National Bank Financial analyst Matt Kornack thinks 2025 could be “comeback season” for the real estate sector, seeing Canadian REITs as “down but not out.”
“A new political order within the U.S. adds a wider range of alternative outcomes over the near term,” he said. “However, underlying fundamentals remain – Canada’s consumer is challenged but there is light at the end of the tunnel with interest rate increases set to be fully passed through by mid-2026 with reprieve thereafter. The same cannot be said for the U.S., but there it is a question of discretion owing to longer mortgage terms, as a large segment of the population is tethered to their existing home.
“Trade wars aside, lower bond yields in Canada should help transition to a period of infrastructure investment to catch up with population growth. On the latter, we are less concerned about adding more people than we are about the current population seeing improved wages, employment and productivity. Turning to REITs, we are feeling better about the setup for 2025 given lower long bond yields and valuations on top of what we think will be a more durable top-line growth environment than the market is anticipating.”
In a research report released Monday previewing fourth-quarter earnings season as well as the year to come and introducing his 2026 financial forecast, Mr. Kornack made “modest” adjustments to his target prices for equities in the sector, noting “lower rates and moderating growth should serve as offsets to one another.”
“After taking our target prices up by 9 per cent heading into Q3/24 results on 30 to 50 bps lower cap rates, our adjustments heading into 2025 are modest (down by 2 per cent on Targets vs. flat on NAVs),” he said. “Cap rates are essentially the same as long bond yield forecasts are around 25 bps lower, but growth expectations are moderating in a less inflationary environment. The slight increase in discount applied is a function of access to capital for growth and heightened uncertainty on macro forces outside the control of REIT management teams. Nonetheless, our total return expectations are outsized and attractive from a real estate standpoint.
“2026 Estimates – Ops/rates collide but still expecting strong earnings growth. We are forecasting an acceleration in earnings growth in 2025 (up 7 per cent) vs. 2024 (up 4 per cent) on a number of factors including exposure to variable-rate debt, transaction activity and relative operating fundamentals. 2026 will see this pace continue (up 7 per cent) albeit predicated on a continued conducive interest rate environment (relative to some lower in-place expiring rates). A departure from this trajectory could be problematic, but only temporarily.”
He noted “valuations are looking the best, on a relative basis, they have in a while” and added: “Asset class pecking orders largely unchanged – doubling down on apartments, getting cautiously optimistic on an industrial inflection. By total return we favour Cdn. Apartments (34 per cent), industrial (27 per cent), seniors (25 per cent), retail (21 per cent), diversified (15 per cent) and office (14 per cent). Aggregate total return across our coverage universe is a lofty 24 per cent. We think this is achievable on the back of capital inflows as GIC / money market funds diminish in attractiveness relative to yield equities. Similar to what we saw late in the summer but on a more sustainable basis.”
For his “focus ideas,” Mr. Kornack’s changes are:
Canadian Multi-Family
Canadian Apartment Properties REIT with an “outperform” rating and $60.50 target, down from $61.50. The average is $55.63.
Analyst: While the tone has soured a bit for apartments around population growth as a driver of demand, we are less bearish on the outlook broadly but still think taking a defensive approach to the segment is advisable. On this basis, CAPREIT’s low turnover, which inhibited growth in the good times, provides a significant buffer should fundamentals deteriorate. The REIT has the most significant MTM opportunity and unlike peers that are finding ways to fund growth in a capital-constrained environment, CAP is flush with capital with more coming in the door. Its pivot to owning new does, at the margins, increase its economic sensitivity but the core portfolio of legacy assets still represents the bulk of the asset base. Liquidity is a plus and broadly speaking CAP is a REIT flow of funds proxy and technical fundamentals on the stock are positive. As such, the REIT tops our total return pecking order going into 2025.
Flagship Communities REIT with an “outperform” rating and US$20.50 target (unchanged). Average: US$20.11.
Analyst: “MHC is our top U.S. housing pick, and the seventh highest total return in our coverage (down from 1st in our Q3 preview as a result of relative trading performance). The valuation discount remains steep, despite offering some of the highest organic growth and defensibility in the REIT sector. Trading liquidity is sparse but for those that can we would happily buy and hold this name.”
