct vacancy has actually remained positive for the past 18 months. The long-term trends remain key. With interest rate environment normalizing, occupiers are increasingly able to focus on the longer term and the ongoing impact of the key structural demand drivers. So we believe that the ingredients are there for GTA absorption to return to long-term averages.
We see a similar trend in Montreal, albeit on a smaller scale. Most of the new space that has been built in Montreal in recent years is in secondary locations, and that's where there's now disproportionate levels of vacancy. And in Calgary, actually, as you can see, has remained resilient. Distribution trends and strong demographics are driving that market and are expected to continue to drive demand there over the long term. Absorption's actually outpacing pre-pandemic trends, and Calgary has really become, I would say, the key Western Canadian distribution hub, taking, you know, some business away from Vancouver, but it's just locationally, it's in the right place, and it's got all of the elements that the distribution hubs require: labor, you know, population within a certain drive time.
Urban mid-bay assets have always remained resilient during the current period of higher availability, with only 30% of the availability, as you can see from this pie chart in the GTA, coming from units of under 100,000 sq ft. Demand is still strong in that 50 to 150,000 sq ft segment, and the segment has continued to perform as it has, you know, across the market, but also within our portfolio. And as Colliers guys from Colliers pointed out recently, there's if you look at their stats, a lot of the new deals in the GTA have been sort of clustered in that size range. That's where we see the most activity. Some examples of what we've seen in our portfolio.
Earlier in Q3, we signed a new lease for a standalone 100,000 sq ft asset in Burlington at CAD 19.50 a sq ft. And just last month, actually, we signed a new lease for our recent development on Abbotside in Caledon, just north of Brampton, at CAD 18.50, with very strong steps, and that asset's now fully leased. And our renewal spreads in this segment are also strong. Here you can see a couple more examples of deals that we signed in the past few months at 100% to 200% spreads over expiring rent. So these positive fundamentals drive transactional activity in the private investment markets as well.
We're seeing several groups of active buyers and, you know, as Michael and Peter discussed, there's more global institutional capital focused on the GTA as a preferred destination for global capital. And that's targeting specifically industrial. We also see many private investors looking to reinvest profits from, you know, other sectors and businesses, as Michael mentioned, into industrial and logistics assets, and those deals are getting larger. And finally, as Colin and Graham were discussing, there are lots of user investors looking to acquire midsized freestanding buildings at premium valuations just to house their businesses. They invest a lot in those businesses, and, you know, they've been through the pain of rising interest rates or sorry, rising rental rates, and a lot of them just don't want to deal with that.
They just want to own the assets, and they see that, you know, real estate, you know, is always a good long-term investment for them. So, and I think it's important to highlight that these user, this user sale phenomena is sort of something that's unique to the urban industrial sector. That's where, you know, across real estate, you don't see as much of that, but certainly urban industrial is where it's focused. So turning to Europe for a moment, we continue to view European and urban industrial fundamentals as very attractive. Relative to North America, Europe offers lower rents with more upside, constrained supply, and attractive capital values. Leasing velocity. Speaking about sort of leasing velocity, European research is very focused on measuring lease take-up, which is just, effectively new leasing, plus any renewal activity in larger box logistics.
It actually excludes any pre-negotiated renewal options, so the dataset is very narrow, but take-up for the first half of 2024 has been stable, actually 5% above the levels pre-pandemic, you know, from 2015 to 2019, and generally, they're only tracking prime rents for core purpose-built logistics. So when you're looking at the statistics that you might see from the major brokerages from Europe, that's what you're seeing, and those rents are up about 5% year- over- year, but JLL actually tracks urban logistics, European urban logistics versus big box rents, and here you can see from this slide that urban logistics rents have outpaced big box rents over the past 10 years, which mirrors what we've been seeing in our own portfolio.
In the European investment market, we are seeing increased M&A activity with over EUR 2 billion of deal volume year to date, and we're also now seeing more larger portfolios come out into the market. Significant liquidity is returning to the debt capital markets, with over EUR 12 billion of unsecured bonds issued since the beginning of 2023, and over half of this was raised by industrial or logistics names. Finally, there's been over EUR 3 billion raised in the equity markets by industrial and logistics issuers since 2023, and I'm sure the bankers, the investment bankers in the room are wishing they worked in Europe right now because it's certainly more active over there for now. Turning to our investment strategy, we're really focused on urban industrial assets, as you can tell.
We define urban industrial as sort of well-located industrial assets situated in or very near to major urban areas. It's functional space suitable for a variety of uses, warehousing, light assembly, food preparation, a whole range of uses, as well as last-mile logistics, and one thing that it can also include, and we consider that it includes, is industrial outside storage, or IOS. It's a bit of a growing subsector that's increasingly caught the eye of institutional investors. There's a lot of capital that has been forming to invest in this sector.
The assets. What's interesting about the assets is they can often generate the same NOI as traditional industrial assets, but they obviously, because it's land and there's little or no buildings, there's very minimal CapEx or active property management required, and it's a covered land play, obviously. We like urban industrial because there's very limited new supply. Very few developers are building this because it's really tough to make the development math work. It's expensive to build. You know, the smaller the building, the higher the price per sq ft, and even finding a suitable site is a challenge. It also appeals to a diverse range of tenants across many industry groups. Smaller units often command higher rents on a per sq ft basis, and it's covered land play.
Over time, many urban sites, as we've, you know, I think we've all seen in around the city, often become well suited to repositioning or to accommodate more intensive or diverse uses, so a prime example of urban industrial within our portfolio is our Courtneyp ark redevelopment in Mississauga, and this is the type of asset that industrial people get excited about. What makes it so special? Well, it's 200,000 sq ft, net zero carbon certified and targeting LEED Gold. The asset has all the modern technical attributes that urban logistics, distribution, and fulfillment users would look for. With 40-foot clear height, it's got great shipping door ratio, functional truck court. It's flexibly designed. We can accommodate up to four tenants, ranging from 40 to 200,000 sq ft.
