The second quarter of the year is starting to shape up for investors and economists following the decision of the Bank of Canada (BOC) to cut its key policy rate. The announcement made on June 5 is a watershed moment for the central bank, lenders, and borrowers, after nearly four years of monetary tightening and skyrocketing interest rates.
The BOC brought down the key interest rate from 5.00% to 4.75%, making Canada the first G7 nation to do so, according to reporting by Reuters. The decision to bring down interest rates has been a long-standing debate among policymakers, however, the recent announcement is an indication of easing inflation and slower consumer activity.
This will be the first of several rate cuts expected this year, with chief economists expecting a second rate cut in July, which would bring the policy rate down to 4.50%. However, nothing has been announced about whether consumers and investors could see additional easing as early as next month.
Current expectations estimate that the BoC could further trim interest rates before the end of summer, should inflation continue its downward trajectory after hitting a three-year low of 2.7% in April, however, this would most likely be a gradual process.
Is There Opportunity In The Real Estate Market?
While the 25 basis point cut was expected, many experts are not yet convinced that Canada’s property market will experience a sudden rise in new buyer activity. This comes after years of exorbitant prices coupled with tight interest rates, limited supply, and strong demand that continues to cast a shadow over the market.
Despite the uncertainty, recent market trend insights by The Canadian Real Estate Association (CREA) reveal a somewhat positive outlook for the market heading into the remainder of the year.
Residential Market
The springtime market, which started in April, had already indicated a steady improvement in new sales, supply, and demand compared to the same period last year. Based on April’s CREA report, residential home sales increased by 10.1%, with roughly 48,836 new units sold in April 2024, compared to 44,371 in April last year.
The total number of new residential listings increased 34.9%, a steady improvement compared to the same period of 2023. Elsewhere, the average price of new homes sold across the country was down 1.8%, a slight decline, with the average listing price now standing at $703,446 versus $716,044 in April 2023.
Office Market
The pre-pandemic office market is still somewhat turbulent, with the national office vacancy rate hitting a record high of 19.4% at the end of last year, CREA reported. Experts claim that a “healthy” vacancy rate stands anywhere between 10% and 12%, making the current estimates a nearly double increase in available office space.
However, some industry leaders believe that the completion of new office space between 2021 - 2023 - nearly 1.6 million square feet of new offices - has helped to drive office vacancy figures north, most notably in larger cities including Toronto, Montreal, and Vancouver.
The rest of the year might see a slow, but gradual improvement in the office real estate market, with experts claiming demand will manage to catch up to supply and further stabilize into next year.
Still, the majority of major office buildings and complexes remain dormant, or at least partially vacant, as hybrid and remote working has entrenched a lasting impact on companies, and within the office property market.
Retail and Commercial Market
Retail and commercial properties suffered a massive blow during the pandemic as larger brick-and-mortar stores had their doors shuttered, and the rise of eCommerce and online shopping added additional insult to injury.
Now, nearly four years after the pandemic first started, retail fundamentals are looking to see an improvement in 2024 as retail vacancy rates begin to trend downward, with experts seeing the national retail and commercial vacancy rate stabilizing around 2% closer to the start of 2025.
A combination of factors such as favorable immigration policies, moderate consumer demand, and steady growth in demand have propelled the overall outlook. High interest rates will continue to influence overall demand, however, investors and developers could begin to see a decline in net absorption of elevated borrowing costs.
Finally, the completion of new developments in parts of the country, such as Edmonton and Montreal, combined with growing immigration into cities, which had already seen the population of Toronto 2024 experience a major boom, will help to support the overall stabilization of the market.
Industrial Market
Favorable conditions are on the cards for the industrial property market, as new supply will stabilize demand and rent growth begins to slow. The combination of higher demand and lower rent growth could be a positive turnaround for both tenants and consumers, as this could lead to lower prices in storage and manufacturing, helping to ease prices within the supply chain.
Larger availability has meant that new construction projects have started to slow, with project development and construction activity contracting 11.2% quarter over quarter during the first quarter of 2024, according to recent estimates by CBRE. Overall, construction of industrial real estate has declined a robust 29.5% since its peak in the third quarter of last year, which has led to a steady rise in average vacancies.
