Keith Reading explains how advisors should be positioning REIT allocations to clients in a slower market
The bank of Canada’s seventh consecutive interest rate hold gives the real estate sector a degree of the stability it’s needed for some time now, but that stability doesn’t do away with some of the other economic issues now hanging over the sector. That’s the core view taken by Keith Reading, Senior Director of Research at Morguard in Toronto. Reading sees the ongoing cost of living crisis tied to energy prices and the middle east conflict, as well as instability in Canada’s trading relationship with the United States and the existential issues posed by AI as potential headwinds for Canada’s housing market in particular and its real estate sector as a whole.
Reading explained how he views these factors in a real estate market that is still not roaring the way it did in the pandemic era of extremely low interest rates. He outlined how consumers and businesses are struggling with higher prices and uncertainty about the Canadian economy connected with CUSMA renegotiations. He outlined, too, how individuals are struggling with house purchases in an age when they’re being told AI might replace them. He said that despite these factors there is still reason to look at real estate investments, provided they’re understood as sources of stable returns rather than portfolio torque.
“You’ve got in the market stable mortgage rates, relatively stable pricing. But the big dark cloud of uncertainty is something that is affecting many buyers. That’s a factor for if you’re looking to buy a house. It’s a factor if you’re working, what’s your job going to look like? And similarly for businesses, there’s a lot of uncertainty,” Reading says. “The good news is we’re still seeing quite a bit of activity on the commercial side.”
Surveying commercial and residential real estate markets
While Reading says that each subset of the real estate market faces its own headwinds, there are improvements in areas like industrial and office real estate. Industrial has recovered with some absorption of the significant stock that was built in the wake of the pandemic. Office demand has picked up as well thanks to back to work mandates from many large employers. Reading still believes we’re not in a full-blown recovery for the office market, but the highest quality office assets are currently holding up particularly well.
Apartment real estate, he notes, should recover despite the hits it has taken from reductions in the rate of Canadian immigration. That reduction in immigration rates may also slow the residential purchase market, compounding a class of home buyers who are less likely to maximize their mortgages in the face of an uncertain economic environment. Both businesses and individuals, he says, are putting their money into stable properties that can be maintained over the long-term.
“It’s not the time to go up the risk ladder,” Reading says. “It’s time to be stable, conservative, selective.”
How investors might play real estate now
Reading is still of the view that despite this uncertainty, investors want to allocate to real estate. REITs, especially those invested in stable long-term properties, are still popular among investors, while the mom and pop investments in the condo market have now completely fallen out of favour. Retail is also a strong sector for investors seeking stability and income, with grocery anchored retail assets performing particularly well.
While AI is creating a degree of long-term existential dread among some workers, Reading says it’s increasing short-term demand for office space as tech firms add staff to build out AI tools and platforms. He argues that the economic tailwinds caused by the AI theme has supported the office market and while Canada has not had the kind of boom in data center construction that we’ve seen in the United States, there are a few properties on the industrial side that might show promise.
As they work with their clients to outline opportunities in real estate, Reading stresses that advisors need to communicate clearly the kinds of returns and performance that clients can expect from their REIT allocations.
“Err on the side of low-risk, stable investments,” Readin says. “I would be looking at industrial, or rental properties. Senior housing is another safe bet… For office you’ve got to be more selective but the performance outlook is pretty positive. I would say you’re not going to see very strong returns, but you should see positive performance in this environment. But you’ve got to be selective. I’d not be looking to take on a lot of risk, I’d be moving towards safety.”