It's well located next to very nearby five major four hundred series highways. It's close to public transit, allowing employees to commute to the location effectively. It offers the proximity to a large and diverse labor market, which is really critical, as well as an enormous pool of B2B opportunities for tenants in the heart of the GTA and industrial GTA industrial logistics market. This is where, you know, you want to be because that's where everybody is, all of your competitors and all of your suppliers and all of your consumers. These attributes get recognized in the leasing market. We completed the building in early 2024, and soon after, we've leased it up to two tenants at $21 a sq ft starting rents, 4% steps, $1 per sq ft in ancillary revenue.
These are among the highest rents achieved in the GTA for new construction in the whole, in the entire year. If we just sort of use market comparables, the 6.6% unlevered, the 6% yield on cost translates into a high teens levered IRR for the project, even though cap rates are higher today than when we started the project in 2022. Courtneyp ark is really our newest urban industrial asset, but we do own a lot of these assets. We estimate about 85% of our portfolio can be classified as urban industrial or urban logistics, and these assets are used by a wide range of tenants for distribution, light industrial, as we said, assembly. You know, there's a whole range of users that like these assets.
Here in the GTA, our urban logistics portfolio is significant and has a built-in mark-to-market of about 55%. In Montreal, the mark-to-market opportunity is similar. Montreal is a smaller market, and small to mid-bay definitions sort of scale accordingly relative to the market. Most of our recent leasing activity there has been concentrated on units of 50,000 sq ft and under. Our Montreal portfolio is really well positioned to accommodate the changing demand trends. Our Calgary assets are amongst the most urban in our portfolio. As you can see, they're quite heavily clustered in terms of location. The average mark-to-market in Calgary is not as high as in the GTA and the Montreal area, but we remain very constructive on the prospects for demographic and structural changes driving further rent growth there.
You know, we obviously like the Calgary market. And finally, in Europe, we're very focused on the key urban hubs in the Netherlands, Germany, and France. We continue to see structural supply constraints in these markets. It can take years, maybe even decades, to get the permission to build on greenfield sites. In many of those markets, there's just greenfield development is almost no longer permitted. Rents are not high enough to justify supply, new supply as well, so especially for these smaller footprint buildings and multi-tenant assets. And we think that these, all of these drivers collectively will lead to continued outsized rental growth.
Thanks, Bruce. Another reason we like urban industrial is because it offers significant possibilities and optionality for alternatives and for alternative uses, in many cases, better uses, more valuable uses for our assets, while all while generating solid and growing cash flows. In other words, the term gets used all the time, covered land play. And here are some of the uses we are currently working on. We have selected several sites for feasibility, where we're looking to secure additional power and realize upsides through either powered land or powered shell strategies. We will discuss our data center approach in a minute. In addition, we have 2 million sq ft of temperature-controlled facilities. These assets command higher rents and are rarely built or almost never built on a speculative basis.
With our significant land holdings, we see good opportunities to add to this part of the portfolio. The urban locations that we have make our assets good candidates for residential and mixed-use intensification, which we expect to result in value creation as we make progress on these entitlements. We're also evaluating several sites for self-storage, primarily in Canada. In certain cases, we're looking at partial self-storage conversion opportunities as part of broader refurbishment and repositioning. Our access to the shared services platform, Dream, enhances our ability to pursue some of these ideas, as in many cases we have colleagues who specialize in these asset classes on the development side, asset management side, or private partnerships. Let's talk about data centers in more detail. We talked about AI today.
It's a rapidly growing business globally and has been one of the key focus areas for us in terms of finding higher and better uses for our sites. This slide shows the spectrum of data center opportunities, starting from powered land, and for those who are less familiar with terminology, we'll reiterate it a little bit. So powered land is referred to sites that have been prepared for data center development. These sites have procured the necessary power to accommodate hyperscaler and AI needs. Data center facilities with basic structure, including power and utility infrastructure, both without the interior fit-out, are referred to as powered shells, and the complexity and the operational intensity scales up significantly from there to fully fitted facilities. We are approaching data centers as an opportunity to surface value for our industrial properties.
As such, we're currently focused on evaluating sites within our portfolio that have the potential to accommodate the level of power load needed by modern operators and end-user market. If we are successful, this provides the most flexibility, not only as data center candidates, but also as industrial users, because there are more industrial users the more power you have to your facility. The powered land strategy also has low capital requirements. And once we complete our powered entitlement phase, or get through the powered land stage, we would evaluate the opportunity to pursue the development of powered shells on a build-to-suit basis, joint venturing with operators, or selling sites to users at a profit and reinvesting that capital in our core business. Building turnkey, fully fitted out data centers is not in our scope.
We have selected thirty sites for feasibility and further due diligence with inputs from commercial and technical advisors based on a set of criteria, including the potential for additional power and planning restrictions. The sites on our shortlist are located in Canada and key markets in Europe. One market you won't see on this slide, for example, is Montreal. While Quebec has exceptional power that is clean and relatively inexpensive, the market is currently constrained for power, and we'll continue monitoring opportunities in this market over time. Here are our GTA sites that we have selected for further due diligence. For reference, we have overlaid the existing data centers highlighted in blue compared to our sites in orange. In many cases, we've been approached by end data center users looking to buy these assets from us.
While we are open to engaging in these conversations, we continue advancing our power procurement work as we expect this will create value over time. In the meantime, these assets are highly functional industrial buildings that will continue producing strong cash flows. Our standard leases, as a reminder, have demolition and redevelopment clauses, enhancing our optionality to pursue these opportunities. On this slide, we're providing illustrative returns for data centers in our portfolio, which demonstrates why we are investing resources in this opportunity. On the flowchart to the left, we are iterating our decision or value creation tree from industrial to powered land to powered shell. And the assets you see on the page is a functional cluster located on a 11-acre site in Etobicoke, across the street from an existing data center leased to a high global hyperscaler. The economics are interesting.
