As falling rent hits apartment REITs, Scotiabank analyst gives only one an ‘outperform’ rating

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Real Estate

Scotiabank analyst Mario Saric surveyed the domestic rental market and related REITs,

“Monday’s Rentals.ca November data was worse than October. Avg. 2BR asking rents fell -1.8% m/m (vs. -0.7% October), driving the 3-month avg. to -1.2%; avg. 1BR was -1.6% vs. -0.6% October. National Apartment Rent fell -1.2% m/m vs. -0.4% October, with 3-month avg. at -0.8%. Last November, rents fell by less at -0.8% m/m. We estimate market asking rent erosion range of -0.3% (KMP) to -0.8% (BEI), with KMP markets the “best” and BEI most ‘challenged’ for the 2nd straight month; KMP benefited from m/m growth in New Brunswick. On 2BR data, Vancouver (+0.5% m/m) outperformed, with Edmonton, Ottawa, and Halifax all down 1%-2%; Toronto and GTA West fell 1%. On 1BR data, GTA West (+0.4% m/m) outperformed, with Calgary, Edmonton, and Vancouver all down 1%-2% … Our ‘Neutral’ view reflects expected during the seasonally slow Q4 and Q1, before heading into the all-important Spring leasing season. Our only SO-rated Apartment REIT remains KMP”

AI impact

Wells Fargo strategist Ohsung Kwon is forecasting higher U.S. unemployment and lower rates thanks to AI,

“A hawkish cut is consensus and priced into the futures market. We see room for a more neutral cut, especially around the balance sheet … AI EPS (ORCL +AVGO) are also big events given recent concerns … An initial labor market disruption from tech innovations isn’t unusual. Since the 1700s, three out of five historical tech innovations initially resulted in higher unemployment rates. AI’s accelerating impact on the labor market likely puts a ceiling on rates, especially with a lower multiplier effect from Tech capex. Historically, EPS up, rates down has been the best backdrop for stocks… Labor is the biggest cost for companies (36 per cent of OPEX). We estimate every 1-per-cent savings in labor cost translates to a 2-per-cent tailwind for S&P 500 EPS, all else equal. By sector, Health Care shows the largest multiplier (5.5 times) due to big labor costs and thin margins, followed by Consumer sectors and Industrials, while Real Estate and Energy have the smallest”

Bullish view

BofA Securities analysts are more bullish than most on the U.S. for 2026,

“Aditya Bhave’s base case for 2026 is that consumer resilience will help stabilize the labor market. He looks for above-consensus GDP growth of 2.4 per cent in 2026 and 2.2 per cent in 2027. Aditya sees five tailwinds for the economy next year. First, we expect the OBBBA to add 0.3-0.4pp to GDP growth in FY26, via consumer and capex stimulus. Second, the lagged effect of ongoing Fed cuts is likely to buoy activity in 2H. Third, trade policy should turn more supportive for growth regardless of whether tariffs are overturned. Fourth, we think AI-related investment will continue to support the economy next year. Lastly, base effects from the shutdown should mechanically boost 2026 GDP growth … S&P 500 to 7100 in ’26 Savita Subramanian’s 2026 target for the S&P 500 of 7100 implies a 5-per-cent price return. She expects earnings to grow in the mid double digits but multiples to compress by 5- 10 per cent. For the last few quarters, investors may have devoted more energy to ‘which hyperscaler should I own into earnings?’ than anything else, and most expect more of the same in 2026. We are less bullish on hyperscalers, more bullish on AI adopters, but that could be a ways away. We also worry about the tension between AI taking jobs vs. consumption remaining resilient in 2026. Savita expects broadening and a more idiosyncratic market backdrop”

Bluesky post of the day

Diversion

“AI chatbots can sway voters better than political advertisements” - M.I.T. Technology Review