The Canadian commercial real estate market is currently being shaped by a number of macroeconomic factors such as inflation, interest rates and the tariff dispute with the U.S., with specific trends being seen in certain sectors of this real estate space as a result. There is even some cautious optimism, despite the economic headwinds.
The retail sector, for instance, appears to be on firm footing.
“Toronto’s urban retail market has remained resilient,” says Brandon Gorman, executive vice-president and broker at JLL Retail Canada. “Our latest market data shows urban street front vacancy has dropped to 8.13 per cent, the lowest figure since we began tracking these metrics. Food and beverage continue to drive leasing activity, representing over 39 per cent of all new lease transactions downtown Toronto in the last 12 months.
“With limited new retail supply coming to market, particularly as development projects are put on pause or cancelled altogether, we’re seeing strong demand that’s helped maintain healthy occupancy rates and rental rate growth.”
A new report – Green Street’s 2025 Canadian Outlook – provides an overview of the Canadian commercial real estate market from a macroeconomic perspective and covers financing conditions, valuation metrics, key demand drivers and supply dynamics for the four traditional commercial real estate sectors of retail, office, industrial and apartment or multifamily across Canada’s 10 largest markets of Vancouver, Edmonton, Calgary, Winnipeg, Hamilton, Toronto, Ottawa-Gatineau, Montreal, Quebec City and Halifax. Green Street, which is an independent, leading provider of research, news, data, analytics and advisory services for the commercial real estate industry in Canada, the U.S., Europe and Australia, makes recommendations based on standardized operating fundamentals, valuation estimates and expected returns that focus on average quality properties.
Green Street’s report is forecasting that 2025 will see many of the same trends that were seen throughout 2024, with retail growth proving to be steady with high occupancy rates, low supply and steady rent growth. The apartment sector is facing challenges, the report says, primarily due to amended immigration policies by the federal government, and affordability issues and increased supply are putting a downward pressure on rents. The industrial sector will be flat as incremental demand is outstripped by supply and the office sector likely will continue to struggle in 2025 due to increased supply and tepid tenant demand, the report says.
Other factors cited in the report that will affect the commercial real estate landscape include deceleration in Canada’s population growth this year, decelerating job growth especially in the private sector and in 2026 immigration policies that could mean fewer available workers and rising labour costs – factors that are expected to have the most significant impact on Ontario.
All of this is being closely watched by market analysts, intermediaries, lenders and investors, which in the commercial real estate space include private entities – such as individuals, private companies and partnerships, and private real estate investment trusts (REITS), and mortgage investments corporations (MICs), as well as institutional investors, such as pension funds – and those investors on the public side, which include real estate companies listed on stock exchanges and publicly traded REITs and MICs. Property technology (proptech) companies, both private and listed, are also becoming prominent market agents.
These categories of investors generally have different strategies to drive growth and mitigate risk, and one important differentiator between private investors and listed investors is their respective cost of capital and need for investment liquidity, says Fred Blondeau, managing director and head of Canadian research at Green Street.
“Institutional investors typically have a lower cost of capital and need a minimum investment size for it to have an impact on the portfolio,” he says. “Which means they would usually have lower risk appetite, and longer investment horizons. Listed investors would essentially look at the same macro and sector metrics, but also idiosyncratic (or specific) risks to listed entities, along with general short to mid-term market and sector dynamics, notably interest rates’ trajectory.
“In Canada in particular, listed REITs/REOCs [real estate operating companies] tend to be smaller and less liquid when compared to other markets, which add to the risk profile of these investments.”
Green Street works to helps to clear a path for both of these types of investors, especially as they navigate uncertain economic times, with exclusive market information, insights and predictive analytics through a SaaS platform that covers the public and private commercial real estate markets. Such tools are invaluable resources for investors, bankers, lenders and other industry participants looking to optimize investment and strategy decisions.
“As an example, when we have a conversation with a pension fund that wants to invest in assets and generate returns, the question is, with our research and our independence, does it make sense to invest in the apartment market in Toronto versus the industrial market in L.A. versus the retail strip centre market in the U.K.?,” says Gaurav Mathur, an analyst concentrating on Canadian research at Green Street. “And since we have that global view, we’ve done the research. We have a standardized set of metrics. It’s easier for investors to compare where they could go and potentially allocate capital to.”
Green Street’s performance is tracked, on both the public and private side, although “we tend to focus from a private standpoint on more conservative markets across the board,” Blondeau says.
“We’re not just saying ‘buy this’ and we then shut our books on it,” Mathur says. “There are reasons for [our recommendations] and we’re discussing those reasons with our clients, as well as pointing out our performance. That independence and authenticity is something which investors value a lot.