As an industrial use, this building is expected to do great, with strong upside in rents leading to mark-to-market yield of roughly 6% on current carrying value. Under the powered shell model, we expect significant capital requirements of approximately $100 million. These capital investments would translate into NOI potential of over $15 million or $11 million incrementally. The significance or this results in about 11% yield on cost on that incremental capital, i.e., $11 million incrementally on NOI, over $100 million of investment. The significance of these numbers is twofold. On the one hand, this demonstrates the value creation potential each site has as we make incremental progress. On the other, the scale of the opportunity could be significant.
If we are successful on even a few sites, we can open up the possibility to deploy over $500 million of capital at highly accretive yields, leading to over $50 million of incremental NOI. For context, our Q2 NOI run rate was approximately $350 million annually. We'll continue to refine our approach, and we'll look forward to providing more color on this work stream as, as we advance. While data centers is an exciting field and can capture one's imagination, our core business is much simpler, but equally as exciting. Over the past several years, we've been focusing on establishing an organic growth model for the business that has multiple drivers. This allows the business to be stronger, more resilient, and ensure that we, as a management team, have multiple levers to pull at the same time.
And some of the alternative uses we talked about earlier will enhance our possibility for growth in the future. So we've grouped our growth drivers into four key areas: organic growth of our core portfolio, our development program that started only a few years ago and is already providing a significant boost to our overall NOI. Industrials not only has strong prospects for alternative uses, but also has great potential for ancillary revenue, and the list of opportunities that we have in front of us keeps growing. And lastly, our private partnerships is a relatively new business for us also, but is already producing strong results. So let's start with the organic growth embedded in the portfolio. Many of you know that we have significant mark-to-market potential.
This slide quantifies the leases scheduled to mature until the end of twenty twenty-six, and the impact of these leases, and the impact of leases that were recently signed that will take effect in Q3 twenty-four onwards. We estimate that rolling these leases to market without any assumptions for market rent growth could translate into $50 million of incremental NOI by the end of twenty twenty-six, relative to the Q2 2024 run rate. Going back to the earlier question about debt maturities and pressure from interest expenses, we will demonstrate later that this driver alone is expected to exceed the pressure from interest expense. Now, contractual rent growth is an increasingly meaningful driver for us. Only as recently as two years ago, contractual rent growth for our portfolio was 2% on average in Canada.
Today, the average rent steps in our Canadian business are 3%, and that number keeps growing as we sign new leases at higher escalators. We've just shown you a few examples at 3.5% to 4% annually. Our European leases are indexed to CPI, which is market standard for Europe. Those that are not have contractual escalators. While CPI is market standard, we're exploring opportunities for higher rent steps similar to the GTA.
And just at the end of August, Sjoerd and his team, who is in the room, signed a new lease in the Netherlands for a temperature-controlled facility, 400,000 sq ft at top rents in the market, arguably above top rents in the market that had been achieved, well above expiring rents and 3.5% or 3.75% contractual escalators for five years, which, you know, well above the outlook for inflation for Europe, which again highlights the demand for urban assets in Europe, but also the value of temperature-controlled assets. So with that, our entire rental compounds with this growth, which adds up to a very significant number over time.
We estimate by the end of 2017, this driver alone will contribute another $17 million to our net rents. Now, occupancy has been top of mind for a lot of investors and analysts, and when we look at our portfolio, occupancy has remained consistently strong over a very long period of time, fluctuating between 95% and 99%. What's also noteworthy is our retention ratio has remained strong and consistently high, and it's a metric that we focus on and hope to keep strong, especially as we build these long-term relationships with our customers. That said, in a multi-tenant portfolio like ours, we will always have turnover and transitory vacancy. As such, a range of 96% to 97% is a good long-term run rate for our business.
Our current in-place occupancy is on the lower end of that range, and as we're focused on rent levels and rental growth, but we expect occupancy to revert to mean over time. Here, we're illustrating the impact of 100 basis points gain in occupancy, i.e., to the lower end of that long-term run rate, which could translate to CAD 6 million of incremental NOI over the Q2 2024 run rate. We note that while this driver is significant, it's far less impactful compared to our mark-to-market opportunity and the impact of rent steps. Turning to our next pillar. Our development program is relatively young. We have started actively pursuing development opportunities only three, four years ago. Today, this program is already producing results as we continue enhancing the quality of our portfolio.
Completed projects are contributing $8 million of NOI annually. Most of these projects got started on spec and are now 100% leased. Our substantially complete projects are 60% leased, and as we finalize leasing, we expect $11 million of NOI from these assets. It's important to note also that all of these leases for new developments have contractual escalators and market-leading contractual escalators, which will compound over time. Here are projects underway. We have 1.2 million sq ft in the near-term pipeline, to be completed by the end of 2026, and these projects are expected to contribute another sixteen million dollars to our NOI. Two of these projects are currently under construction. The third project is fully zoned and is scheduled for construction start in early 2025.
What's important and exciting to note is that we have a substantial land bank, primarily comprised of excess land, which can accommodate another 3 million sq ft of density. This land bank is wholly owned on DIR balance sheet, and our private partnerships have similar intensification opportunities. The yield on cost on these projects is stronger, as land value is embedded in the current carrying value for the respective income-producing assets. Over time, we can realize yield on incremental capital of over 8%, leading to $20 to 30 million of NOI potential. We're actively pursuing a number of opportunities on these sites already, including, for example, an active build-to-suit negotiation for Bodegraven in the Netherlands at an 8% yield on incremental capital. Let's put it all together.
