This year could see a turnaround for public Canadian real estate investment trusts as market fundamentals improve and commercial property sales rebound, some analysts say.
Brad Sturges, Saloni Seth and David Pierse with Raymond James & Associates said they expect total returns for the sector to be in the 20% to 25% range, with 5 percentage points of that return driven by distributions.
"Given some potential near-term political and economic uncertainty, we believe Canadian REIT sector total return performance may be more second half of 2025 weighted," the analysts said in a report, using an acronym for real estate investment trust. The report noted 2024 was the third consecutive year of relative underperformance for Canada's REITs and other public real estate companies relative to the overall market. This is the longest streak of underperformance in the last 25 years.
"Key potential near-term positive catalysts for the Canadian REIT sector may include clear evidence of a soft landing scenario, and perceived lower investment risk of a deeper economic recession in Canada [and] greater clarity surrounding the Canadian political environment following an expected federal election," the analysts wrote.
They added that "a continued dovish" stance by the Bank of Canada could support a stable, declining interest rate environment and lead to increased transaction activity in the direct property market.
The analysts added that shopping centres and multifamily rental properties topped their sector picks. The office sector was their least favoured.
At Canaccord Genuity, analysts Mark Rothschild and Zachary Weisbrod said REITs could return about 20% this year.
"While fundamentals have softened in the residential and industrial asset classes, rental rates are generally well below market rates, and we believe most REITs should continue to deliver healthy organic growth," they wrote in a report. "We also note that retail fundamentals have been quite strong, and while slower economic growth could negatively impact occupancy, REITs generally own high-quality and well-located portfolios and should outperform the market, in our view."
Real estate services giant CBRE forecast a recovery for the investment market this year, noting in a recent report that transaction volumes had been trending higher since a recent low in the first quarter of 2024.
"While some real estate asset classes are contending with sector headwinds, market fundamentals are mostly still relatively healthy and supportive of the long-term appeal of Canadian real estate as an investment," according to the report. "In particular, alternative assets will see robust investor demand in 2025, given their comparatively stronger fundamentals. Combined with a more accommodative financing environment, investment capital will continue to be drawn off the sidelines in 2025."
While optimism for a recovery is strong, Canadian REITs' unit prices have started the new year down almost 3%. Financial services specialist TD Cowen acknowledged the decline has occurred since it first published its outlook for the sector in December.
"Bond yields rose with growing concern about the pace of overnight interest rate cuts," wrote Sam Damiani, Jonathan Kelcher, Golden Nguyen-Halfyard and Linda Wang.
Still, those four analysts noted in their updated outlook published this month that they expect a 20% return for the REIT sector in 2025.
"Canada's listed real estate sector has a lot to navigate, including potential U.S. tariffs, an uncertain economic outlook, and an evolving pattern of interest rate cuts," they wrote. "That said, with leasing fundamentals through the vast majority of our coverage universe either strong, strengthening, or simply holding up well, we see reason for investors to begin looking past the current volatility into a potentially larger trend of rising property values, aided by a normalization of interest rates and a recovery in Canada's housing market (albeit with the condo market recovery perhaps taking an extra year or two)."