The Canadian Investor - Real Estate Trends for 2025 and 12 REITs to Watch

Episode Date: February 10, 2025

In this episode, Dan Foch from the Canadian Real Estate Investor Podcast joins Simon. The duo takes a deep dive into how Canadian real estate and REITs performed in 2024 and what could shape the market in 2025. They explore why REITs and utilities underperformed compared to stock indices despite expectations of lower interest rates, the challenges posed by tight cap rate spreads, and how different real estate sectors are adapting. They also discuss key trends in residential, retail, office, industrial, healthcare, and data center real estate—highlighting risks, opportunities, and what investors should watch for in the year ahead. They also provide potential REIT ideas for exposure in specific types of real estate. Tickers of Stocks/ETFs discussed: AP-UN.TO, HR-UN.TO, GRT-UN.TO, DIR-UN.TO, SRU-UN.TO, REI-UN.TO, CSH-UN.TO, SIA.TO, NHW-UN.TO, EQIX, DLR, AMT Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Welcome back to the Canadian Investor Podcast. I am back here with not Dan Kent, the one and only Dan Faust from the Canadian Real Estate Investor Podcast. Dan, welcome back to the

show. If you want to give a small introduction to people, some new listeners, because this will be airing at the end of January. We're recording this on January 10th. Just so people are familiar with you and just understand what your background is and obviously what the great work you do with Nick Hill on the Canadian Real Estate Investor Podcast. Yeah, for sure. Thanks for having me. My name is Daniel Foesch. I am one of two hosts of the Canadian Real Estate Investor Podcast, which is the real estate spin-off of this show. I work in the real estate space as a broker and a partner in a real estate brokerage. I'm Chief Real Estate Officer at Valerie.ca, which is Canada's first AI-powered real estate brokerage. I help investors buy and sell real

estate on a regular basis. That's what I do. And that involves helping them underwrite, helping them finance, helping them build out a strategy, etc. I've been doing that for 10 years. A lot of the podcast is the knowledge that I've gained along the way. The last piece that I do is a lot of economic consulting for developers and investors along the lines of being a realtor in that space. It's a lot of research, helping them figure out what assets to buy, how to position it, what rents they should be using and positioning. And so that's where my economic depth comes from because a lot of this stuff is rooted in macro right now and people are learning that the hard way over the last couple of months. Oh yeah, exactly. I mean, macro, I think a lot,

like especially in the stock investing space, a lot of people just, you know, kind of forget about the Macro. They just focus on the businesses, which I totally understand as a strategy. I know Brayden is a bit more like that. I tend to have a bit more mixed approach where, yes, I'll understand the businesses I invest in, but Macro definitely drives my big investing teams. And yeah And the reason why you're here today is we'll do a quick recap of 2024, what happened with real estate, and then we'll talk about 2025

and look at the year ahead, some potential ideas for people wanna invest in real estate, whether it's actual physical real estate that they would either buy themselves or with some partners, or looking at real estate investment trusts where people can invest just with very small sums of money and get some exposure.

And of course, real estate is not all real estate is created equal. So I think sometimes people forget that a little bit. So we'll talk about different kind of, I guess, sub-sectors or I don't know what you call them within the real estate space, but we'll talk all about that. So did you want to start off doing a quick recap of 2024? And I also have a few notes about that. Yeah. In the commercial market, which I think would be more relevant to your audience who would be buying real estate kind of indirectly, things were kind of like stable, I would say.

I wouldn't call it strong, but you know, it indicates maybe a little bit more of kind of just like a stable flat market. I expect it to stay stable and trend sideways probably. Maybe there's a little bit more downside risk based on unemployment and potentially a change in government that could lead to maybe a little bit of layoffs and austerity on government spending and government jobs. So some of these sectors, I don't know if they'll prove as resilient in 25 is 24, but office, we saw the strongest return to office in the world or sorry in North America on a percentage basis. So percentage of pre-COVID, a lot of that probably is based on population growth. We aren't seeing a strongest return to office.

I'll get to some of the data, but we aren't seeing the strongest return to office on days worked basis because we have pretty strong hybrid and horrible traffic. Industrial, I mean, industrial is just booming probably maybe to the point where it's at risk of becoming overbuilt against a recession in Canada. And again, this is why the macro matters from my perspective. Multifamily, actually industrial, so that's large cap industrial, mostly warehousing, logistics, a little bit of data side. And then there's a smaller cap industrial evolving where you're starting to see a lot of small businesses actually use government programs to buy real estate for owner occupied.

So if you run a painting company, as an example, we have a client who runs a painting company and they're gonna buy a $1 million place to actually house all of their equipment and vans, et cetera. That's becoming common through BDC. So that's government spending. Yeah, oh yeah. And then- Very familiar with BDC for sure, yeah.

Yeah, and then the other piece is CMHC is basically solely stimulating the multifamily market and multifamily cap rates. Returns basically have gone way down. Valuations have gone way up. And I think it was looking pretty solid until towards the end of the year, rents really have started rolling over based on rentals.ca's most recent report. And so that could be probably one of the big headwinds heading into 25.

Yeah, no, I think that's a great overview. And of course, we'll be looking at and we'll be just providing some ideas for people to invest, especially on the REITs front. And one thing I decided to do, and I don't know if you had a look at my notes for that, but I'm just pulling some information from finchat.io and I took a pro in terms of proxies I decided to use some ETFs just to gain an idea obviously it's not perfect proxies but I used total returns for the past year

just to get an idea of exactly like oh what you know read ETFs have done compared to the broad market and to my surprise I mean I thought they would have performed a little better and the main reason behind it was with you know we saw interest rates go down the Bank of Canada hundred and seventy five basis points if I remember correctly and then the US a hundred basis point with the Fed but of course you 175 basis points if I remember correctly, and then the US 100 basis point with the Fed. But of course, as you and I know, what tends to happen is that,

it doesn't necessarily mean that interest rates will go down on the long hand. And that's what we've seen is rates have been pretty sticky on the long end where these rates are dictated by the bond market. Now, before we talk a little bit more about that because I know that's an area that you're really interested in. So I did compare here between six ETFs. So XLRE the ETF that's a US ETF so it's a US REIT ETF. XRE is a Canadian REIT ETF. SPY is the S&P 500 just as a benchmark as the index.