Our near-term pipeline could translate into CAD 27 million of incremental NOI by the end of 2026. A medium to long-term pipeline is expected to double this number for up to a total of CAD 60 million of NOI contribution from our development, and this, again, is on land that we already own. Now, turning to ancillary sources of revenue. Ancillary sources of revenue is one of the reasons we get excited about this asset class and get excited to get to work every day. Our business is becoming much more fun and exciting than leasing a warehouse for five years and then seeing your tenants five years later to renegotiate the lease, and three revenue models we are showing here are just among the few that we are exploring currently. Solar is an established program for us.
We already deployed significant capital into this and are generating returns, but we've just scratched the surface of what's possible in our portfolio. EV charging is an area that is coming, and we are starting deploying capital at highly compelling returns. Currently, primarily for the passenger vehicles of our tenants. We see even larger opportunities down the line as fleets of our customers get electrified or buildings themselves get electrified, and combining this with solar enhances the return substantially. Urban footprint that we have in key cities allows us to explore other possibilities. We're currently in the feasibility stage on approximately 50 sites to set up a joint venture with specialized cell tower operator.
The returns are very compelling, and what's interesting is that this does not interfere in any way with the existing use of the sites and alternative uses for the sites in many cases. On the next few slides, we'll talk about solar, which is the most advanced work stream for us. Solar power is an initiative that aligns our sustainability goals with producing attractive returns. The revenue model differs by country, in many cases, differs by province. In Canada, we started in Alberta, where we sell power to our tenants in the buildings, so projects are sized to the power needs of our users. We agree to a rate with the tenant based on current market plus annual contractual escalators, which in Calgary average 4%. And not only is this providing good returns, it leads to positive interactions with our tenants.
This directly facilitates their business and adds a renewable power at predictable prices. We expect that this model will allow us to strengthen our relationship with these occupiers and enhance our retention prospects even further. In the Netherlands, we sell power to the grid, with a guaranteed minimum rate. And with that, we target an unlevered yield on cost of 8 to 10% on this capital. We're also exploring opportunities to enhance this revenue further through battery storage, virtual power purchase agreements, selling renewable energy credits, and obviously, EV charging that we talked about earlier. And this opportunity is not just a hypothetical. We have 22 projects completed or underway, which could generate 22 megawatts of power. With CAD 25 million dollars invested, we are generating an 11% yield on cost on projects completed to date.
Now, the exciting part is our medium-term pipeline. We've identified another 150 megawatts of additional solar capacity in our portfolio, and these are just projects that screen favorably today, vis-à-vis the roof age, regulatory environment, and demand for power in the building, so the list could grow over time. For these projects, we see an opportunity to deploy over $200 million of capital at very attractive yields, which could lead to another $20 million of NOI potential over time. Last but not least is our private partnerships. This business has grown significantly again over the last three years. Now, not only is this providing an accretive source of new revenue for us, it allows us to continue to add scale to our business well beyond what DIR could do on its own.
Our co-investors are like-minded, they have long-term outlook, and are among the most sophisticated global investors. And our ongoing interactions provide a unique and different perspective on the markets where we operate, which is highly valuable for us. Now, these benefits are hard to quantify, so this page has clearer numbers. DIR currently generates CAD 10 million of margin on a run rate basis from this business, and the numbers are material, especially when put in historic context. And the revenue model is also highly scalable. Property management revenue grows as underlying businesses deliver organic growth. Leasing revenues has a direct correlation to market rents, and that we achieve on new leases and renewals. And lastly, the partnerships and the underlying vehicles can scale materially over time without requiring significant capital from DIR.
Our platform is another tangible benefit of pursuing the private capital model. Together with our private partners, we manage one of, if not the largest, industrial platform in the country. The entire portfolio, at 100%, comprises over 400 buildings, spanning 45 million sq ft, with 3,000 acres of land, primarily urban land, and 10 million sq ft of development potential, some of which is in active construction or in pre-construction phases. This scale allows us to think differently, but also provide differentiated offering to our occupiers, hopefully unlocking new opportunities, not only in the investment market, but also operationally. One key area of growth that we have identified as we look at the scale of our business is our major customers.
These are occupiers who can benefit from partnering with landlords with significant scale and national presence. The slide highlights a few key names of a much larger list of multinational and multi-location occupiers, who together, have over 25 million sq ft across our portfolio. And many of these groups have much larger footprints in Canada, creating opportunities for consolidations and strategic partnerships. What we did is we started a new initiative earlier this year. We're designing a program, primarily targeting these groups. Kim Hill, who joined us, with the Summit transaction, has experience in industrial and great relationships across the country, is leading this program. What we're doing here is, looking to, work with our major occupiers on an occupier-to-landlord basis, as opposed to location-by-location basis. This includes standardizing our leases with them, so that new leasing decisions are faster and cheaper.
We're looking to leverage our scale to drive development opportunities, leverage our expertise for customized sustainability and building retrofit solutions, and we expect this will allow us to build long-term relationship and improve our retention ratio with these groups and drive new business opportunities. We are already seeing early signs and early wins and early results from this program. For example, we are currently working with a major European occupier who is with us across three locations in Canada. Their footprint in the country is well over one million sq ft, and they are looking to build strategic partnership with an industrial group that has national presence to potentially consolidate their operations. We're currently exploring a build-to-suit opportunity for them in Western Canada, and consolidation opportunity for them in Montreal.
I know that Kim and I are both very excited of what this program could become, and we will report back as we make progress. With the Summit transaction, we have created one of the leading industrial teams in Canada, merging best practices from both businesses and creating stronger growth opportunities for our key talent. Our team is now comprised of 150 dedicated professionals across all key disciplines within our asset class, focusing on driving value for our customers and results for our stakeholders. With that, and in the spirit of saving the best for last, I will turn it over to Lenis for a financial overview, or also known as the part that everyone's been waiting for.
