As Canadian interest rates ease from recent highs, one veteran real estate investor says the country’s property recovery remains far from even, with multi-unit residential landlords facing the toughest conditions while retail holdings stay resilient.
Aurelio Baglione, CEO of Virtus Group of Companies, told BNN Bloomberg that rising borrowing costs have hit the commercial and housing markets broadly, though the effects have been milder than the sharp rate increases of 1990-91 that he experienced earlier in his 40-year career. He said the multi-unit residential segment has been hurt the most in the current cycle, with apartment rents pulling back in some markets and new rental developments taking longer than usual to fully lease.
Retail Holdings Prove Resistant to Tariffs
Baglione said his firm’s retail portfolio remains its strongest performing segment and has not been affected by tariffs tied to the ongoing trade dispute with the United States. He pointed to a U.S. property his company purchased during the COVID-19 pandemic, a BJ’s Wholesale Club location comparable to Costco, noting the tenant recently exercised a five-year lease renewal.
On the residential side, Baglione said federally backed mortgage insurance through the Canada Mortgage and Housing Corporation continues to support the viability of some new rental developments. He said insured mortgage rates remain below four per cent, which can still make projects work if they generate strong enough yields. However, he said properties bought in the past at lower capitalization rates, once considered premium or “trophy” holdings, are no longer easy to make profitable under current conditions. He added that a number of REITs exposed to that segment have had to cut distributions, cut redemptions, or have seen declines in net asset value.
Caution on Data Centre Real Estate
Asked about the growing trend of REITs formed specifically to invest in data centres, Baglione said he views the space as risky given how uncertain it remains which companies will emerge as long-term winners in that sector a decade from now. He described himself as a conservative investor and said he sees the current enthusiasm for property-specific REITs, including those targeting data centres, as resembling similar trends he has observed periodically over his career.
Distressed Sellers Creating New Opportunities
Baglione said the majority of properties he has purchased throughout his career, roughly 80 per cent, have come from distressed situations, and he continues to focus on opportunities based on fundamental yield. He said the REIT he runs targets a seven per cent distribution rate, with an additional three to four per cent built in annually through mortgage principal reduction, and that any property under consideration must be able to support that return with a reliable, bankable income stream from the outset.
He said current market conditions are producing more of these opportunities than he has seen in recent years, as owners of infill and development projects that have become difficult to sell are being forced to offload other assets instead, including apartment buildings and commercial plazas, to raise capital.
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