Interest rate cuts boost Canadian REIT stocks by 10-25%
Canadian real estate investment trusts (REITs) are showing signs of recovery after enduring a challenging period, largely due to ongoing interest rate cuts and a shift in market confidence, according to industry experts.
Adam Jacobs, head of research at Colliers Canada, explained that REITs, which rely heavily on borrowing and refinancing, struggled in the aftermath of the COVID-19 pandemic. Many REITs took on major development projects that became more difficult to manage as the economic landscape changed.
“[REITs] are a very, very capital-intensive business, you have a lot of borrowing, you have a lot of refinancing you need to do, and a lot of REITs have taken on some pretty big development projects, which are a leap of faith,” Jacobs said in an interview with BNN Bloomberg.
He pointed to Toronto’s The Well, a large-scale development, as an example of how shifting market conditions have impacted REITs. The Well was planned before the pandemic with the intention of becoming a tech hub for companies like Shopify and Amazon. However, with the rise of remote work, demand for such spaces has shifted.
“[It] made perfect sense,” Jacobs noted. “It [was] going to be a tech hub [with] Shopify and Amazon… then you wake up in 2024 and everybody is working from home and Shopify walks away from their lease, so they obviously borrowed a lot of money due to construction, to buy the land, and to do the leasing and everything.”
This reliance on borrowing for construction, land purchases, and leasing has posed significant challenges for REITs, particularly in an environment of fluctuating demand.
“So, it’s been a difficult time for them, because they are in a constant state of needing to borrow and re-finance,” Jacobs added.
Despite these obstacles, REIT stocks have risen by 10% to 25% in recent months, largely due to interest rate cuts, Jacobs explained. However, he acknowledged that the REIT sector has faced more difficulties than other areas of real estate.
“There are three megatrends: interest rates, one, work from home and the housing crunch are the two other ones which, depending on the type of REIT you have, they’ve either had a somewhat positive effect or a negative effect,” he said.
The recent uptick in REIT performance wasn’t entirely unexpected. TD analyst Sam Damiani told BNN Bloomberg last month that the S&P/TSX Capped REIT index experienced its second-best week since November 2024.
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TD analysts had been predicting that Canadian REITs would begin to outperform, noting that they have historically done well during similar periods since 1988.
Jacobs emphasized that the recovery is widespread across the REIT sector.
“It’s pretty across the board,” he said. “It’s just kind of a general like ‘the worst is over; we can put our money back into this sector and probably get a good return over the next couple of years.’”
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