Thanks, Alex. So throughout this morning's presentation, we've discussed the industrial market, our investment strategy, key growth drivers of the business, along with our platform. What provides the foundation that enables us to execute on these strategic initiatives is a strong balance sheet. Which takes us back to the question... I'm sorry. Leverage was 36% as of the second quarter of 2024, which is within our targeted mid-30% range. Our other key credit metrics are listed along the bottom, which all show that our current BBB mid credit rating is well supported. In August, we upsized our unsecured revolving credit facility to $750 million and extended the maturity to August 2029. Available liquidity is currently over $750 million, plus another $250 million available on our accordion option.
So now we'll go back to the question that was raised earlier: Can our historical FFO growth continue over the next few years as DIR refinances CAD 1.3 billion of debt that's maturing in 2025 and 2026? So let's illustrate how we expect to achieve this. With an investment-grade credit rating and a portfolio that's two-thirds based in Canada and one-third in Europe, we have the ability to borrow on a secured or unsecured basis in Canadian dollars or in euros. Here are the various debt funding options available to us. We have strong, long-standing relationships with secured and unsecured lenders in Canada and Europe who want to grow their exposure to Dream and to the industrial asset class. The debt capital markets have been very active in Canada.
There has been strong investor demand for recent re-issuances, leading to tighter credit spreads, making pricing even more attractive. We believe we're well positioned to address our upcoming maturities. The CAD 1.3 billion of debt maturing over the next two and a half years is all euro-denominated debt, comprised of a euro mortgage, a euro-equivalent unsecured term loan with a relationship bank, and a euro-equivalent unsecured bonds. The weighted average interest rate of this debt is 81 basis points. Our marginal cost of debt has declined significantly over the past year. Euro debt remains cheaper than Canadian debt, currently by 40 basis points, and the incremental euro debt is currently 3.9% for five years, and about 130 basis points lower than 12 months ago.
The one-year forward curve is currently pricing in a further 40 basis points decline in the five-year euro rates. So let's assume a midpoint of 3.75% as our marginal cost of debt. By the end of 2026, we expect that the incremental annualized NOI achieved from executing on our growth drivers to outpace the incremental interest expense from refinancing these debt maturities. To recap the growth drivers, we've listed them here, but they do say a picture is worth a thousand words. So here we have shown, as at the end of 2026, the incremental annualized interest expense, assuming the CAD 1.3 billion of debt is refinanced at 3.75%, which is about CAD 38 million. This is sized against the incremental annualized NOI potential at the end of 2026.
You can see how significant the rent mark-to-market opportunity is at CAD 50 million, which alone outpaces the incremental interest. On top of that, the contractual escalators and indexation, assuming 2% CPI in Europe, is expected to add CAD 17 million annually by the end of 2026. Assuming a 100 basis points increase in occupancy, that would add an additional potential CAD 6 million. Substantially completed and underway development projects, when stabilized, are meaningful contributors with CAD 23 million of NOI potential. And this is not assuming anything from the project under planning or anything from our excess land bank. An incremental solar revenue from scaling up could add a potential additional CAD 5 million. So as you can see, there is plenty of buffer over our incremental interest expense, and we are not using aggressive assumptions.
In fact, there is additional upside that's not being factored in here, such as adding more solar projects, accessing additional intensifications within our assets. Assuming above zero market rent growth in our markets, and Graham just stepped out, but I think he was alluding that there is some expectation of perhaps market rent growth returning latter half of 2025. But we've not assumed, for now, about zero market rent growth in these numbers and no inflation in Europe. And we also haven't assumed any growth in our private capital partnerships. So we believe the business is well positioned to continue growing FFO after refinancing the CAD 1.3 billion of debt maturing in 2025 and 2026. Over the past several years, we have upgraded portfolio quality while growing our FFO.
As such, our FFO payout ratio has declined to 70%, resulting in growing our retained cash flow after distributions. In addition to growing retained cash flow, we are opportunistically recycling capital. We've completed or are in advanced negotiations on CAD 100 million of dispositions so far this year across our platform. We would be open to selling non-strategic assets in our non-core markets at premiums to carrying value and where we expect the future potential returns to be lower than alternative opportunities for that capital. User sales are a unique opportunity to the urban industrial asset class, and these are typically mid-sized, freestanding buildings in urban markets. We have seen user premiums in the 30% range on a per square foot basis, which translates into mark-to-market cap rates below 5%, with no leasing costs or downtime.
With our significant liquidity, growing retained cash flow and our potential disposition proceeds, let's discuss how we're thinking about capital allocation. We have just over CAD 100 million left to spend on our development projects currently underway, where the yield on incremental capital is over 10%. This is our top capital allocation priority for the near term. Future intensifications in our solar program can produce over 8% unlevered yields, so we would like to do more of this as well. Co-investing with our private partners is compelling, as our returns are enhanced by the property management and leasing revenues earned. We evaluate the merits of unit buybacks when we have capital to deploy. While the short-term math works when trading at a discount to NAV, we must also focus on maintaining our balance sheet strength, liquidity, and flexibility for the long term.
On-balance sheet investment opportunities are evaluated with a focus on accretion of free cash flow and how they enhance the quality of the portfolio while maintaining balance sheet strength and liquidity, and lastly, returning additional funds to unitholders via distribution growth could be a use of capital, and here we want to ensure that we continue to grow our retained cash flow after distributions and continue the progress on reducing our FFO payout ratio. As we have grown the platform, and established and executed on our strategic growth pillars, our total return model has also evolved to focus on growth and reinvestment of our retained cash flow. Our monthly distribution has remained steady and is well covered. We are growing our retained cash flow and will look to reinvest in accretive opportunities that increase cash flow and NAV.
We will look to grow our NAV, not only by reinvesting the retained cash flow, but also by unlocking value through alternative or higher and better uses for select assets within our portfolio. And lastly, we would look to grow our distribution sustainably over time by growing at a rate that is lower than how fast we grow our retained cash flow.
