The Yonge Eglinton Centre in Toronto, owned and managed by Riocan, pictured during the COVID-19 pandemic in 2020. The retail segment has rebounded in recent years.Melissa Tait/The Globe and Mail
When investing in commercial real estate, most assets – from malls and warehouses to data centres and self-storage – are privately held. Still, some investors prefer to invest in the smaller group of publicly listed real estate investment trusts (REITs) for their transparency and liquidity.
“It’s important to note that [publicly traded] REITs have significantly better governance, whether it’s because they have to disclose their financials quarterly, there are analysts who cover the companies closely, and, in general, they have lower leverage,” says Mark Rothschild, an analyst at Canaccord Genuity Corp., who covers the sector.
Publicly traded REITs are often lumped together in diversified funds, such as iShares S&P/TSX Capped REIT Index ETF XRE-T, which tracks the S&P/TSX Capped REIT Index and includes commercial, office, multi-family and health care REITs.
But performance often varies between the different REIT segments.
Consider industrial REITs, which outperformed during the pandemic as companies scrambled to find and build warehouse space to handle the surge in online product orders.
Meanwhile, retail REITs suffered as people stayed away from brick-and-mortar stores, leading to store closures and higher vacancies.
The script flipped in more recent years, as industrial became overbuilt and retail started its recovery.
Today, analysts say the outlook is positive for both industrial and retail, as long as the economy holds up.
“Whether it’s retail REITs or industrial REITs, we believe investors should expect positive returns this year,” Mr. Rothschild says, citing more balanced supply and demand alongside improved lending activity and lower-cost debt.
Retail REIT renaissance
National Bank Financial analyst Matt Kornack says retail REITs are having “a nice little renaissance” post-pandemic, confirming that consumers like a mix of in-person and online shopping.
“It feels like a healthier environment,” he says. “You can definitely see it in the numbers – and the tone of management teams is more positive than it has been for a while.”
Still, he says investors will need to be patient, given that the industry works on long-term leases.
“We’re not expecting there to be this huge spike in growth,” he says, but he thinks industrial REITs can generate above-inflationary growth over the next decade.
Some examples of Canadian-listed REITs that focus mainly on retail include Automotive Properties REIT APR-UN-T, Canadian Net REIT NET-UN-X, Choice Properties REIT CHP-UN-T, Crombie REIT CRR-UN-T, CT REIT CRT-UN-T, First Capital REIT FCR-UN-T, Plaza Retail REIT PLZ-UN-T, Primaris REIT PMZ-UN-T, RioCan REIT REI-UN-T and SmartCentres REIT SRU-UN-T.
Industrial volatility stabilizing
The industrial REIT sector was “the place to be” during the pandemic, Mr. Kornack says, when rents rose amid the e-commerce surge because of a shortage of space. Low interest rates also spurred a building frenzy to meet the demand.
Mr. Kornack says the industrial sector is in the later stage of that pandemic-era buildout, and supply has caught up with demand.
“Occupancy has come down, rents have come down,” he says. “It was one of those pandemic winners that turned into an okay place to be, but not the same level of performance [as earlier in the decade].”
There are only a handful of Canadian-listed REITs focused on industrial real estate, including Dream Industrial REIT DIR-UN-T, Granite REIT GRT-UN-T and Nexus Industrial REIT NXR-UN-T, as well as smaller, more diversified players such as Parkit Enterprise Inc. PKT-X and Pro REIT PRV-UN-T.
Commercial outlook and investment ideas
Dennis Mitchell, chief executive officer and chief investment officer of Starlight Capital in Toronto, says industrial and retail REITs have double-digit weightings in his Starlight Global Real Estate Fund.
Some of his top industrial holdings include Dream Industrial REIT in Canada, as well as U.S.-based Prologis Inc. PLD-N and Australian-listed Goodman Group. In retail, some of his top holdings include Primaris REIT and First Capital REIT.
He also recently added U.S.-based data centre companies, including Digital Realty Trust Inc. DLR-N and Equinix Inc. EQIX-Q.
Before those purchases, Mr. Mitchell says he had exposure to data centres through his holdings in Prologis and Goodman Group.
The industrial supply glut has been worked through, Mr. Mitchell says, making industrial REITs more appealing, while many retailers have figured out an effective hybrid model of brick-and-mortar and online sales.
He also has a small weighting in StorageVault Canada Inc. SVI-T, Canada’s only public self-storage REIT, which he describes as a “very unique play” and part of the broader commercial REIT sector.
Mr. Mitchell urges investors to look at real estate by segment, not as an overall sector, and believes the outlook is strong given lower interest rates and positive economic indicators – despite current geopolitical issues weighing on markets.
“Now is the time to invest in real estate at discounts to NAV [net asset value],” he says. “[REITs] provide high, tax-efficient monthly distributions. And then let time be your ally as they compound over your investment horizon.”