As of Q1 2023, industrial vacancy has risen to 3.7%, mostly due to new supply availability, and the sublease market space seeing a decline in price growth.
Overall, industrial and manufacturing continue a slower pace of expansion, compared to other market segments, however, price easing could present a more attractive turnaround for manufacturers and consumers sitting at the end of the supply chain.
4 REITs For The Summer
For dividend investors, taking advantage of the high-quality real estate market could provide them with long-term upside, allowing them the opportunity to level out their portfolio distribution, as property supply and demand begins to stabilize.
Looking ahead, several key real estate investment trusts (REITs) could hold multi-dimensional benefits for investors, ranging from residential to retail, and demand for essentials could continue to experience positive growth during the summer season.
Canadian Apartment Properties REIT
Canadian Apartment Properties (TSX: CAPREIT) holds one of the largest rental housing portfolios on the market, with more than 64,200 residential apartment suites, townhouses, and manufactured home community sites. Their portfolio holds properties in both Canada and the Netherlands as of the end of Q1 2024.
Overall, CAPREIT witnessed a steady first quarter of the year, with overall residential occupation standing at 98.4%. Total monthly rent averaged at $1,552 for the quarter, which remains significantly lower than the national average.
According to industry estimates, the current national average rent rose 8.8% between April 2023 and April 2024, bringing the average rental price up to $2,188 per month.
Canadian Apartment Properties’ portfolio is largely distributed towards apartments and townhouses, making up nearly 96% of their portfolio, with the remainder being manufactured home community sites.
Additionally, the distribution of properties on a regional basis sees their portfolio holding a large share of active sites in Ontario (46.3%), Quebec (15.2%), and British Columbia (14%). Sites in The Netherlands make up about 15% of their portfolio, as of March 31, 2024.
Basic financial positions remain strong, with CAPREIT holding more than $369.3 million in available liquidity, $44.6 million Canadian cash and cash equivalents. Total mortgage financing ended the quarter at $143.2 million, with an average maturity of 8.7 years at an interest rate of 4.64%.
Overall, CAPREIT holds a big and steady portfolio with large quantities of liquidity. Steady portfolio distributions allow the company to level out its risks while managing to acquire new sites and developments.
CAPREIT has a yield of 2.9%, which trades at a forward-looking price to funds from operations. Though the uncertainty remains overhead, CAPREIT presents investors with equal spreads and more consistent returns.
Choice Properties REIT
Next up is Choice Properties (TSX: CP.UN) which holds a diverse portfolio of properties across Canada. In total, the company holds roughly 77% of retail property, 19% industrial, and 4% mixed-use & residential properties in their portfolio.
With the majority of its portfolio invested in retail, the company sees more than 60 million square feet of leasable space across the country. Despite the overall decline for retail space in places such as the U.S., in Canada the picture is painted slightly differently.
Favorable immigration policies have meant that many cities have seen their populations swell over recent years, and one thing new arrivals will need is a place to sleep and a place to buy essential goods.
Experts believe that recent immigration policy changes could help bolster demand for retail and industrial properties. Canada’s population has increased by 5% in the last two years, and by any measurement, that’s quite impressive.
For companies such as Choice Properties, the migration of residents in cities could help bolster their position should they hold a more long-term outlook on the retail leasing demand. According to the company, they currently have around 40 development projects underway with a total additional 16 million square footage that will be added to their portfolio.
However, numbers are what makes investors talk. Based on Q1 2024 reporting, Choice Properties had 97.7% retail, 98.8% industrial and 94.7% mixed-use and residential occupancy rate. Retail occupancy rose by 2.5%, while industrial mixed-use and residential were up 2.8% and 1.3%, for the quarter, respectively.
Though first quarter results were positive, overall performance remains steady and in line with broader market demand. CP delivers consistent returns, based on their fair market value, and offers investors an income-earning opportunity based on their cash distribution history.
Granite REIT
For investors looking more toward industrial and manufacturing, Granite (TSX: GRT.UN) is an investment trust engaged in the development, ownership, and management of various logistical warehousing and distribution properties. On top of this, the company operates several industrial properties both in North America and Europe.
As of April this year, the company owns around 143 investment properties located in Canada, the U.S., Germany, and Austria, among others. In total, their portfolio spans more than 63.3 million square feet, with additional development projects in the pipeline.
