Commercial real estate investors have had a tough few years, and 2025 hasn’t offered much relief. Interest rates remain elevated, leasing activity is uneven, and many downtown office buildings are still sitting half full. For income-focused investors, that’s raised real questions about whether urban REITs are still worth holding.

Toronto, in particular, has become a market under the microscope. Vacancy rates in the core are still above pre-pandemic levels, and landlords are navigating everything from rising maintenance costs to shifting tenant expectations.

With all this in mind, investors are now facing a crucial question: Is there still long-term value in office-heavy REITs, or have urban properties become too risky for reliable returns?

Urban REITs Under Pressure

Urban REITs have been under steady pressure since the pandemic drastically changed how and where people work. Some parts of commercial real estate are starting to settle, but office buildings in big cities are still under big amounts of pressure. Refinancing has gotten more expensive with rates where they are, and a lot of tenants just don’t need as much space anymore. Hybrid work is here to stay, and that’s led many companies to scale back or take a wait-and-see approach before committing to long leases.

Toronto is right in the middle of this storm. Downtown vacancy rates are still hovering near record highs, with some Class B and C office buildings struggling to attract tenants at all. According to recent updates, Allied Properties REIT (AP.UN.TO) has reported continued challenges with leasing demand, particularly in non-core locations. Dream Office REIT (D.UN.TO), another major Toronto player, has been trading at a significant discount to its net asset value, reflecting investor concern about longer-term lease absorption.

Toronto remains one of the most closely watched urban REIT markets in North America. While investors dig into earnings reports, a lot of what drives performance happens on the ground. Companies specializing in commercial property management in Toronto are key to keeping things stable by handling vacancies, tenant turnover, and day-to-day operations during a time when predictability is hard to come by.

Valuation Breakdown

On paper, both Allied Properties and Dream Office REITs look like bargains. Allied is currently trading at about 0.39 times its book value, and Dream’s is even lower around 0.24. That means the market is pricing these companies at a fraction of what their assets are supposedly worth.

Those deep discounts aren’t without reason. Allied is offering a dividend yield of 11.99%, which might catch the eye of any income-focused investor. But their FFO per unit has dropped from CA$0.58 last year to CA$0.50 in Q1 2025. Their occupancy rate is also showing some strain, now sitting below 86%, which puts pressure on cash flow and long-term growth.

Dream Office paints a similar picture. Its price-to-FFO ratio is just over 6, which is low by any standard. But occupancy is down again this quarter, at 78.4%, and debt levels are increasing. Their total debt-to-asset ratio is now just under 53%, which doesn’t give them much room to maneuver if things get tighter.

What The Numbers Don’t Show

For investors who are willing to stomach some volatility, these REITs could offer upside over time. But the low valuations come with real risks, especially if leasing challenges continue or refinancing gets tougher. It’s one of those situations where the numbers might look good, but the story underneath matters just as much.

What The Market Is Missing

There’s a lot of focus right now on vacancy rates and lease challenges, but not all office properties are built the same. Assets in prime locations like Toronto’s Financial District still carry real long-term value. These buildings tend to attract higher-quality tenants, including financial institutions, law firms, and government agencies, many of whom sign multi-year leases and aren’t as quick to abandon space.

That kind of tenant mix brings more stability to a portfolio, especially when the broader market is under pressure. It’s also one of the key differences between REITs that are struggling and those that are managing to hold the line. While some properties are chasing short-term leases just to fill space, stronger portfolios are holding on to longer-term agreements in top-tier buildings that are still in demand.

Location still matters, and for REITs with assets in the right places, that could make all the difference going forward.

REIT Alternatives Gaining Traction

Currently, office REITs simply aren’t where the momentum is right now. A lot of investors are looking at other areas of real estate that feel a little more grounded. Industrial REITs have been the big winner lately. Granite REIT (GRT.UN.TO), for instance, has exposure to warehouses and logistics space that’s still quite resilient with e-commerce demand holding up. It costs more, but the returns have been more reliable.

Mixed-use REITs is another area that investors are leaning into. These combine residential with retail or office, and that mix seems to smooth things out. If one side lags, the other often holds steady. Yields might not be especially large, but vacancy rates are typically better, and there’s less tenant turnover.

For investors not looking to bet on a single company, there’s always the ETF route. Something like iShares S&P/TSX Capped REIT Index ETF (XRE.TO) gives exposure across the sector without going heavy into one specific bet. It’s not perfect, but it’s less risky than trying to time the office recovery.

At the end of the day, real estate’s still in play. People are just getting smarter about where they invest their money, and commercials aren't the default anymore.

Risks and What to Watch in 2025

Office REITs aren’t just dealing with market pressure but they’re currently operating in a changing landscape. Interest rates remain a major factor and any further hikes, or even just staying higher for longer, will keep refinancing costs elevated and weigh on valuations.

There’s also growing talk around converting underused office buildings into residential space. While that might be a smart move for cities, it doesn’t always play out well for traditional REIT structures. Regulatory changes are another issue with updates to zoning laws or changes in tax treatment for commercial properties that could reshape the economy quickly.

For now, investors should keep a close eye on leasing updates, sublease trends, and indicators like downtown foot traffic. These will be the first real signs of whether the urban office recovery has legs, or if it just looks good on paper.

Is The Urban REIT Model Still Investable?

Urban REIT investing in 2025 requires a closer look at the details, and understanding the assets, tenant mix, and lease terms has become more important than ever. Properties in strong locations, backed by solid tenants and smart lease structures, still have the potential to perform, but there’s no room for autopilot.

Now’s the time to dig deeper into the fundamentals. Who’s leasing the space, what terms they’ve signed, and how well the property is being run are the details that will separate the REITs that weather this cycle from those that fall behind.

Real estate still has a place in diversified portfolios. But the days of treating urban REITs as a one-size-fits-all investment are likely behind us.