XIC is the TSX 60 so for the Toronto Stock Exchange. And then I added XUT, that's a utilities ETF and IDU utilities ETF, but this one is listed in the US. And the reason I added utilities is at the beginning of 2024, I think there were a lot of people that were making the case I added utilities is at the beginning of 2024, I think there were a lot of people that were making the case for both utilities and real estate with the thinking that lower interest rates should be a boost to these type of investment, mainly because you get a pretty good yield from these type of investments.

And if interest rates are going down, people that are actually looking for yield or income will likely increase demand for those types of ETFs. And what we've seen is the utilities have performed much better than the real estate sector. Of course, they're not identical. Utilities tend to have very stable cash flows where real estate, obviously, depending on occupancy rate and the type of real estate that you have, cash flows can actually be

a bit lumpier. So that would explain that a little bit. But as you can see, real estate has been the poorest performing in terms of the ETFs compared to utilities. Utilities have performed better, but all of them have underperformed the index. So it's something I just wanted to bring a little bit of context, especially if you're looking to invest in real estate and using the REIT Avenue that's publicly listed. Yeah, nice. I think the only thing that really stands out to me there is potential and I'm maybe not the best expert when it comes to equities, So caveat with that, but like potential rotation as we're seeing, you know, the Fed maybe not cutting

like potential rotation into maybe some of these lower risk classes or, you know, you would assume if that people start doing that, these could have a little bit of upside, right? As people maybe want to get off the roller coaster of some of these growth stocks and into some more stable stuff. No, and that's a great point.

Yeah, exactly. Some rotation. I mean, I think right now what I've been reading and seeing, there's a lot of complacency in the market. So people tend to, even though there's a lot of talk, the markets are overvalued and whether you look at the Buffett indicator, where it looks at total market cap in the US compared to the US economy,

it's a historical highs. You can look at a bunch of different indicators, even sentiment, right? It's really, really high. It's still super concentrated in those mega cap tech stocks in the US. So it's, I totally agree with you, but it's weird that I don't know how long this complacency will continue. And of course, we have the potential impact of Trump, what he's going to do with the economy, different kind of policies. Trump is really a wild card. I mean, he says a lot of stuff and it's hard to figure out sometimes which way he's going to go. But what I wanted to share here is

what we've seen with the Canada five-year bond and the US 10-year bond. And what we've seen over, and this is the last year so it includes a little bit of, you know, it's between Jan 10, 2024 and January 10, 2025. The easiest thing to explain is that despite the Bank of Canada and the Fed cutting, well, despite the Bank of Canada cutting, the five-year, I mean, it's down, but not as significantly. It's not down 175 basis point, just kind of ballparking it as down what? Like 40 basis point in the past year, roughly. Yeah. Yeah. And then the US 10 years actually ups. Well, especially after unemployment, like both jumped up today because unemployment ticked down in both economies. And so, I mean, they

seem to have settled a bit, but it seems like the bond market... Fortunately, the bond market is often wrong, but it seems like the bond market is kind of calling the bluff of both central banks a bit. Yeah, but it does make it a bit more... People are probably wondering why we're talking about the bond markets here, but a lot of the financing for businesses, but obviously real estate REITs or real estate in general. Of course, there's also I think CMHC. You're better with that kind of financing than I am.

I think it's MLI Select, I think. Yeah. Yeah. So CMHC financing depends pretty heavily on the Canada mortgage bond because basically the government of Canada... Well, it actually depends on the GOC five-year as well because the government of Canada actually is the largest buyer of Canada mortgage bonds, which I'll set aside as an interesting political conversation.

So basically, they have a spread capture program to generate revenue for the government. So they take the 50 basis points spread. So they can borrow money at whatever the five year is. Let's say right now it's 3.16 and they can lend it out at... Or they do lend it out through the CMHC program at 50 basis points higher and they pocket the difference. Okay. So, that's...

But also in the US, I mean, a lot of... Well, your 30-year mortgage rates in the US depend on these bond yields, right? And so, the real estate market is heavily dependent on the credit market. It's the one asset class that is most purchased with debt, and that follows the bond market religiously. Yeah. It's important too, even if we look out of real estate, you're looking at large corporations or corporations in general.

I mean, you can look it up. The Federal Reserve, the US, the Federal Reserve in the US does a great job. So you can look at bond spreads between the 10 year and different type of corporate bonds. So it has a big impact. So that spread will have a big impact on businesses and the type of financing they can get.

So that's why bond yields are something you should always be aware whether you own businesses, whether you own real estate, kind of understanding where that's why bond yields are something you should always be aware whether you own businesses, whether you own real estate, kind of understanding where that's going because it will have impact when the debt is being refinanced because let's be honest, a lot of the debt, a lot of the corporate debt is never repaid, it's just rolled over.

And that's something just to keep in mind, those bond spreads are really important. Yeah, 100%. Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking.

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at and CBRE published this in their Q3 or Q4 report, like kind of their year-end summary is basically the spread on your cap rates above the bond yield because it's pretty typically within a certain channel, which is about like 400 to 500 basis points above the Canada 10-year bond yield. And currently, it's much tighter than that. It's at about 355. And typically, like when you see these periods where the yield gets really tight above the bond yield, it'll revert to back into that channel.

And so that could happen in one of two ways, right? So the first would be if cap rates go up, which would mean that your valuations of property would go down relative to the income that they're producing. And the second would be that yields go down. So that would mean that the spread above the interest rate, let's call it, or the bond yield rate goes up and without cap rates changing because yields have gone down. So it's kind of like, it's been a bit of a difficult market for REITs to really do well. They're typically acquirers, right? Like they make money by buying real estate and yielding. But right now, I mean, you buy a multifamily residential

property in a core market in Canada, you're buying it at like a 3.75 to low 4% cap rate, right? Like it's just not a good yield. And so they can't really produce outsized returns. The way that they can do that, and you're starting to see a lot of REITs pivot because they have excellent land holdings, is into development, right? And industrial and multifamily are especially where I'm starting to see this, which we'll discuss later in the episode. Yeah, that's great. And you know, I pulled some data and you had what you just explained. There's some data here for our Joint TCI viewers. So this will be more the Canadian data and then I pulled some commercial real estate property type occupancy rates.