Thank you, Lenis. We have covered a lot of ground today, and while I'm certain that everyone in the room has been paying very close attention, we'll recap some of these key observations. Again, the business growth prospects for us, Dream Industrial, in our asset class, which is urban industrial, are amongst the strongest in our history. We believe that industrial markets in Canada and Europe are healthy and supportive, and have supportive long-term supply-demand dynamics. And our business is well positioned within the industrial market with multiple drivers of growth. It was focused on our core portfolio, development, intensification, and ancillary revenue. Our business is also well positioned within the capital markets through our strong and flexible balance sheet, strategic private partnerships, ongoing capital recycling, and access to unique capital allocation opportunities.
We're consistently focusing on higher and better uses, which provide additional sources, avenues to allocate capital and increase value. Our platform has scale, allowing us to look for ways to add value for our occupiers and open new opportunities. And all of this underpins the potential for continued growth in cash flows and delivering strong total returns to our unit, unitholders. We have achieved many significant milestones over the past few years, and we couldn't have done it without the hard work and dedication of every one of our employees. We're excited for the challenges and opportunities ahead. I hope our enthusiasm for our company is coming through in our presentation. We want to thank to our unitholders, our business partners, and advisors for your continued support of Dream Industrial. We will now open it up for questions.
First off, congratulations on a great presentation on many fronts. But, Lenis, just with the building blocks that you have there in terms of the NOI by year-end 2026, the organic growth is very clear. For the solar and the stabilization of current development projects, what's the incremental capital that you think you require to drive that? I think it's CAD 27 million in totality.
Yeah. Thanks, Mike. So for completing the projects that are currently underway, I had mentioned, and we do disclose there's about $100 million of incremental capital that's required to complete those. And then for solar, you know, we've mentioned an incremental $5 million. If you kind of take, you know, targeted 8% to 10% unlevered yields, you sort of kind of do the math backwards there. It's probably about, you know, an initial. And we're currently generating about $1 million, so probably an incremental ten, sorry, 50 million there.
Okay. So for most of that growth then, you would assume majority of that gets funded internally? There's no additional debt required.
The business is generating some free cash flow as well.
Right.
Not you know, some of that could be funded by the free cash flow that the business is generating. I think we identified that the development pipeline is one of our top capital allocation priorities as well. Then, you know, we are actively looking at opportunistic recycling capital as well. It's not necessarily all debt funded.
Thanks.
Yeah, so yeah, the business retains cash flow on a monthly basis, so we're putting that capital back to work, and we talked about capital recycling, where we executed on some. There's a pipeline. The assets that we featured or dispositions that we featured on the slides are the ones that are complete. There are multiple ongoing user sale discussions across the DIR wholly owned portfolio that will be at similar accretive returns.
Thank you. Well done. Congrats!
... Tommy?
Thanks. I wanted to maybe come back to the data center discussion and maybe some of the projects that you're looking at there. Can you talk about sort of where you're at in terms of maybe a timeline on that, and what sort of incremental capital per year are you thinking, and whether that starts, we'll call it in the next 12 to18 months or so?
So where we are on that is we have engaged advisors, and we have a working group formed, comprised of our development professional, asset management professionals, who are specifically working through taking some of these sites through power entitlements. We're starting dialogues with utilities, and we are, as we highlighted on the slide, at the powered land stage, i.e., we're taking sites through entitlements with the view to add value and unlock the optionality to either then sell sites to users at better values or then look at build-to-suit opportunities and things like that, so the current stage does not require any significant capital, and as we make progress on any given site, then we'll be obviously communicating this to the market. Timelines are hard to predict at this point.
This is something we're spending time on. I think, folks were asking us about data centers, as recently as Q1 this year. And what we said at the time is that, yeah, we're doing a lot of homework. We'll come back to the market once when we're ready. So we're ready with kind of this interim update, and as we make further progress, we'll update the market, and we'll also provide guidance on capital deployment prospects, which, again, will be incrementally positive because of the returns that we are currently seeing. Mancha?
Thank you. So you mentioned about the incremental NOI opportunity, you know, mark-to-market, $50 billion, escalated $17 million in occupancy gains as well. Pretty significant there. What kind of same property NOI growth it will translate into the next two to three years?
Yeah. So, we typically, as you know, provide more specific guidance on same-property NOI growth, FFO growth, at the beginning of the year, which we'll do again in February 2025. We commented before that we expect same-property NOI growth for 2025 to accelerate from 2024 levels. That remains the outlook, and the numbers that we're showing are consistent with that outlook. There's been no assumptions change, if you will, recently. If anything, you know, with some of the leasing that we've highlighted earlier in Bruce's presentation, we've seen some early absorption of vacancy at rents that we would otherwise target than we maybe expected when we provided our last update in August.
Got it. So would you say almost high single digit for the next two years based on these numbers?
You know, without providing any guidance at this point, yeah, we continue to expect acceleration from 2024 levels, consistent with our Q2 earnings calls message.
Thank you.
Uh, Sam?
Yeah, just on the distribution growth, it was mentioned up here as a future possibility. I'm just wondering what your thoughts are on the payout ratio, which has been coming down nicely in recent years. Is there a payout ratio you're targeting before you initiate distribution increases, or is it more a function of the, you know, myriad of other opportunities that, of course, are compelling right now for capital allocation?
I think it's primarily the function of the latter. We're not only focusing on FFO payout ratio, what we do measure internally, and then there's information available in our disclosure as well, to calculate it for all the market participants. We also look at free cashflow payout ratio, and retain free cashflow, i.e., after spending active capital, whether it's maintenance capital, leasing costs, et cetera. And so what we are focusing on is opportunities to reinvest capital, and trying to balance this with sustainable distribution growth. Again, with the view that we want to make sure that our cashflow, retained cashflow, increases over time.