Industrial
Dream Industrial REIT with an “outperform” rating and $16.25 target, down from $17. Average: $16.13.
Analyst: “Our highest total return to target for the industrial segment goes to Dream Industrial, again, as the REIT remains relatively inexpensive vs. its medium-term growth outlook. DIR’s ability to grow its NOI is driven by its exposures to Canadian urban mid-Bay properties. As was highlighted at its investor day, demand for this segment has remained more resilient supporting elevated market rents, with still a significant MTM opportunity. We see nearer-term industrial fundamentals as stabilizing with peak vacancy in Canada forecasted for Q2/25 with an inflection in market rent growth likely thereafter. DIR has generated solid SPNOI figures notwithstanding lower occupancy and our expectation is for continued strong growth with a fairly substantial positive inflection as occupancy moves back into historical ranges (likely an H2/25 and beyond story).”
Healthcare
Chartwell Retirement Residences with an “outperform” rating and $19 target, up from $18.50. Average: $18.18.
Analyst: “Within the healthcare group, CSH remains the top focus idea as interest in senior living continues to gather pace. Year-to-date, CSH has announced or closed $1.2-billion of acquisitions, representing the most active year in the REIT’s history. The timing seems optimal too, as we are now on the cusp of the oldest baby boomers (turning 80 next year) reaching the average entry age of low-80, propelling the growth in eligible tenant from 3 per cent to 4 per cent for the next decade. Looking out to 2026, with more limited development on the horizon, this demographic acceleration will result in steadily improving rental growth prospects for the industry, in turn leading to cap rate compression. Lastly, against a backdrop of immigration curtailments and softening economic demand impacting other real estate asset classes, the setup may leave seniors as the last industry niche to enjoy persistently positive tailwinds into next year – validating its premium valuation.”
Retail
RioCan REITwith an “outperform” rating and $22.50 target, down from $22. Average: $22.08.
Analyst: “RioCan maintains its hold as our top total return potential in the retail segment. We like REI for its strong structural organic growth potential (3-plus-per-cent SPNOI growth guidance), comparably cheaper valuation, and limited value attributed to an established development vehicle with sizable near-term and leverage positive completions. On the latter, REI is slated to receive $700-million in condo sales and $500-plus-million in rental development completions through 2026, providing greater certainty over earnings and helping management achieve its 8x D/EBITDA target. REI trades at 11 times 2025E FFO/u, which is a half-turn discount to peers, despite offering above-average growth and a largely derisked development pipeline.”
Diversified
H&R REIT with a “sector perform” rating and $11 target, down from $11.50. Average: $11.46.
Analyst: “Within the diversified group, H&R remains our top focus idea, driven by exposure to multi-family assets in U.S. markets and industrial development lease-up around the GTA combined with a better balance sheet and limited office maturities. Recent transaction activity was a plus (with possible additional funds coming from the sale of its ECHO position) as management continues to showcase their progress in achieving reasonable pricing on a blended basis for the REIT’s assets in a market where transactions are still at somewhat of a standstill. These sales are incrementally positive given that the stock trades at an implied cap rate of 9 per cent and continues to move the pro forma entity more towards apartment ownership (we are still waiting on a broader inflection within the Sunbelt markets). We think there is torque to the upside on lower rates as the portfolio remains defensive but don’t see urgency to this trade.”
Office
Allied Properties REIT with a “sector perform” rating and $18.75 target, down from $19.50. Average: $20.19.
Analyst: “Our highest total return to target in the office sector remains Allied, given the REIT’s relative asset quality (including an exceptional urban land footprint) vs. its Canadian office peers. There is an ongoing flight to quality where tenants are prioritizing built-out space with access to amenities, and as such, we believe Allied is better positioned on a relative basis given broader office turbulence. Additionally, its above-noted ultra-core urban portfolio provides for a value floor and could appeal to investors with a long-term view on the Canadian market and particularly its top cities. We continue to like the quality and footprint of the portfolio offering relative to valuation and expect management to continue proving this value through monetization of select assets while also improving balance sheet metrics. Nonetheless, office fundamentals are likely to remain challenging.”