So what we saw, what we've seen essentially the data from Nareed and the US so it is goes back all the way to 2008 and I thought it was interesting obviously Canada and the US it's a bit different but I think we can probably see some tendencies is that you're looking at occupancy rates that are you know for the most part I think the only exception here is retail that's doing pretty well at 95.6%. Aside from that, you're looking at occupancy rates that have been trending down overall, at least for, you know, apartment, industrial office, and of course, retail is kind of the

exception here. But you've seen occupancy rate kind of go down a little bit. Are you seeing that kind of thing in Canada as well where a lot of different property types for commercial real estate are seeing occupancy rate down? I would say not as severely as the US simply because we just don't overbuild as aggressively or we don't build to the point where... You look at some of these growth markets in the States, like you're Houston or like South Florida, they

see, oh, population's growing there. Let's front run it and just build a ton of everything. And then the market catches up and they're like, oh, okay, we've misprojected. And then you have to backfill. So some US markets, super overbuilt, rents falling, vacancies climbing. In Canada, we are seeing the same thing. I think it's less about that overbuilding and more about just general macro factors. So basically you have your unemployment rising, wage growth is kind of stagnant.

The economy, I would say, is not faring exceptionally well. And so even though population has been growing and the number of people and businesses, et cetera, that should be using the space should hypothetically mean that there'd be more occupiers. We measure rents and we measure asset values in dollars, not human beings. And so the amount of money that those businesses and people hold is more important than the number of people themselves. You'll start to see businesses downsize, people downsize their rental properties, etc. That's the factor that we're seeing. It's less micro than the reason you see it in the US where it's really more related to

actual structural factors like overbuilding. Yeah, the classic free market where builders see there's an increased demand for it so they start building a lot then the pendulum swings too far out on one way and then has to swing back on the other way I think for people that are new just wrapping their head around it just think about the pandemic right think about the pandemic think about when the lockdowns were in full effect I know a lot of people may have PTSD when think about the lockdowns but that that's okay. Think about it for a second. I like mountain biking and mountain biking was a perfect example because for a period of time, I mean, you just couldn't do much, but you could

go outdoors and do outdoors activities. So they got a huge influx of mountain bike and road bike demand. So you got these bike companies that just produced because they just could not produce enough to satisfy demand. And then when things started reopening, the companies took too long to adjust to the demand starting to wane. And then late in starting last year, we started seeing like big, big discounts on bikes across the spectrum, whether it's mountain bike or road bikes, because then you had an inventory surplus. So that's pendulum again, right? You get companies that see demand increasing, start producing, but then they're not quick

enough to react to the slowing demand. And then this pendulum swings the other way, which I guess it would be the same thing than real estate in the US. Yeah. Yeah, it's difficult as a business, especially when you're making real estate related decisions, which are very like it's a long run supply chain. You're leasing for five years at a time. Typically you're building for, you're building a building, its economic life is hundreds of years or a hundred years.

So these aren't decisions that if you make them on short term data, they have kind of longer term consequences, right? Mm-hmm. Yeah. And just, I think the example of bike is perfect because you can, you should be able to react much faster on bike production versus real estate. And even there, we saw, you know, inventory glut that ended up happening. But anyways, enough about bikes. We are here to talk about real estate and doing a 2025 outlook. We'll try to focus a bit more on Canadian real estate. And I'll be talking a bit more about REIT options for people I know you'll be chiming in. Now, I'll just go over some quick information

in terms of if people are looking to invest in REITs. I think I'll just go over a few metrics that I think are really important. It's not going to be a real deep dive here, but if you are investing in REITs, real estate investment trusts, a lot of them are publicly listed. These are things I think you should really understand before starting a position. So first of all, understand the type of REIT, where the properties are located and what the prospects are for those properties or that type of sector within the commercial real estate sector, the occupancy rate and where it's going, debt level and how it's structured and how interest rate costs have trended. And I will be talking about some reads that actually cut the distribution or the dividend because of wanting to tackle that debt. So it is very important,

especially if you're looking to rely on the income from that REIT. Look at funds from operation, also called FFO and adjusted fund from operation, very important metrics. The issue with those is they're not generally accepted accounting metrics. So these are produced typically by the REITs, but again, they are very useful and important to understand. FFO adds back non-cash items to net income like depreciation and amortization, also removes the impact of sales, the sale of property whether it's a loss or a gain, adjusted funds from operation factors and rent increases and recurring maintenance capital expenditure. Whenever you look at a REIT, make sure you look at how they define it, because these are general definitions, but sometimes they will actually, you know, each company

may have a slightly different way of calculating those. I think it's really important to understand that. You want to make sure you understand the payout ratio of the distribution compared to the funds from operation and the adjusted funds from operation. Make sure it's sustainable. For REITs, I mean, if you have it in the 70 to 80, even low 90s range, if everything else looks good, that's usually like not too concerning from my experience and then credit rating from rating agency that's really important because how we talked about bond yields being important for when you're financing with debt well if you have a good credit from a rating agency it will likely help you to get a bit of a better rate compared to a similar read that would have not as good as a credit rating. So those are the main things.

So anything else you want to add for that before we start looking at the different prospects for commercial real estate in 2025? No, I don't think so. Okay. So do you want to give me what you think will happen with multifamily REITs in 2025? And then I'll give a few ideas for, sorry, multifamily, but I'll give a few ideas for REITs specifically for people that would be willing, looking to invest in public markets.

Yeah. I would say again, I'm not exactly sure how pricing dynamics and stuff like this work for, but it would surprise me to see multifamily really grow a lot in, like We have a ton of supply coming online. We have record purpose-built rental growth right now. So there's a lot of rental supply competing with the market. Plus you have ownership costs, while still massively unaffordable, they're improving. And so you will start seeing a lot of tenants, especially higher-end tenants leaving the market to go and buy homes. And so a recovery

in the housing market is actually kind of bearish for the rental market in that regard. That being said, population growth is still pretty high. So, you know, it could be reasonable to assume that you will see continued growth in the fullness of time. We do have this short term downturn where I think that to be honest honest and I forecasted this like with an economic note that I put out in Q2 actually basically rentals.ca had indicated that rents were already rolling over and started to fall and I had said that this to me proves that population growth is actually already falling and I forecasted that the liberal government would put a policy in place to say that they were going to reduce population growth to actually take credit for that trend when the

data showed up in Q3, Q4. And they did that. I got very lucky perhaps that they did exactly that. Yeah, my god, they're like, it's you making those predictions. Yeah. We have. But, and so I think that, you know, I actually think the population contraction, a lot of the work was done by the economy and a lot of that is actually behind us.

