Canadian real estate investment trusts have had a volatile 2026, with the S&P/TSX Capped REIT index climbing roughly 11 per cent between January and July before giving back those gains as bond yields surged, leaving the sector hovering near where it started the year. The swing underscores how sensitive REITs remain to the direction of interest rates, even as some analysts argue that the sector’s internal differences are creating distinct winners and losers.
Why Yields Are Driving the Sector
Sairam Srinivas, Director of Equity Research for Real Estate & REITs at ATB Cormark Capital Markets, says REITs have been penalized for macroeconomic uncertainty over the past five years because of their leverage and interest-rate sensitivity. “REITs as an instrument flourish when rates are low, when equity markets are running, and when they can use capital markets to reinvest in the business,” Srinivas said, adding that Canadian REITs have spent the past five years deleveraging and moving closer to the stronger balance sheets typical of U.S. peers.
Scotiabank strategist Hugo Ste-Marie has cautioned that investors eager to jump back into rate-sensitive sectors such as REITs, pipelines, utilities and telecoms may be acting too early. He argues two conditions need to be met before these sectors become attractive again: a sustained decline in bond yields, and a deterioration in the U.S. economic growth outlook. Neither condition is currently in place, he says, noting the U.S. 10-year Treasury yield jumped more than 80 basis points in the third quarter and has repeatedly stalled near 5.35 per cent. BMO chief economist Doug Porter has pointed out that the recent run-up in yields has been driven largely by rising real yields rather than inflation itself, with inflation in advanced economies actually easing from 2.7 per cent to 2.4 per cent in August.
Selected Canadian REIT Metrics
Subsector and Regional Divergence
Despite the headline pressure, Srinivas says certain subsectors look more resilient. He points to retail, which he says has been unfairly penalized for years due to past large-format bankruptcies, leaving cap rates well above financing costs for strong operators. He cites Primaris, a mall operator, as an example of a REIT rewarded for quality management, posting roughly 35 per cent year-to-date growth. Multifamily REITs, by contrast, may struggle to absorb higher interest costs given slowing rent growth and rising new supply, even with access to lower-cost CMHC-insured financing.
Geographically, Srinivas says REITs have performed best at Canada’s “directional extremes” — the West and Atlantic Canada — which have faced fewer tariff headwinds than Ontario and Quebec’s manufacturing-exposed central corridor, while also benefiting from monetary easing and fiscal supports.
That regional dynamic is central to an investment thesis laid out by RBC Capital Markets analyst Jimmy Shan, who points to federal government plans for billions in new defence spending, particularly shipbuilding investment concentrated on the East Coast. Shan highlights Killam Apartment REIT, which generates 59 per cent of its revenue in Atlantic Canada and 33 per cent in Nova Scotia, and PRO REIT, which holds industrial property in the Halifax area, including a 38-property, nearly three-million-square-foot industrial park in Burnside with more than 400 tenants. Shan notes Halifax home prices have risen 94 per cent since 2019, with 14,000 rental units currently under construction and population growth between 2022 and 2025 roughly matching a decade’s worth of growth at the prior pace.
Capital Markets and Valuation Gaps
At the North American level, portfolio manager Andrew Moffs of Vision Capital says fundamentals for listed REITs remain constructive despite the pressure from rising yields. He notes construction costs have risen 48 per cent since 2020, slowing new supply across most property types and making it “cheaper to buy than build.” Through the second quarter of 2026, 70 per cent of U.S. REITs beat consensus funds-from-operations expectations and 86 per cent raised full-year guidance, according to Moffs. He also points to an active privatization trend, with 21 takeovers of listed REITs in North America over the past two years at an average 40 per cent premium to unaffected unit pricing, as the median listed REIT continues trading below net asset value.
Where Valuations Stand Today
Market pricing reflects the uncertainty. Killam Apartment REIT traded with a 4.2 per cent distribution yield and a price-to-funds-from-operations ratio of 8.0 times, well below its ten-year average of 14.9 times, with an average analyst target price 21.5 per cent above its recent close. PRO REIT carried a 6.9 per cent yield and traded at 7.1 times funds from operations versus 8.0 times historically, with an analyst target 13 per cent above its recent price. Elsewhere on the TSX, Allied Properties REIT, Boardwalk REIT and H&R REIT were among names recently flagged as technically oversold or hitting new 52-week lows, reflecting the broader pressure rate-sensitive sectors have faced as bond yields climbed.
Srinivas argues that investors should resist writing off the sector wholesale simply because rates have risen. “I would push investors to kind of look beyond that headline and start identifying themes and look at it from a stock picker’s perspective within the sector,” he said, adding that pockets of growth remain visible for those willing to look past broad sector-level moves.
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