It doesn't stay steady over time, but increases over time, i.e., the long-term distribution growth should be at a lower pace than the free cashflow growth, so that free cashflow reinvestment compounds over time, providing for more strong balance sheet and business. Kyle?
Thank you. Earlier on in the presentation, there was a lot of discussion about foreign capital coming to Canada. Obviously, you guys have been quite successful in attracting that. So I guess two questions there. On the GIC side, you know, how are they feeling about Canada? How are they feeling about your pace of investment and the opportunity set ahead of them? And then, you know, would there be an opportunity for you to partner with incremental foreign capital if this is going to be kind of the next driver of you know, investment opportunities in Canada?
Thank you for the question. Without commenting on GIC's behalf, we're obviously in ongoing dialogue with them. Hopefully, our collective view and our collective sentiment towards Canadian industrial is reflected in what we've been doing. So, the venture that we set up in February of 2023 has been one of the more active buyers in Canadian context. We've added, you know, $500 million of assets to the venture. We have significant assets under contract, both on the development side and in producing side, and industrial outside storage. We have currently under contract in Vancouver, which we're very excited about. And so the venture is growing, and we obviously, as many of you know-...
Dream Summit is a reporting issuer, so our financial statements for Dream Summit are available publicly, and so that's the best way to track what our venture is up to, and we continue kind of seeing that positive sentiment towards Canadian industrial globally. As far as future partnership opportunities go, we're pretty happy with our setup in Canada. We are in active dialogue for to set up programmatic ventures for Europe, and that's one of the areas that we're looking to add scale in.
Hey, guys. Sorry to bring it back to the near term because you've painted a very compelling medium-term outlook. But we heard earlier, sounds like peak vacancy is probably Q2 of next year, but the tone's improving in the US from an industrial standpoint. Are you starting to feel kind of that traction build in Canada? And also, I mean, it seems like your portfolio maybe experienced vacancy earlier. Are you starting to see some leasing in that vacant space?
Yeah, thank you for that question. When it comes to our portfolio, yeah, we continue to see good activity, if anything, late summer, early fall have been on the more active sides. A couple of new leases that we announced or talked about today are very, very, very new. When we're looking at the activity levels across our availability set, whether it's in our public portfolio or private ventures, we are seeing touring activity on a whole range of units. What we've seen, call it, over the past 12 months, is that activity being centered in 50 to 150,000 sq ft range.
We are in active dialogue on a handful of 200 to 300,000 sq ft requirements right now, primarily for our new developments, which is good to see. We haven't seen that big box market being active, so, we definitely welcome that. Although that's not bread and butter for us, obviously, it's obviously helpful. We continue to see that mid-size market being active. You know, hopefully, our results speak for themselves. We do achieve rents that we that are premium rents for our assets. You know, we often say that, you know, in our business, we get to sell our product every five years, and so we want to make sure that every time we sell it, we sell it at the right price.
As we've demonstrated as well, on our slides, that this is the much more meaningful driver, that rent level is a much more meaningful driver compared to occupancy, and occupancy is, you know, a much easier driver to activate. So talking about South Service Road, which we just talked about earlier today, the 100,000 sq ft asset in Burlington, we leased it at $19.50, with 3.5% steps. In March, Andrew had an inbound at $15, and we could have done it at $15 in March. So that occupancy would have been higher, but the rent differential that we achieved between by being patient is significant. And again, that rent differential is going to stay with us for the next five years.
And so that's what we're focused on and continue to be focused on across our markets. We have one more question over there.
Oh, sorry. Hi. Thanks for the presentation. There was a slide towards the end that spoke about incremental NOI to outpace incremental interest expense, and you had two bars there. And on the right bar, there was a $23 million from development, $17 million from rental growth. I think it was 3% in Canada and 2% in Europe. I'm just wondering if we think about the right side and that incremental NOI, what do you think is the biggest risk factor? Like, is it you know, the rental growth slowing in that $17 million? Is it the development? Like, what's your concern item that you're watching most, and is there anything to do to offset that risk?
Thank you for that question. The reason we presented the numbers this way is we wanted to specifically de-risk the taller bar. So we didn't add any rental growth, we didn't add any speculative development that is not currently underway. So every project that we are showing here is either under construction or there's one project slated for construction start in the spring. But other than that, everything is going vertical today. And we didn't model ancillary revenue that we are actively pursuing as other than incremental, a little bit more in solar revenue that we think is very tangible.
So we wanted to de-risk that chart to then illustrate that even with conservative assumptions, you get to a pretty attractive place, and that demonstrate kind of that the business is well positioned over the medium term. Hopefully, some of the drivers we talked about earlier, and by the way, this is not all mark-to-market that is available to our portfolio, this is just near term, you know, paint the picture that the business is well positioned over the medium and long term to produce solid returns. That's how we thought about it, and that's why we wanted to show more of a conservative outlook here just to illustrate the point. We're going to try to do better than that. Chris?
So the limiting factor in on solar historically has been sort of a regulatory environment. In Ontario regulatory environment up until, you know, somewhat recently wasn't particularly constructive. It has become more constructive, so we are spending a lot more time and leaning into that opportunity. You know, we wanted to obviously prove the model and we're way over kind of the pilot phase in Europe as well. And so now we've done this. It's generating what it's supposed to do. It's actually doing better than what we underwrote, and so we are now looking to properly lean into the opportunity and scale it up.
We have dedicated, we've dedicated resources very recently to this program within, within DREAM to just focus on this, to really, drive proper scale in this opportunity. And as we commented before, this is just what's feasible today. There's more roofs than CAD 200 million can accommodate. And so over time, and as, especially as we advance some of these new revenue models or alternative revenue models, we think that the opportunity can be scaled further. So the limiting factor in Canada primarily is what's getting used in your building. And that's the case in Alberta, that's the case in Ontario. And so as we crack the code, if you will, on how that works, on how we can sell or maximize the system on the roof...