Not to say that most of it, but a lot of it is. So you probably got another two quarters of falling population growth. So that's lower population growth than we saw before. And then I think we get back to kind of that growth trajectory. Do I think rents will grow in the 12 month? Yeah, probably. But very nominally, like probably at inflation, not, you know, the six, 7% that we've seen. And that's at a national level in cities like Toronto, Vancouver, etc. Where you do have like Toronto, you have

record supply coming on for two years, 24, 25, you have hundreds of thousands of condos coming in the next five years, at least in Toronto. So that's probably going to pull it down a little bit. But nationally, again, I don't see a ton of growth in the income of these businesses or the asset value of these businesses. But what I do think is that that'll present a good buying opportunity for these because what happens after is

once you get the condominium pipeline, and we do a full episode on this, I'll mention the number in a bit, but when I talk about something else. But after this, like after the condo pipeline that's being built right now runs out, there's no new projects being contemplated or sold in the condo space. So in like three years or four years, number one, we have a big problem for the construction

industry forming, but number two, we also have a huge gap in the supply pipeline that the only people who are really well positioned to capitalize on that are REITs at scale, right? Or are multifamily owners at scale. And so I think that probably there should be a buying opportunity in the next like 24 months. I couldn't say what it'll look like, but it might be a decent time to kind of start accumulating, right? Yeah, because these REITs do one big advantage for publicly listed REITs is they

can tap the public markets, right? So it is a big advantage that they have. So that means they can either issue equity or debt to be able to get financing. Not as easy if you're not in the public market. You can still get equity financing, but it won't be as easy if you're not in the public markets. Yeah.

So in terms of ideas here for multifamily REITs, I won't go into detail. I'll just give some names and people can do their own research. So Canadian apartment properties, symbol is CAR.UN. These three are listed on the TSX. Killam apartment REIT, symbol KMP.UN and then Interrent IIIP.un is the symbol. Now, anything else you want to add here, we'll move on to Office. Well, I guess maybe I'll mention on the multifamily side

just quickly, like the asset class is basically completely dictated by CMHC. And like, so everyone is using this MLI select program and you might want to look at like what potential development pipeline some of these reads have. I actually used to work for Interrent as an analyst, which is interesting. And they're a great group of people. And basically that-

I did not know that for the record. Oh, you didn't? Yeah. And then also geographical exposure might be worth thinking about. Killam is very East Coast. So if you want exposure to that market geographically, if it's somewhere that you believe in,

versus maybe if you're more bullish on the prairies. But I want to talk a little bit about the CMHC program exposure to that market geographically if it's somewhere that you believe in versus maybe if you're more bullish on the prairies. But I want to talk a little bit about the CMHD program and I'll try and do it as quickly as possible because I know this is going to be a long episode at this point. Basically REITs are using this program to pivot into multifamily development more and you're seeing it even with retail REITs, which is interesting, which we'll talk a little bit about. You can typically build a multifamily project if you're doing if you're hitting the right

criteria with a 5% down payment, cheapest interest rate in the market, usually 50 basis points lower than anything else, including like first time homebuyer mortgages and amortizations up to 50 years. Okay, this is absolutely wild. You only have to hit a 1.1 debt service coverage ratio, which means you only need to be 10% cash flow positive. So it's a very high risk product by the way. I do a lot of these deals for small cap investors. So like, for example, we have buildings that you could buy for 5% down in the Edmonton market. But I would say that, you know, REITs obviously de-risk that for you, but you could go do that and you could definitely get an outsized return from a REIT and basically do the exact same thing, the exact same strategy

that they're doing with far more risk, but far greater return. And this is one of the few asset classes where the average Joe kind of could go buy an apartment building, a small apartment building or a small like block of townhouses or something like that. Whereas the average Joe can't really get direct exposure to an industrial building or office or retail, right? So the last thing I'll leave with there is like your typical home mortgage is 25-year M and these are 50-year amortization.

So it's basically purely an amortization and cash flow play. It's not like that. You have to be comfortable not seeing the principal get paid down for like a long time. Yeah. And I think that's what I was going to prompt you. Like people might be like, oh, like why is it risky? I mean, at the end of the day, you have very small like the equity you have when you start, you don't have much.

You actually would be in a negative equity position if you really think about it. Your CMHC premium is 3.8% plus you're paying broker fees, sunk cost to close the property. If you needed to sell the property, you'd have to pay 5%. If you were to do it at 5% down, if you sold the property, you'd be taking a loss of probably 5% to 10%. That's where the risk is. If your exit costs money, and then now all of a sudden we're seeing like Calgary as an example where the most of these smaller projects happened, just went from like 2% last year vacancy rate for brand new buildings to 7%. So last year, if you

contemplated a project and got financing from CMHC, you are in a very different market than you are this year. And that's how the risk gets realized. Now all of a sudden you went from... Because your cash flow was so tight, so the leverage piece I explained on the equity, but the cash flow is also super tight. So if you go from 2% to 7% vacancy, now all of a sudden your cash flow negative and you're paying on some of these, some of the ones I had examples here, two, $3 million assets, now you're paying 25% of the mortgage on a two million dollar asset.

It's not something that the average investor can or should be doing. Yeah, exactly. It might be a good opportunity if you do have a long time horizon and a pretty solid financial backing I would say, or able to sustain some short term, I would say, right? The funniest part is like, I basically just explained how this product is like not that good and I guarantee I will get calls from your listeners saying, I want to do that. Sign me up. So that like, it's just that people want to own apartment buildings.

So, and people want to do the thing where they put the least cash down, which is kind of scary. Again, leverage works both ways. I think I've said it time and time and again, whether it's real estate or investing with leverage, it's great when things are going well, but if things don't go as planned, it goes both ways. So it's an amplifier.

