Opinions
Derek Warren A Comment -- General Comments From an Expert A Commentary COMMENT May 26, 2025
You might be interested:
As we all know markets in general have seen a lot of volatility, a lot of which is due to our friends down south. But we've noticed a normalization over the last little while, and REITs are becoming normal again ;)
It was nice when interest rates were almost at zero and the value of real estate was spiking. But that's not what you really want. Real estate is supposed to be a store of income; you get your monthly rent cheques passed through and the REITs manage the real estate for you. You get 6-7% yield and a couple percent of growth, bringing you close to 10%, and you can count on that year over year.
With the correction and repricing that's happened, yields are now back to normalized levels. In spite of the things that are happening in the economy, he's seeing things being quite stable in the real estate market at this time.
He's always monitoring the sub-sectors. The retail space was very challenged during Covid. There's been a purge, where the weakest tenants have gone. Everything's back open and running, and filled with better tenants. There hasn't been any new retail built, yet we added a huge population boom to the country through immigration. So we're seeing things actually doing quite well in that sector, and it's showing up in the numbers.
Yes, we really saw that in the apartment markets. Upon seeing the immigration numbers dip, a lot of American investors fled. His team actually likes apartments a lot here. The immigration blip will normalize, and residentials are a really great entry point here.
Right now, he's excited about the apartment market again. The reduction in immigration and international students has put pressure on this segment. But in a way, things were too high. It's all lovely as a landlord when you can charge $4-5k a month for an apartment, but it's not really sustainable.
There will be a refreshing change here as rents come down, because people can breathe a sigh of relief and finally be able to get rid of their roomates :) Or get their own place. Or move out of their parents' basement. The secret, especially in rent-controlled markets such as Ontario, is that the rent value is one thing, but to raise rents you need people to move. And people stopped moving. They just hunkered down because they couldn't afford to move. So rents that may have been below market get to reset to the market price.
That's why he's bullish on apartment REITs right now, especially on the more affordable zones across Canada.
For a while, people thought that condo values only went up. We're seeing now that that's not the case. People got a bit greedy. If you're buying something as an investment, it's important to know that investments can go down. As interest rates started to turn and the low trend ended, you could lose.
There's a saying that if you can't lose 30-50%, then you shouldn't be invested. But when you're buying real estate, and it's 90% leveraged, that 30-50% correction would wipe you out completely. Unfortunately, some people are going to go through that. Normalization will return to the market and, hopefully, a lot of new product. He knows a lot of young people who would like to be able to rent at a reasonable rate so they can save for a future down payment.
The EU is so bureaucratic and slow that he doubts they can reach a trade deal by then. Trump slapping then withdrawing tariffs is his bargaining chip while markets get whipped around. The bottom line though comes from the C-suite who won't make any deals until this all ends. This will eventually matter, but now the markets don't care. Right before Covid hit, markets were at all-time highs, though the Covid news was out there, percolating. Markets didn't care. Will we see another AHA! moment when we see notable weakness in the US economy, especially jobs? He thinks so, but nobody knows when. Another jolt like April 2 will happen in early July. Expect uncertainty and a lot of good coming, too. But he doesn't see the market going up a lot from here. In fact, markets shouldn't be ripping higher now.
The TSX keeps creating highs. He's been asked, Why own the TSX instead of the U.S. during tariffs? People were getting fear fatigue over tariffs, getting used to them and moving on with their lives. But we will still see pain and uncertainty in Canadian employment and mortgages. That said, markets still bounce or fall over what Trump says on a given day. US consumers will have to pay more for things made around the world, given tariffs and drive inflation. His greatest concern is that companies are not hiring because of uncertainty caused by tariffs. We're probably already in a recession. GDP per capita is flat at best, and the rest of this year could be tough for Canada.
Not a surprise, we all knew it was going to happen. HBC paid very low rent in its legacy spaces, sometimes according to 100-year leases. There is upside if you can remove HBC as a tenant. REI.UN and PMZ.UN are the two most affected; especially REI.UN, due to the structure it put in place years ago.
There has been news that some 28 of these leases may be purchased. Lease conditions do say that if you purchase the lease, you have to operate the same kind of store. Canadian Tire has shown interest. Might be like a painful surgery that you have to go through, but end up being in better shape when it's all done.
The thing about The Bay space is that it's fine when it's on 2 floors. Once it gets to 3 floors, especially when that third floor isn't connected to the rest of the mall, it becomes challenging. In those cases, the real value may be in tearing it down and building something else.