We start this edition of Market Factors with everyone’s favourite income sector - REITs - as RBC analyst Pammi Bir has just published his year ahead report. Section two focuses on credit risks from the U.S. government and AI-related corporate debt. The diversion recounts the past year in neurobiology discoveries and there’s some quick hits as usual.
RioCan signage is shown at a strip mall in Mississauga, Ont.The Canadian Press
Income investing
Better times ahead for REIT investors
RBC Capital Markets real estate analyst Pammi Bir reviewed the past year in the sector, looked ahead to 2026, and provided the REITs that would benefit from his projections.
Mr. Bir began noting that in terms of total returns, 2025 is the best year for REITs since 2021 at roughly 6 per cent. This will come as little solace, however, when the TSX is up 32 per cent year to date and the S&P 500 has generated a 13 per cent return so far in Canadian dollar terms.
Investor sentiment is to blame to some extent for the underperformance, according to the analyst. In the first half of the year, stable rates, valuation discounts to historic averages and insulation from U.S. tariffs drew investor assets to the sector. As the year progressed, stable global growth data created a risk-on environment that benefited hot themes like AI at the expense of real estate.
Real estate weighting in the S&P/TSX Composite Index has dropped from over 5 per cent in 2015 to just 1.5 per cent now. This minimizes flows from index ETFs and general investors tracking to benchmark.
Next year might be better, according to Mr. Bir. He expects FFOPU (funds from operations per unit, the REIT version of profits) growth to improve from roughly 3 per cent in 2025 to between 4 and 6 per cent in 2026. Added to an average 7 per cent increase in NAV and 5 per cent dividend, the sector’s total return should improve to high single digits.
In terms of subsectors, seniors housing remains at the top. The analyst believes premium valuations are justified by the best profit growth in the REIT sector. Industrials is the next favourite thanks to discount valuation levels and decent growth.
Self storage, with strong private market values implying a publicly traded REIT rally, is sector number three followed by retail REITs and their strong fundamentals and reasonable profit growth. The deeply discounted multi-family REITs could catch a bid and office REITs, in need of balance sheet repair, the least favoured.
In terms of individual recommendations, Mr. Bir lists Boardwalk REIT, Colliers International Group Inc., Chartwell Retirement Residences, First Capital REIT, Granite REIT and Storagevault Canadian Inc. as his very best ideas. Other companies he likes include Canadian Apartment REIT, Dream Industrial REIT, Extendicare Inc., BSR REIT, H&R REIT, Killam Apartment REIT, Flagship Communities REIT, Minto Apartment REIT, Primaris REIT, Riocan REIT and Smartcentres REIT.
Debt
Public and corporate credit risks rise
The biggest market disaster potential emanates from credit markets, not equities. Goldman Sachs global strategist Peter Oppenheimer waited until the last page of his 2026 forecast report to address credit risks, writing: “Is credit and government debt a risk? Yes.”
Corporate debt markets are stressed by the immense borrowing needs necessary for data centre buildouts, which is why I keep careful track of Oracle Corp’s credit default swap values. CDS is the cost of insuring corporate debt against default – the higher the number, the higher the default risk according to markets. Oracle’s five-year CDS hit 154 basis points last week; it was below 100 as recently as mid-November.
The failures of auto lender Tricolor Holdings and auto parts owner First Brands Group did not help sentiment in the corporate debt sector. Skepticism about the value of private equity holdings hit a fund owned by alternative asset manager Blue Owl Capital Inc.
U.S. public debt continues to expand, driving debt service costs to over US$1-trillion annually. Mr. Oppenheimer noted the possibility of a sharp jump in Treasury yields if markets begin to question America’s willingness to maintain an orderly Treasury market.
Such a jump would result in a deep downdraft for equities both in the U.S. and globally. A disorderly sell-off is Treasuries is unlikely, but does represent the single biggest risk for markets in 2026.
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Diversions
New brain discoveries
Scientific American released The 10 Most Mind-Blowing Discoveries About the Brain in 2025 which is right up my alley.
The first discovery listed was that the human brain has five distinct phases of life, with turning points near ages nine, 32, 66 and 83. The second discovery is a bit freaky: we actually have memories of being born and a toddler but we can’t access them.
The third discovery is also baby-related. A newborn’s brain contains high levels of a protein that, in an older person, would indicate Alzheimer’s disease.
Number four is that the brain can produce new neuron, while the fifth discovery was that, while brain activity is similar when we see something and imagine it, there is a “reality signal” only present when looking at the real thing. Scientists have isolated the brain signal distinguishing reality from imagination.
The sixth discovery is progress on a treatment for the horrific Huntington’s Disease and number seven indicates that chimpanzees are capable of updating their beliefs based on evidence - a process previously thought only possible in human brains.
Scientists altered the vision of subjects to create a new colour previously invisible to our eyes, forming discovery eight. The ninth is that the brain consumes so much energy that it actually glows. And the tenth discovery is not actually a discovery at all, but a debate between two prominent scientists about how the brain creates consciousness.
The essentials
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Globe Investor Highlights
Tom Bradley on the many surprises of 2025 and Jeff Sommer on why you shouldn’t trust any forecasts for 2026
Norman Rothery ranks the top 250 stocks in Canada, and presents the 25 megastars of the past year
Here’s why we can expect the 2027 TFSA contribution limit to rise to $7,500
Silver has rocketed to all-time highs and has emerged as an AI play. David Berman advises caution
Why it’s unlikely the U.S. dollar will see a bounceback next year
Quick Hits
I am happy the holiday newsletter break is here because I’m really tired of reading 2026 outlook reports predicting resilient growth despite headwinds, performance leadership broadening beyond AI, emerging markets outperforming, better opportunities for active managers, and event risk from the U.S. president and geopolitics. Same things over and over. (I’ll be back with the next Market Factors on Jan. 5)
Citi posted a podcast with internal AI specialists and a Google executive discussing AI implementation. The whole thing was so full of corporate jargon and ambiguity it gave me horrible flashbacks to tedious meetings in my previous career at King and Bay.
There are enough risks from equity valuations and AI-related credit that I think the VIX is too low, at below 15, but we’ll see.
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