Exactly, one way or the other. Welcome back into the show. This is the Canadian investor podcast made possible by our friends and show sponsor EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates

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what I need done quickly. Switch for free today and keep more of your money. Visit questtrade.com for details. That is questtrade.com. So, okay, so now we'll move to office real estate, office space. So again, I'll let you kind of lead the way here and then I'll give a couple names.

Obviously I'm not saying all the names are in the space in Canada, just a couple names for people to be familiar with and do their own research that they might be interested to get some exposure. Of course, I think it's probably one of the least loved space. Am I wrong to say that still? Yeah. I mean, I will... Yeah, you have a lot of legacy owners who don't love their assets anymore and are refusing to mark them to market.

So yeah, I mean, Canada is different because it's like mostly pension funds. So we don't, like you don't really feel it in the public markets that much. And just to add to that, so people may be wondering like, what do you mean like mark to market? So what happens is obviously if it's privately owned, you know, these are big, a lot of them, right, there are hundreds of millions of dollars in terms of property. I think some might be even work in the billions. Billions. Scotiablaza is like a billion and a half, two billion. Most recent transaction,

like the guy from Zara, I think bought a building downtown and it was like a billion something. Yeah. And it's not like there's transactions like these that happen every day. So it's not easy to mark. You can, I guess, make a case, you know, to keep it higher the value versus lower. I think you can probably make some argument. I think most people would probably agree that it's probably on the lower side because of the tendencies that we've seen

since COVID started. But yeah, that's a big thing. And one thing that could make these type of real estate investment trusts that are publicly traded is that these, you can argue, that are publicly traded is that these you can argue that are definitely mark to market just based on how they've been trading. The yield that they're generating in terms of their distribution and distribution is just a synonym for dividend when it comes to to REITs. So there could be some some opportunities for contrarians, but anyways, I'll let you continue and I'll

say how I got burnt with that trade in the last couple of years. Yeah, sure. For me, I just look at this as an outside real estate analyst. How would I underwrite these assets if I was... The biggest things I'd be thinking about is, is there a predictable pipeline of people willing to pay for the use of this space? And my answer would be, it's probably the least predictable pipeline of tendencies among the asset classes that we're looking at. And so, it would probably be the highest risk play from my perspective. All of that being said, I mean, it already... It always had the highest vacancy rate, right?

Well, maybe go back to the 90s when you couldn't like, you know, industrial wasn't sexy at all and office was, but you know, Toronto actually has a really strong return to office, but it's very bifurcated. So we have the peak day is 86% of pre-COVID occupancy, whereas, and this is the only city we have data for, by the way, I'm not just like trying to be a Tony Toronto over here, but your average weekly is 73% and your low day is 44%. And so I think a portion of that data, probably like 10% of that comes from just the GTA population. Do you want to explain the difference between the two?

Yeah, sure. So your peak day is basically the day when everybody comes into the office, right? And then your low day would be when a lot of people are working from home. So that's Friday, right? Peak day, Wednesday. And you can see that in the traffic patterns. Like Wednesday, you cannot get downtown and then low. I mean, I guess you're in Ottawa market. So there's- Similar. Yeah, it's similar. Yeah. Well, with the federal government forcing people to go back three days a week. So I think you're seeing it more, I would say Monday to Thursday. I think people want to get the Friday at home as much

as possible. And then I think some people are like rip off the bandaid on Monday and then Monday, Tuesday, Wednesday, and then they get the Thursday, Friday. But yeah, I've noticed Monday to Thursday, it's definitely busier, especially Wednesday is the peak day. Yeah. Yeah. And so this is where you want to analyze some of those knock-on effects on surrounding retail and surrounding residential markets and stuff like that where that's worth considering. It is interesting though if you go city by city, you look at a city like Calgary, which has the highest vacancy rate for office in the country, yet also the highest return to office

because the sectors, agriculture and mining, are the highest return to office because the sectors, agriculture and mining are the highest return to office sectors. Government is the lowest. So, you know, you have like, I think it's like twice as high of a percentage of people in the workplace in Calgary compared to Ottawa, despite the vacancy rate being twice as high. Like that's the actual vacancy that you would see kind of show up on a REIT. And a lot of this is, again, I only have Toronto data, but Toronto has the highest share of workers compared to Paris, Singapore, New York, Sydney, and London. Toronto has the highest share of workers working zero days per week in the office.

So we haven't been super demanding about return to office by the sounds of it. Yeah, no, exactly. And I'm just showing here is CBR EQ for office property report. And I wanted to just your thoughts on this. So is that something you're seeing? I know you're more connected with Toronto, but you're pretty well plugged across Canada. Like what I'm seeing here is that, you know, it seems like there's more and more demand for suburban office space, at least from what I'm seeing here, you're seeing downtown kind of the vacancy rate pretty much hitting 20% where suburban is kind of trending sideways

at 17.2%. I would say you can make a case that's actually coming down a little bit recently. Yeah, it does look to be rolling over. Yeah. Yeah. I mean, like you saw suburbanization of everything during COVID, right? I think people like it was probably the largest secular shift in sprawl, a return to sprawl that we've seen. You know, policymakers, everybody was telling us we needed to live more closely together and density and all that stuff. And now we're kind of going in the other direction.

And offices, I mean, like, you know, a lot of satellite offices, a lot of people just, you know, moving their job to the office that's closer to home or trying to save some money on housing because a lot of this becomes a function of housing as well, right? Workforce housing costs. And if offices can pay their employees less because their employees can afford to live in a cheaper market, then they can very easily make up the cost of opening a new office or shutting down a core office, right?

Yeah, no, exactly. And in terms of REITs, there's two that I'll talk about. Allied Properties REIT, which is a class A office property. Typically, these properties are either new or older buildings that have been completely renovated with great amenities, high demand. They cater to knowledge businesses in the case of Allied Properties REIT.

They've been selling their non-core asset. It kind of started in 2023. They sold their data center REITs that they had, and then they've recently sold some non-core office assets. And just to show people how it's been trending here, so the occupied area from Q3 2022 to Q3 2024 went from 89.6% to 85.6% and leased area during the same period went from 90.7% to 87.2%. And allied has definitely high quality properties.

