Real estate investment trust (REIT) investors received an unpleasant reminder that buildings don’t exist in their own little interest-rate universe.
Government bond yields have surged again. Canada’s benchmark 10-year yield sat at 3.9% on October 1, while long-term bonds yielded 4.3%. Globally, borrowing costs recently reached levels not seen in decades.
That creates a problem for real estate investment trusts (REITs). Investors can suddenly collect respectable income from government bonds without worrying about tenants, refinancing or somebody driving a forklift through a warehouse wall.
Naturally, REIT prices have been taking some punishment. Yet falling prices can improve the equation when the buildings underneath them are still performing.
Source: Getty Images
Why yields hurt REITs
REITs typically borrow heavily because buying warehouses, apartments and shopping centres requires rather more capital than opening a lemonade stand. When bond yields rise, new debt becomes more expensive. Higher rates can also reduce property values because buyers demand better returns from real estate.
There’s another squeeze. A REIT yielding 4% looks less exciting when a 10-year Government of Canada bond offers almost the same amount. That doesn’t make Canadian REITs uninvestable. It makes leverage, cash-flow growth and the price paid far more important.
Granite REIT (TSX: GRT.UN) checks several of those boxes after its latest decline.
Warehouses are still full
Granite owns logistics, warehouse and industrial properties across North America and Europe. Its 145-property portfolio covers roughly 61.5 million square feet. These are the buildings companies use to manufacture, store and distribute products. E-commerce, supply-chain re-shoring and growing logistics networks can therefore support demand without requiring an office-return miracle.
Operationally, things are holding up well. Second-quarter in-place occupancy reached 98%, up 2.2 percentage points from the previous year. Even better, same-property net operating income on a constant-currency cash basis jumped 8.3%. Granite also achieved average rental-rate spreads of 7% on leases beginning during the quarter.
The balance sheet helps
Granite’s net leverage ratio stood at 32% at quarter-end, down from 35% at the end of 2025. That matters enormously when borrowing costs rise. A REIT already stretched to the ceiling has fewer options when debt matures. Granite has considerably more financial breathing room.
Adjusted funds from operations (AFFO), the cash-flow measure I’d watch when judging distributions, reached $1.26 per unit during the quarter. Its AFFO payout ratio was 70%. The REIT currently pays $0.30 per unit each month, or $3.55 annually. At the October 1 price of $83.99, that produces a yield of roughly 4.2%.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| GRT.UN | $83.99 | 119 | $3.5496 | $422.40 | Monthly | $9,994.81 |
That makes Granite one of the more interesting monthly dividend stocks after the recent decline.
Cheaper for a reason
Before you go flooding cash into Granite, there are flags. Granite reached a 52-week high of $101.50. At $83.99, the units are now about 17% below that level. The valuation has fallen to roughly 13.7 times FFO. That’s considerably easier to digest when occupancy remains near 98% and rents are still moving higher.
There are risks. Higher rates could still increase refinancing costs and push property valuations lower. Magna International also represents about 26% of Granite’s annualized revenue, creating meaningful tenant concentration. Industrial property demand could weaken if trade or manufacturing slows as well.
Bottom line
That said, rising bond yields are supposed to make investors reconsider REITs. They shouldn’t make investors stop looking at them.
Granite’s share price has fallen roughly 17% from its 52-week high while occupancy, rents and property cash flow remain strong. Its 32% net leverage ratio also gives it more flexibility than heavily indebted landlords facing the same rate environment.
The bond market has made Granite cheaper. If the buildings keep doing their job, that could make today’s selloff considerably more useful to long-term income investors.