You know, the market is moving that way. The buildings get electrified, fleets get electrified. Without even using things like virtual PPAs, we think we can get to even more capital opportunity to be deployed and then maximize system capacity on various roofs, which again, is not in this CAD 200 million spend that we identified.
Yeah, I guess on that CAD 200 million dollar spend, it implies CAD 18 to 20 million dollars NOI, and you're at 5 annualized by the end of 2026. So I'm just wondering, could that be a little faster than that?
Certainly, our goal is to... And again, that goes back to the question, like, what we wanted to illustrate on that slide is kind of a conservative outlook. But certainly the goal is to go faster, if we can. One more question?
You did a great job of outlining that incremental $100 million or so of incremental NOI. When you look at your IFRS valuations, and part of it is a DCF approach, how much of that $100 million is captured currently in your IFRS value?
It's a great question. I think, when it comes to new revenue, not at all. When it comes to development, it's primarily at cost until it gets stabilized. When it comes to mark-to-market opportunity, arguably, that's reflected in appraisers' appraisals, and appraisers do factor that in, although we don't always agree with their views. And, yeah, when it comes to higher and better uses, again, not at all, because that's not how appraisal methodology works. Is that - does that answer your question?
A follow-up on that question. You mentioned a significant optionality in data centers, cold storage, mixed-use development, self-storage. To what degree are those reflected in your IFRS value? And if they're not reflected today, when will they be?
So the existing cold storage facilities are obviously valued as such. When it comes to opportunities to scale this further, yeah, that's not reflected. Again, the land bank that we have is embedded within the IFRS value. So effectively, when you're looking at implied per sq ft metrics, whether it's at IFRS value or implied by the stock price, you know, the $3 million development potential, whether that gets activated as industrial or cold storage, that's already included. And look, we didn't talk about many other things that we're pursuing. We are looking at opportunities to partner with operators in the cold storage space and really leverage our development expertise and land bank and their operating expertise, to then build primarily refrigerated facilities.
But again, these are earlier stage opportunities, and as we make progress, we'll report back. And yeah, as we always said, we very much like the space. It's hard to build on spec, but when we have an opportunity to partner either with a user and operator, we're definitely looking for those. When it comes to self-storage or intensification, it's not factored in, but it's factored into our decision making. So in many cases, when we look at user sale opportunities, we do look at how does the building look over the long run?
We have users who knock on our doors for available mid-sized urban assets, and they would put values that are on these assets that are 30% and in many cases 50% above the IFRS, which sounds compelling. We look at what are the prospects for these assets. We had one case where we had a user approach us on a vacant building at you know well over $300 a sq ft and well below 5% mark-to-market yield that we could achieve on that asset. Now that asset is located right next to a GO Transit. Over...
Medium term, and even if you use 15 years as your time horizon, or 20 years as your time horizon, you can see that this, this is, this is residential density, screams as residential density. And so if you use very moderate assumptions on residential density and use market rents, so basically the alternative to selling it to a user at a very high price is to lease it as industrial, carry it as industrial for the next 15 years, and then 15 years later or 20 years later, realize some of that upside. That's. Very quickly, that's $350 a foot or whatever number, doesn't scream very attractive, over that time horizon, as fundamental, kind of urban industrial land or urban land. And so that's what we look at, and so, it makes our analysis more challenging.
It's not as simple as, yeah, well, somebody knocks on your doors at a premium to IFRS, and we pursue a sale. Does that make sense?
Sorry, I just wanted to come back to one of the responses to the earlier questions. You mentioned exploring JVs in Europe or private capital JVs. Can you just, Alex, can you maybe just expand on that? Is that... Are you thinking about some of your existing assets? Would these be, you know, new acquisitions or, and, multiple or single partners?
Primarily single partner. In various conversations, our preference generally is to pursue a greenfield venture, i.e., identify a program and then look for opportunities in the market. We wouldn't be opposed to starting the venture with, you know, vending in some assets at the right valuation. Now, that valuation discussion becomes sometimes challenging, so that's why it's not our first preference. But we are in dialogue. Other than this, it's difficult to provide kind of more guidance. As we make progress, we'll report back, and obviously, the filter that we apply to these discussions has to be compelling financially for DIR, not only from a growth and scale perspective, but has to have a compelling reason. So that's the main filtering.
Okay.
Doesn't look like we have any further questions?
Yes. So-
Oh, oh, we have one more question.
Thank you. I'd just like to know, how do you prioritize between IFRS NAV growth versus cash flow retention? Because the REIT is DRIPing right now and issuing monthly under CAD 14 per unit. That'll hurt your cash flow retention if you stop it, but I would think it's probably better long term for shareholders' total return growing the NAV. How do you balance that today?
Yeah, that's a great question, and thank you, thank you for asking. I know it's being asked from time to time. Now, in our business, DRIP is not something that we turn on and off on a weekly basis, so these are medium-term decisions, when we look at it, and obviously, at a certain price, it doesn't make sense, and we've turned off DRIP before and turned it back on afterwards. But the span of time between these two decisions is significant, and it's not something that we do on a monthly basis. And so this, as we look at our capital planning and business plan, we obviously evaluate whether there's room for DRIP in our capital allocation stack and how it impacts.
Now, a 25% number seems like a lot, however, you look at the impact of this DRIP on FFO and on NAV, it's quite negligible. And so that's something that we also keep in mind as a just for perspective. Yeah, definitely top of mind, and you know, every few months, we definitely evaluate whether there's place for DRIP in our capital sources, if you will.
All right.
Mm-hmm.
Yeah. Thank you, everyone. Well, Alex, the rest of the management team and I will be available to chat further. Lunch is available in the room next door. For those of you that aren't able to stay for lunch, there's also going to be food to take away. So I'll thank you again for your interest and support, and this concludes today's session.
Thank you.