It's one name that I bought in late 2022 if I remember correctly. My thesis that more and more businesses would ask employees to come back to work and Allied would benefit because if you're a business, if you want to encourage your employees to come back to work then having an ICE office with amenities is definitely a plus to encourage your employees. That didn't exactly work out as I planned. And what I noticed is I was following the company very closely every quarter listening to what they were saying. And I saw a shift with management late 2023. And then I kind of kept my position for a couple of quarters, three quarters if I remember correctly, their tone started shifting because they were

saying that occupancy would start picking back up. And then the stone started shifting to saying, it will pick back up, but we don't know when, eventually. And that was starting to be, and I don't blame management per se, like that's okay. Like obviously, you know, you just said it's very hard to predict where this space is going to go. But for me, once I started seeing that, and especially when you have a management team that knows the space very well, it's just kind of some alarm bells that started going on. I think it's still a very high quality, but it's yielding close to 11% right now in terms of distribution yield. So you're getting a lot of income. When something is yielding that high, the market's usually telling you that there might be some issues right now or down the line.

So I ended up taking a small loss because I had purchased Allied when it had seen some significant drawdowns already. So for people, this ticker is AP-UN on the Toronto Stock Exchange. And then the other one is H&R REIT, although this is more of a diversified REIT. They have residential, industrial, office, and retail properties. That's another name that people may be interested in researching if they want some exposure to office. Yeah. There's a couple of, I mean, I think in the office side, Allied's a good example of, they did that huge mixed use master

plan community in the city of Toronto, The Well. Yeah, the Shopify building, right? Yeah. That was the one. Yeah. So again, a lot of these, really the way for these groups to actually make outsized returns is through development, not acquisition in today's market. But we're in a growth market in Canada.

Yeah. And if I remember correctly, weren't they, wasn't it a joint venture between them and another REIT? RioCan, yeah. Oh, RioCan, that's right. Yeah. Okay, perfect. My memory is not too bad. Yeah. Anything to add there before we move to industrial or logistical or logistics? No, yeah, go ahead. Okay. Well, actually I'll let you kind of give your synopsis. I think this works well and then, because you know this stuff way better than I do. And then I kind of give people some ideas in terms of REITs for exposure. Yeah.

So, I mean, industrial is still at pretty low vacancies, kind of like you're more trading towards those multifamily vacancies. It's faster to build and deliver than office or residential because it's not high rise. It's ground-based. So it's like one or two stories. You can watch them frame up a steel industrial structure on the side of the highway on your commute to work over the course of like months, right? And you do see that if you drive in the GTA, if you're seeing these things get slapped

up, especially if you're seeing the ones that have like the blue racking inside, that's like typically a big logistics warehouse for like an Amazon or some sort of last mile thing. And all of that racking actually is like part of the structure. And they have robots that go and pick orders from that. So I mean, I think that there's, you know, that's a good thing because it allows for you to capture the growth in the asset class, but it's also a bad thing in such that it's a bit of a potential for overbuilding. I think there could be a bit of a play on, you know, CAD USD, Canadian dollar because

Canadian industrial. Well, unless Canada becomes a 51st state. Yeah, true, true. But, yeah, but I'm already hearing a lot of Canadian construction inputs, for example, going to the US, like concrete, for example. Some of my consulting clients in the real estate development space are forecasting with their cost consultants, like 5% to 10% increases in certain construction costs because they're already competing with US builders for the same material like concrete, even steel that has a tariff on it.

There's a friend who you've probably seen on some of my Twitter spaces, Cindy Stumpo. She's a famous luxury home builder in the Boston market. She's buying kitchens out of Canadian suppliers as an example. Now her input cost just went down on an exchange basis. So these could actually benefit. Like there's, I think we have a limited manufacturing base in Canada, but that could change pretty quickly in response to some of these U.S. demands. Could tariffs change this?

Yeah, probably, I think. But even then, like I still think if we can produce cheap and a weaker cat outweighs the tariff impact. And you know. It'll at least offset some of the tariff impacts, depending on whether there's a tariff or not, right? Like a lot of people are freaking out and I think the current government is also, I mean, you see them in some of them. What government?

What government exactly? There's one for three months. Whatever is in place right now, whatever people want to call it, they're kind of freaking out. And at the end of the day, look, I think we have to wait and see what happens. Like, you know, Trump says a lot of stuff. I think like it's a classic negotiating tactic, right? You kind of put the worst case scenario, you try to put the fear into the negotiator on the other side to try and get a better deal. So you set the bar basically, you know, the most difficult part as possible to try and get a deal that's probably a bit more satisfying for both sides.

So I think we just have to wait and see. I don't want to... I see a lot of people panicking and I think for me, I think we'll wait and see until he takes office, see what happens. Yeah. The other thing I think like, actually, I guess I'll finish the tariff thought. I think like, you know, you look back at 16, 17, I mean, there's two big things from the Trump presidency. Tariffs is number one. You can see comps from during that period of time. There was like 70,000 exemptions for Canadian businesses on tariffs, right? So I don't know if it's as big of an impact. I think it's kind of more political theater. The bigger one is the deportations, which we saw like 100,000 people crossing the border into Canada through Roxham Road during that period of time, which is something worth considering as a potential outcome if he goes seriously on that. The size and scale of industrial

is something that's worth thinking about. I think you're seeing the GTHA in Canada, kind of like our economic core, ramping up to be the size population-wise and industrial base-wise of Southern California, South Florida, or even the Tri-State area around New York City. The challenges are GDP and those is like a half of that. Yeah. But yeah, and then the final piece is that I think industrial is not even industrial. You think industrial, you think these guys are smelting metal or making asphalt or something. It's not that anymore. It's flex commercial space basically. It's like commercial operators. A lot of it's warehousing. And a lot of people don't know this, but you can... Like this

is an asset class that has a small business owner operator. You can actually buy this very easily in Canada. And I mentioned BDC earlier. So I just, you know, rather than... Because I know you're going to talk more about stocks if somebody wants to get exposure to this asset class. But if you wanted to do it as a direct investor and you own a business, if your business uses like a shop as an example to store vehicles or equipment, call the BDC or listen to our podcast or give me a shout and ask the BDC if they'll give you money to purchase real estate. And typically, what you can do is... I wouldn't really call this an investment necessarily, but more a savings vehicle.

