Real Estate Investing: Is the Glass Half Full or Half Empty?

The last three years have been challenging for investors looking to earn positive returns in commercial real estate. The MSCI World Real Estate Index shows annual returns of -1% per year for Canadian real estate funds and -6.2% per year for U.S. real estate funds over the last three years to June 2025. These indices represent the returns of dozens of large privately held real estate pools for major institutional investors. 

Our Canadian and U.S. real estate pools have performed notably better, but well below their longer-term results. The 3-year annualized return for our Nicola Canadian Real Estate LP (NCRELP) was 2.4% to June 2025 and for the Nicola U.S. Real Estate LP (NUSRELP) was 2.2%.  By comparison, the 10-year annualized returns for both funds were 8.1% and 9.2% respectively.

Over long periods of time, investment grade income-producing real estate has performed very well and has been able to match long-term total returns from stocks with significantly lower volatility. And, for many investors, better tax-efficiency.

A Model That Stands the Test of Time

Real estate is an illiquid asset. Most of us know at least one family that has built significant wealth by acquiring real estate and building a legacy portfolio. This often becomes the foundation of wealth for future generations. Families that successfully invest in real estate are less concerned with liquidity and more focused on cash flow and long-term tax-efficient capital appreciation.

 This model of building an effective real estate portfolio is why Nicola Wealth created its three real estate pools. The funds give our clients the ability to invest in diversified pools of properties across Canada and the US with the ability to sell their position in as little as six months. These unique features are only found in open-ended, evergreen funds.

Why did we design our real estate limited partnerships this way? In 2001, when we created our first Limited Partnership (LP), 31 of our clients invested $100,000 each to raise $3.1M of capital.  Combined with mortgage financing we acquired a retail neighbourhood shopping centre. Income, net of expenses, was distributed quarterly, and we hoped for a reasonable gain in value over time when we sold the asset. That is indeed how things turned out for this investment, and for the three other single-property real estate LPs we launched in the following years. If the model was working then, why did we change it?

For several reasons:

•  Client demand exceeded the supply we could provide with single-property LPs. Clients had to sit on waitlists and faced limits on the amount of capital they could invest.
• A minimum investment of $100,000 per LP (over 20 years ago) meant many of our clients could not achieve diversification in terms of number of buildings, property type, and geography.
• Our original single-property, closed-end LPs offered no liquidity until the building was sold. Investor capital was typically locked up for at least seven years.

In 2005 we evolved the model by rolling our single-purpose, closed-ended LPs into multi-property, open-ended LPs. These new LPs allowed our clients to continually add capital with a smaller $25,000 minimum investment (and eventually, with no minimum investment). It also allowed individual investors to request liquidity without the partnership needing to sell an attractive long-term asset. Finally, they had more diversification with an interest in seven properties (and growing) through a single LP. Today, there are more than 95 different properties in our Canadian LP and 180 in our U.S. LP.

Fast Forward to Today  

Our real estate team collectively manages a portfolio of over $10 billion CAD in gross assets and $5 billion of investor equity. We could have chosen to invest in publicly traded Real Estate Investment Trusts (REITs) instead of building and managing a portfolio of privately owned real estate. However, if we had chosen that option, returns would have been significantly lower over most time periods, with far greater volatility. 

While most real estate investments are not technically in a bear market, returns have been historically weak for about three years. During this same time, equity markets have performed better. The table below makes this abundantly clear. It also makes the case that, over longer cycles, investment grade real estate has performed well compared to stocks and has accomplished this with much lower volatility.

You can see that while our Canadian and US Equity Income Funds (i.e. stocks) have out-performed over the last three years, real estate has had similar returns over the last 10 years with significantly less volatility and down-side risk.

Staying Disciplined Through Market Shifts 

Investors have many reasons for selling investments, including buying other assets (personal or investment), paying down debt, or because they feel future returns might not be reasonable. Over the years we have written several newsletters about the negative impact investor behaviour can have on portfolio returns. Most of us can understand the logic that it makes little sense to sell stocks when they are down. Our first newsletter about why most investors show poor decision in trying to “time the market” was published more than 20 years ago. If you are interested in reading 7 Habits of Highly Ineffective Investors, written in 2004, please reach out.  It is as true today as it was back then.

Returning to today, we believe this is a poor time to sell real estate assets. Investors should be patient and, at a minimum, wait for stronger real estate markets before reevaluating a potential sale. There is a strong case for the glass being half full rather than half empty. Let’s take a look at both arguments.  

Glass Half Empty  

• 13-year returns are 6-8% below 5-10 year returns for both our Canadian and U.S. real estate income
  funds.
•  The Nicola Value Add Real Estate LP was repriced -18% in July 2025.
•  Most North American real estate markets are still weak.
•  Demand for liquidity from investors has caused a number of private real estate pools to close their funds for redemptions and distributions while they wait for improved market conditions.
•  As of July 31, 2025, the 3-year cumulative returns for our Canadian and US real estate income funds are 7.4% and 6.7% respectively.  Over that same period our Canadian Equity Income Fund is up over ~40% and our U.S. Equity Income Fund is up ~60%.

Glass Half Full 

• When compared to the MSCI indices, both our Canadian and U.S. real estate income funds have outperformed by a wide margin over 3, 5 and 10 years. These indices include some very well-known managers with long track records. We believe that our real estate team has performed exceptionally well for our clients.
• Long-term returns for real estate are competitive with equities but have underperformed over the last three years. Mean reversion is likely. The U.S. equity markets are now trading at almost record price-earnings (PE) multiples
• Real estate is usually more tax efficient than equities because of long-term deferred capital gains, the use of depreciation to defer tax on rental income, and active business tax treatment (~27% vs. ~50% for passive taxable investment income) for returns on our Nicola Value Add Real Estate LP if owned in a Canadian Controlled Private Corporation (CCPC).
• The expectation of lower interest rates in both the U.S. and Canada will help cap rates and overall returns in real estate in both countries.

Are there any other signs that we may have seen the bottom of this part of the real estate cycle in North America? A recent article in the Globe and Mail pointed to lower vacancy rates in Toronto allowing landlords to reduce incentives to tenants.

The Q3 2025 Institutional Property Advisor report had the following to say about the multi-family marketplace in the US:

Returns for a variety of U.S. sub-asset real estate classes are now recovering from a trough in pricing reached in 2023/2024.

The price advantage of renting over ownership has widened considerably and the supply of new units has dropped to levels not seen since 2012.  

Warren Buffett once said that it's wise for investors “…to be fearful when others are greedy, and to be greedy only when others are fearful.”

This is easy enough to say but difficult to have the discipline to follow. However, his advice is regarded as one of the best ways to generate strong risk adjusted returns through all market cycles.