“When we do hit it out of the park, we will take a victory lap. When we get it wrong, we put our hands up and admit we made a mistake. At the end of the day, we want our clients to generate returns, so we’re focused on the best way possible to do that. The Canadian product, launched a year ago, has been very well-received by investors,” Mathur says, referring to Green Street’s expansion of its Canadian market coverage, which led to the release of the inaugural Canadian Outlook report.
When it comes to private investors, they view a number of key factors in the commercial real estate space when they are making investment decisions, such as office market challenges, the strength of the industrial segment (especially logistics and warehousing), retail stability and shortages in multifamily residential properties. They do so all through the lens of new economic dynamics and potential policy shifts under the new federal government, which affect investor confidence, financing conditions and market regulations.
Green Street’s 2025 Canadian Outlook provides some insight into other macroeconomic dynamics as well to help investors. Some of these will be a challenge for commercial real estate investors but some present opportunities.
- The Canadian dollar. When it comes to financing markets, the Green Street report illustrates the difficult position the Bank of Canada is in, with indicators pointing toward an economic slowdown and a weak Canadian dollar. But a weaker dollar attracts more foreign investment. “We’re seeing a comeback now with foreign investors,” Blondeau says, referring specifically to Ohio-based Welltower’s recent $4.6-billion acquisition of Amica in the senior housing space.
“That was when the Canadian dollar was very cheap,” he says. “I think that if you look at the economic trends here in Canada, we were believing that foreign investors could be more active this year on the back of these trends. And I think the window will continue to open because there’s great value here in Canada.” - New federal government. “I think the election answered a lot of questions. It brought stability to the country. We’ve seen that in the Canadian dollar stabilizing and that’s good for foreign investors. That’s exactly what they’re looking for,” Blondeau says.
- Relations with the U.S. The odds of a trade war with the U.S. seemingly change every day and Canada is ill-prepared. “Canadian households are significantly indebted when compared to other developed economies, which has directly impacted the country’s economic growth,” Blondeau says. “Governmental interventionism obviously helped, supporting the activity over the years, especially from a job creation perspective. This eventually came at the cost of a weakened financial health. Potential U.S. and retaliation tariffs could have a significant negative impact on the Canadian job market by causing job vacancies to go down and the unemployment rate to go up, which would affect almost every asset class.”
- The GDP and economic growth. Canada’s gross domestic product has been driven by population gains rather than productivity growth in recent years, and has been tied to tepid investments and to outsized government job growth as a share of its total. Expectations are looking at near-term risks, but the economy should grow by zero to one per cent in 2025 and 2026, and between 1.5 to 2.0 per cent over the next five years, combined with the Bank of Canada’s “accommodative monetary policies” (maintaining or reducing interest rates) and the federal government’s greater spending to support Canadians during a period of uncertainty due to tariffs, Blondeau says.
- Lending rates and Bank of Canada. Where lending rates are headed and how much further they can go down is another factor. What the Bank of Canada decides to do going forward, and where inflation tracks, are macroeconomic factors to watch for, Blondeau says. “On one hand, the Bank of Canada could further support the economy and investments through interest rate decreases,” he adds. “On the other hand, inflation is still present (and could be exacerbated by tariffs), and the Canadian dollar is just normalizing from recent historic lows versus the US dollar.”
The first quarter’s economic growth gave some evidence that there is no urgency for the Bank of Canada to intervene more aggressively, but a more volatile economy could pressure the Bank of Canada to become more expansive. “For commercial real estate investors, this is critical,” Blondeau says. “Tariffs translated into slower decision-making processes. That said, they could also continue to translate into strategic investment opportunities. In the end, job losses and inflation seem to be the two most influent risk factors in the present environment, for the next six to nine months.”
- Inflation. If the rate of inflation starts to go up again, the central bank doesn’t have many moves other than to raise its policy interest rate, Mathur says. A possible cycle of increasing rates will affect valuations across different asset classes negatively, he adds.
- Low liquidity. Liquidity refers to the ease with which an asset can be converted into ready cash without affecting its market price and low liquidity makes it challenging to execute trades quickly, leading to delays in buying or selling assets. “It’s not that easy to sell assets in the current economic cycle,” Mathur says.
Green Street analysts expect further deterioration of Canadian commercial real estate fundamentals in 2025 and 2026, following a rather challenging environment last year, before starting to see improvements and stabilization. More specifically, from both a rental rate and occupancy perspective, apartment and industrial should underperform the retail sector, with retail ultimately being the outperformer over the next five years.
Mathur says that a lot of “headline narratives” have kept some investors on their back foot, as opposed to a robust market at this stage. Nevertheless, despite some of the current challenges that investors of all types are facing, some will find favourable circumstances.
“I think the next six months is creating a lot of opportunity for foreign investors looking for great platforms and assets here in Canada,” Blondeau says.
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