You could basically change from paying rent every month for your business to paying a mortgage every month for your business. And that's a good way to accumulate equity in your business, which I think a lot of Canadian businesses struggle with because it's hard to find a buyer when you've run a business your whole life. And it's also hard to live with the reality of maybe just shutting it down. So I think accumulating hard asset wealth through the business is a really cool way to get exposure to this asset class. That's a great point. And yeah, in terms of public options, so on the stock market, I again, I chose two here.

So Granite REIT. So the biggest issue, this one I know a bit better and the ones I know a bit better, I'm just going to add a bit more commentary. So the biggest issue with Granite is that Magna is still a major tenant here with them being responsible for 19% of the GLA which is the gross leaseable area. Now Magna is a auto parts manufacturer, has extremely deep ties between the US and Canada. So clearly we talked about tariffs, this could have a big impact on Magna. This is one of the companies and Trump has been vocal about the auto industry even like saying well you know we're not really benefiting

from you know the trade with Canada when it comes to that. Again whether he acts on it or not, whether the impact is fully you know they put even more tariffs on this, who knows but I think it's important to mention now their exposure to magna is Much lower than it was 12 years ago in 2012 It was 93% and granite was actually a spin-off of magna So that's why they have such big exposure here now again something to keep in mind There is some risk associated with GRANIT. And GRANIT is GRT.UN. And the other one would be Dream Industrial Read,

ticker DIR.UN.TO. Again, they own properties across Canada, the US, and Europe. And that's really important because even though you may have reads that are listed in Canada, a lot of them actually have exposure to the US and Europe as well. Some are only focused on Canadian properties, but that's what I was saying when we started this portion for 2025 is just understand where the properties are because it's not because they're listed in Canada that all of their properties are here. Yeah. And you do see a lot of these spin-offs from,

like you mentioned, Magna, but a lot of these REIT spin-offs from smart centers, right? Canadian Tire. Yeah, Canadian Tire, President's Choice, et cetera. No, exactly. So now I guess we'll move on to retail. So again, if you want to go over what retail is looking like and what to expect in 2025, or at least

your best guess, we won't hold you to it. Yeah. I think that honestly, don't own retail if you don't want to own residential, would be my advice for 2025. Because I think retail is really a covered land play, to be honest with you. It basically reduces the land cost basis for some of these old shopping mall operators to get into the residential space. We mentioned the well, right? That's a good example. Rio Cans, the well with partnership with Allied REIT, 7.8 acres, right downtown, huge residential

and office and commercial mixed use community, 1,700 residential units, 1.1 million square feet of Class A office space and 320,000 square feet of retail space. You're going to start seeing projects like this with key institutional players in every city in Canada. And that's what's going to be competing with your mom and pop condo investor for the multifamily residential space. There's another example in the City of Toronto as an example, Madamee is doing this project

called The Clove at Cloverdale Mall with Quadreel. A lot of these malls, there's one happening in Square One. I think all of the Oxford Omers malls have these master plan residential communities going up around them. We covered this pretty heavily in our episode 257 on the show, but also one of the sponsors that we had on the podcast, ULI, when they hosted their Toronto event, it was all about the revitalization of the shopping mall. And you had all these US shopping mall operators looking at what we're talking about doing in Canada and they're like, we could never do that. So this is a unique thing that Canada has from an enclosed mall perspective that no other place on earth really does the way that we can. And so my thought would be

basically if you think about it, all these retail power centers even, they're all large acreage sites, you know, 20, 30 acres, they're all on main roads. They all have buildings that are, you know, kind of cheaply built and built to be torn down in a 20, 30 year lifetime. And they're all going to be redeveloped into large master plan residential communities in the fullness of time. And so I do think that probably this is one of my favorite asset classes because you can kind of buy it as if it's a residential REIT. Like a lot of the other buyers that are pricing this and you're competing with are doing, they're buying it based on those kinds of things.

It's yielding, it's retail, et cetera. They're not pricing in the development maybe as well as you might. So that's my key thought is look at when you're looking at retail REITs, look at what they're doing. Like SmartCenters, I know is the first one on your list. Look at what they just did in Vaughan Metropolitan Center. They have like a huge, some of the biggest condo towers in the GTA going up there. Yeah, exactly. So, Smart Center, take her as sru.un. So they have some really strong anchor tenants and I think that is one of their components

right when you want to look at retail rates, especially if they own malls, you want to make sure that there's not a Sears in there. For younger listeners, Sears was back in the day a very prominent retail business but all jokes aside yeah so they have some strong tenants they have a in place or committed occupancy rate that is actually really high I didn't expect to see that 98.5% some of their top 10 tenants so 23.4% is Walmart. So that is one thing. I think I've said it again with Magna, but it's really important just to look how dependent

they are on one tenant. And same thing when investing in regular, in non-real estate companies. If you're looking at companies and they have one customer that is an outside proportion, it is additional risk. Obviously, Walmart is probably not going anywhere, but again when you're so concentrated in one tenant, if anything happens with that tenant for whatever reason, you can be in trouble. I saw, I think it's industrial logistical property. I can't remember the exact name, but it's a industrial read in the US but that catered specifically to the cannabis industry in terms of tenant and they recently I think they had a big

drawdown because one of their major tenant went into bankruptcy protection. So obviously cannabis is still a gray area it's not legal on the federal level in the US, but that's just an example. If you have one tenant that goes down, it could really negatively impact you. And then the second name here is RioCAN. So ticker REI.UN. Again, more diversified, but has some residential properties as well. And you talked about it. They also have retail and office space, I I think with those kind of mixed use properties.

Yeah. Okay, so the last couple ones, so we're going to be close to the hour, not too bad in terms of time. So retirement, long-term care home, you didn't have much notes, so did you want to add anything or we'll just mention the names here? I think it's, yeah, I kind of think about it the same way as residential except it's a little bit more of a, maybe you probably have a better class of like wealth from a tenant perspective and you're not maybe exposed to non-payment of rent, like bad debts as much. We have like from a purely macro perspective, we have the largest percentage of our population

approaching retirement that we've ever had, right? So this is really a great way to get exposure to the aging population pyramid. I would say that if you're getting into the position, you have to think about getting into it basically for the entire duration of that population pyramid, which is people like our parents' generation basically going into retirement homes and then passing away. It it's probably like a 20 year investment horizon from my perspective. Yeah, and that's a good point.

