A recent CBRE survey found more companies are looking to grow their office space this year, while fewer are looking to downsize compared to last year.Wallace Immen/The Globe and Mail
The 2025 forecast for Canadian commercial real estate is the brightest it’s been since the pandemic, with transactions expected to rebound and more companies looking to grow their office space.
However, the industry is still expected to experience headwinds owing to fast-changing work patterns, artificial-intelligence technology developments, growing sustainability concerns and the looming uncertainty of the new U.S. administration.
Here’s a look at some of the trends experts are watching for 2025:
Markets primed for action
For the past few years, Canada’s commercial real estate sector saw some of the fastest interest-rate hikes in history, essentially freezing the market.
But recently, the Bank of Canada cut its key interest rate, which is expected to encourage Canadian and international investors to pursue acquisitions and invest in keeping buildings both competitive and sustainable, says Paul Morassutti, chairman of commercial real-estate and investment company CBRE.
A Deloitte survey of 880 C-level executives worldwide found 68 per cent expect the volume of commercial real estate transactions and the availability of capital to increase significantly in 2025. Those responses signal a major boost in sentiment compared with the same time last year when only 27 per cent of respondents anticipated improved transaction activity.
Return-to-office gains momentum
For example, tech giant Amazon recently announced it would force employees to return to the office full-time, while management consulting firm McKinsey’s senior partners in Miami and Boston recently told staff they should expect to return to the office more often, as reported by Bloomberg.
A recent survey from CBRE indicates that more companies are looking to grow their office space this year, while fewer are looking to downsize compared with last year. Office sublet availability is also going down, Mr. Morassutti says, which is usually a precursor to a more stabilized market as fewer tenants look to shed space. At the same time, top-quality office towers – also known as ‘Class A’ buildings – have the lowest vacancy rates they’ve had in four years, with rent increases not uncommon, he notes.
Another KPMG survey of 1,325 Canadian chief executive officers found 83 per cent want employees to come back to the office full-time, while 90 per cent say they are likely to reward employees “who make an effort to come into the office with favourable assignments, pay raises or promotions,” up from 77 per cent last year.
High costs chill new constructions
Soaring construction costs and an oversupply in office, retail and industrial spaces has resulted in a slowdown of new constructions – a trend that will persist throughout 2025 and beyond, says Scott Figler, director of Canada research for real-estate services company JLL.
One example of this can be seen with Canadian real-estate investment trust RioCan announcing its indefinite postponement of new construction projects owing to rising costs. In November, RioCan CEO Jonathan Gitlin said the company was shifting toward optimizing its existing assets through upzoning and other improvements.
Spurred by an increase in online shopping during the pandemic, a speculative boom in building new warehouses has led to some of these properties sitting empty, Mr. Figler says. “We’re in for a year of high vacancy and rents coming down a bit,” he adds. “That’s a good thing for the economy because operators are going to get cheaper rates for warehousing.” In turn, that should help keep the cost of goods down for consumers, Mr. Figler says.
Meanwhile, the lack of new store construction has seen retail vacancies drop below 4 per cent in Canada, CBRE reports. There has been rent appreciation across the country for almost all retail properties, resulting in increasing investor interest, Mr. Morassutti says.
According to CBRE, the lack of new store construction has seen retail vacancies drop below 4 per cent in Canada.Wallace Immen/The Globe and Mail
Proptech and AI take centre stage
Property technology that’s increasingly using artificial intelligence is top of mind for managers looking to improve efficiencies, reduce costs and make better-informed investment decisions, according to a report from PwC.
Another recent PwC analysis found 50 per cent of Canadian CEOs believe generative AI will improve the quality of their products and services in the next year, while 59 per cent believe it will significantly change the ways their company generates documentation and monitors supply and demand trends and market conditions.However, a separate work force survey found 45 per cent of Canadian real-estate employees said they weren’t using AI because they didn’t think it would benefit their careers.
“AI is overestimated in the short term, but underestimated in the long term,” says Stephanie Wood, vice-president of Alate Partners, a venture-capital fund focused on real-estate technology.
She points to Proptech Collective – national association for innovative, tech-driven companies in the real estate industry – and notes that more than 500 Canadian companies looking at applying AI to design, building, acquisition and real-estate management have joined the organization’s database.
“One of the big problems in real estate is that there’s so much data, but it’s not structured in the right way to actually use it,” says Ms. Wood, adding that many companies are focused on getting their data foundation right today, so they can effectively use AI-based technologies in the future to streamline workflows, maximize investments and manage energy costs.
Sustainability and ESG
A heightened focus is also being placed on sustainability and the integration of environmental, social and governance principles in the commercial real-estate sector.
Ms. Wood says AI-based technologies are helpful when it comes to crunching data to forecast the outcomes of different operating strategies, optimize building consumption, reduce waste and support sustainability goals.
Decarbonization efforts are also evolving from a long-term policy goal to an immediate operational management and cost-saving strategy, according to JLL. Energy use is the largest operating expense in office buildings, representing one-third of typical operating costs. The JLL report found replacing fossil-fuel heating with heat pumps can result in up to 40 per cent in immediate energy savings.
Will CRE see a renaissance?
Some in the Canadian commercial real-estate sector are wondering whether 2025 will see an industry renaissance. While economic uncertainty and the threat of tariffs on U.S. exports play out, Canada is expected to look better in a global context, Mr. Morassutti says.
“There’s a lot of negativity and social media nonsense that says Canada’s broken. But Canada remains a growth play, and there’s more optimism in the market today than there has been in the past couple of years,” Mr. Morassutti says. He points to the fact that falling interest rates should provide greater stability in the market, with deal flow already picking up, capital formation increasing and lending sentiment getting better.
“We expect 2025 to be considerably more active than 2024.”