Looking towards 2024, Granite plans to revisit several key financial instruments including their estimates for maintenance capital expenditures, leasing commissions, and tenant allowances. These instruments are expected to adjust in the coming months, which could help drive down adjusted funds from operations (AFFO).
For the three months ending March 2024, financial earnings remained steady with Granite reporting $138.9 million in revenue, compared to $129.6 million in Q1 2023. Elsewhere, total net operating income increased from $107.4 million in Q1 2023 to roughly $114.5 million for the recent recorded period.
During the first quarter, the company announced the completion of several projects, including a 0.4 million square foot distribution facility in Brantford, Ontario, which will be leased on a 19-year term. A second phase of the Brantford site has been approved as well, which will see the addition of another 0.7 million square feet.
Over in the U.S. in Houston, Texas, Granite received the greenlight for a 1.3 million square feet development project which forms the third phase of a larger development plan.
Though there might be some downward demand for leasable industrial and warehousing space in Canada following stringent interest rates and a high supply market, Granite provides buoyancy as it diversifies its portfolio with international investment property holdings, which gives investors access to foreign property investment opportunities.
Northwest Healthcare Properties REIT
As with residential property, which will remain in demand despite exuberant prices, and surging demand, healthcare providers are seeking ways to expand their operations across the country, and Northwest Healthcare Properties (TSX: NWH-UN) provides the most efficient solution in the industry.
The company operates a wide range of healthcare properties across the world, including North America, Brazil, Europe, and Australasia.
Despite the first quarter being somewhat challenging, Northwest Healthcare Properties held a relatively steady three-month performance which is largely underpinned by long-term lease maturity, and a weighted-average lease expiry of 13.2 years.
In total, global occupancy rates are at 96.5%, while total worldwide rent collection remains high at 98%, according to Q1 2024 financial reports. Though overall portfolio conditions remain stable, total revenue for Q1 2024 declined by 1.3% to $133.5 million. Management explains the decline as being impacted by the offset of contractual and inflationary rental increases.
Another point of interest was the 80% payout ratio for Q1 2024, with adjusted funds from operations per unit in the first quarter falling to $0.11 compared to $0.17 per unit compared to April 2023.
Last year Northwest Healthcare Properties cut its distribution by 55%, partially as it was looking to shore up its balance sheet. The activity, which many argue was due to slower demand and project developments in the post-pandemic economy.
Operational spending and costs for healthcare facilities continue to run tight as inflationary pressure sees the price of healthcare services and goods rise, however, some believe that recent inflation data could help provide a more positive outlook going forward as prices begin to stabilize.
A Now-Or-Never Situation
Across the real estate market, investors might start to gauge more essential-oriented property options - residential, retail, commerce - as cities across Canada are expected to see a rise in new residents in the coming years as domestic migration sees more residents swapping rural housing for city living.
At first glance, this could present new opportunities for residential property development, especially apartments and townhouses. The price of development, upkeep and maintenance, and the ability to provide housing near public amenities could be among key selling points for developers.
Though traditional single-family homes are still in good demand, overall the shift from spacious living to a more compact minimal style will have inner-city occupancies grow, leaving rental spread to stabilize.
The change in interest rates could become another strong tailwind for the actor, which could motivate more would-be buyers and new homeowners to seek to step into the market. Although the change in interest rates is a positive sign, it’s not yet fully certain how much activity the property market will see from consumers compared to businesses.
Overall, we can expect things to stabilize in the coming months, but not ignore the fact that interest and higher operating costs could become a burden to industrial and commercial property owners. Perhaps the slower demand, better supply and overall lowered rentals would mean providing some relief to consumers in the supply chain.
Final Thoughts
Overall, the property market is set up for a positive finish to the year, however, investors remain hawkish over slower-than-expected interest rate cuts. Some of the biggest challenges for investors were interest rates and the level of volatility, although this could soon be changing in the coming months as we’ve perhaps surpassed the peak of tight monetary policies, and instead return to normality.
There’s still a long road ahead, and it’s not without many challenges. Perhaps the change in interest rates would see fewer companies deferring less on capital decisions, and instead begin talking about how they can drive the leasing market with more promising property developments.