And I think prior to the pandemic, a lot of people probably thought these were like the safest investments ever. I know enough that I think they're, Chargwell and CNF Senior Living, so the two names I was gonna mention. I know they had some issues during the pandemic. So I think it's, you know, you always have to remember there could be some

events that you don't foresee in the future that could impact your investment thesis. And that's the only thing I want to mention here. So Chartwell, that's ticker, CSH.UN and CNS Senior Living, SIA.TO, so on the Toronto Stock Exchange, both of them. And then moving on to other types of properties, so the last two here. It's possible we haven't talked about all of them. I think we're covering all the major ones. Healthcare, anything you wanted to add before I give? I think there's only one name in Canada here.

Yeah. I mean, I think that this is one of those ones where it kind of depends a bit on like government spending, et cetera, and there could actually be a bit of downside risk in that regard. Yeah, exactly. And so the healthcare, so it's Northwest Healthcare Properties, REE, ticker nwh.un. Now they own real estate that includes hospital, healthcare facilities, medical office buildings. Something to note, I think it goes with what you just said,

is that they actually cut their dividend, I think it was back in 2023, by more than half in an effort to reduce debt. So because the interest portion of their debt was getting too high. So I think it's really important to keep that in mind. You know, people may think that, you know, oh, they own healthcare properties, they're immune to everything. Again, there is different kind of risk depending on the different type of properties, but especially when it comes to REITs or heavily levered entities, you really have to make sure that you understand how the amount of debt they have, the interest they're paying, where that's trending, when they'll be refinancing that debt. These are all really important things

because if not you could be looking at a dividend cut or distribution cut and that will have a massive impact on your returns because REITs are very dependent, their toll returns are very dependent on their distribution. The latest figures that they have was 96% occupancy, so that is very strong. Now the last one here, data REITs. So do you want to... I know you have a bit of notes on that and then I can give some names. Unfortunately, we don't have any pure plays in Canada, so it'll be American names that we'll be giving here.

Yeah. I mean, I think that this is probably the best. I think that it's probably a little bit overbought right now just based on the hype around AI. But I do think in the fullness of time, there's probably one of the best theses to be made in the real estate space. And I really do want to see somebody in Canada compete in this space because I think our ability to play in the data center space is great. We have cold climate, so it's cheaper cooling.

We have the ability to generate power better than anyone else on earth. I think we have the most hydroelectric power on earth, plus we're doing some big stuff in the nuclear space. Pierre Poliev, who is going to likely, you know, based on my assessment of the polls is going to probably be the next Prime Minister of Canada later this year, mentioned this in his conversation with Jordan Peterson, among a few other things. And I don't really like talking politics, but I think it's important to model your assumptions and based on the most range of most likely outcomes. I think that this could mean pretty big gains in a lot of things in Canada, but I think hopefully in data center and AI compute could really, I think Canada could compete in that

space and I hope to see us do it. But otherwise, yeah, I mean, at this point, you're kind of just buying US data center plays until we see something evolve in Canada. Yeah, exactly. And look, you're totally right. We try not to talk too much about politics, but the reality is if there's a new government in, if they put priorities or they reduce regulation against certain types of industries, clearly it could be a tailwind for those industries. So I don't think you can disregard that, you know, neither. So I think it's important to at least mention that and keep that in mind because it will

be kind of part of that bigger macro space when you think about it. Now in terms of some options, so there's Equinix in the US, EQIX, Digital Realty Trust, DLR, so those are the two biggest data center pure plays if you're looking for those. And then American Tower REIT, which is a mix of Data REIT and communication towers. So communication towers is, you know, cell phone towers, that's so they own those kind of towers. They're primarily communication towers. The reason why they have those kind of towers. They're primarily communication towers. The reason why they have a bit more of a data read exposure is they bought Core Site Realty.

I think it was in 2021 if I remember correctly. So that's how they gain a lot of their data center exposure. So those are the plays. Like I said, not really any public kind of pure plays in Canada. You may see, I don't know what your thoughts, maybe it's a good way to close on this note, is do you think some of those more diversified REITs might start investing a little bit in data center REITs and kind of diversify their portfolios a little bit? Yeah I think it would be silly not to and I think you will start seeing more institutional exposure to the data center side of things because it is a good way to get higher yield and exposure

to the whole new section of the economy. If you look at real estate, it's really just a way to get hard asset exposure, real estate exposure to different sectors of the economy. And that is evolving as the largest sector of our economy. Maybe that's a little bit overpriced right now. But it know, I mean, it would be silly as a diversified REIT, as any other institution who holds real estate, you know, if you wanna get exposure to retail to get the consumer or industrial to get, you know,

your Amazon or whatever it is, you should be doing it with the AI side to get exposure to that new economy that's evolving. So 100%, that's a huge trend that I think. And I think you'll have a pretty consistent pipeline of demand for those projects and those REITs moving forward. Yeah. No, I think well put. Well, I think that's a good place to wrap it up. We've gone about an hour, which is actually probably shorter than I was fearing. I thought it was going to be way longer for sure.

Yeah, exactly. So we were pretty good. I feel like we always run pretty long in these episodes and we start doing notes. I'm like, oh, maybe we won't have enough content and then it just starts adding up. But yeah, it was a great episode, Dan. I will have some of the links in the show note. If you'd like to listen to Dan and Nick Hill is co-host on the Canadian real estate investor podcast, you'll have a link to the main podcast page, whether it's Apple podcast, the web player or Spotify. So those platforms, they also do some content on YouTube that I

really encourage. So you'll be able to see some clips of their episodes and Dan and Nick's beautiful faces. So you'll be able to see them there. Anything you wanted to add before we let people go here? No, I think that's it. I would just really appreciate if people gave us a listen. We try really hard to earn a second episode out of all of our listeners. So yeah, give us a shot. Totally agree.

So thanks everyone for listening and we'll see you next time. The Canadian Investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.