Canadian commercial real estate market update – Q1 2025

Canada’s commercial real estate market: A cautious start to 2025

By the close of the first quarter of 2025, Canada’s commercial real estate market navigated a complex landscape marked by modest growth and heightened caution. The total investment volume reached $9.1 billion, representing a slight uptick from the $8.6 billion recorded in the same period last year (Figure 1). However, this increase was overshadowed by growing investor hesitancy due to several critical factors, including emerging geopolitical tensions, persistent domestic challenges, and evolving sector-specific dynamics. This article analyzes the intricate trends that shaped Canada’s five major commercial real estate markets during this cautious start to 2025.

Figure 1: Canada’s total investment activity – All sectors by region (Q1 2024 vs. Q1 2025)

Macroeconomic and geopolitical headwinds

Significant geopolitical tensions, particularly those between the United States and Canada, cast a long shadow over economic forecasts. The looming threat of new US tariffs was expected to dampen economic activity across various sectors and exacerbate inflationary pressures within the Canadian economy. This volatile political environment has led investors to enter 2025 with a distinctly cautious approach to capital deployment.

Beyond the macro-level geopolitical tensions, persistent domestic issues continued to weigh on the commercial real estate market. Elevated construction costs, a critical and ongoing shortage of skilled labour, and a widening bid-ask gap between buyers and sellers collectively contributed to muted commercial real estate activity across Canada. These multi-faceted challenges created an environment of uncertainty, prompting a more circumspect investment strategy.

Regional and asset class investment dynamics

Regionally, investment activity presented a varied picture: Montreal led the country with the strongest investment activity, followed by Vancouver and the Greater Golden Horseshoe, which both demonstrated robust interest. In contrast, Toronto experienced a decline in investment volume while Ottawa remained stable, maintaining its investment levels. This nuanced regional performance highlighted the diverse impacts of the then-current economic and political climate on Canada’s commercial real estate market.

When comparing the primary asset classes, the retail sector experienced the highest year-over-year growth, increasing by 21% and achieving nearly $1.7 billion in dollar volume transacted (Figure 2). This was followed by the apartment sector, which saw an 11% increase, representing nearly $2 billion in dollar volume transacted. Conversely, the hotel recorded the most significant year-over-year decrease, declining by 77% and representing $137 million in dollar volume transacted. Following this, residential land experienced a decrease of 41%, and the office sector decreased by 17%. Meanwhile, both industrial and ICI land only observed a modest growth of 6%.

Figure 2: Canada’s property transactions by asset class YTD (Q1 2024 vs. Q1 2025)

Investor preferences and sector performance

Further insights into investor sentiment and market dynamics were provided by Altus Group’s Q1 2025 Investment Trends Survey (ITS). The survey revealed that Vancouver, Halifax, and Edmonton emerged as the top three preferred markets by investors, respectively (Figure 3). These markets were likely favoured for their perceived stability, growth potential, or specific sector strengths.

Figure 3: Investment Trends Survey (ITS) – Location barometer (Q1 2025)

Regarding property types, food-anchored retail strips, suburban multiple-unit residential, and multi-tenant industrial were the most sought-after property types in the first quarter of 2025 (Figure 4). Moreover, power centres, tier I regional malls, and downtown class “AA” office properties witnessed increased investor interest. This growing appeal was driven by improving operating fundamentals, strong redevelopment potential, and the anticipation of increased discretionary spending. These preferences were evidenced by notable pockets of strength as the market equilibrium and investor sentiment remained cautiously optimistic for the year ahead.

Figure 4: Investment Trends Survey (ITS) - Property type barometer – All available products (Q1 2025)

Canadian industrial sector: Navigating supply shifts and demand moderation

The Canadian industrial sector experienced pockets of strength amid underlying trade tensions with the US and rising industrial availability rates. A total of $2.5 billion in dollar volume was transacted, representing a 6% year-over-year increase. However, the industrial sector simultaneously underwent a period of adjustment, characterized by increased supply, rising vacancy rates, and waning demand. According to Altus Group’s Q1 2025 Canadian industrial market update, the national industrial availability rate rose by 90 basis points to 5.9% year-over-year (Figure 5).

Figure 5: Industrial availability rates (Q1 2024 vs. Q4 2024 vs. Q1 2025)

While challenges persisted, notably oversupply, economic uncertainty, and the tariffs imposed by the US, various regions showed pockets of strength. The Greater Golden Horseshoe, Ottawa, and Toronto observed positive year-over-year growth in their industrial sectors, with increases of 76%, 48%, and 26%, respectively. Conversely, Vancouver and Montreal observed a moderation compared to other major markets, recording a 19% and 16% decrease year-over-year, respectively. Moreover, despite the tempered demand, national absorption remained net positive for the second consecutive quarter. However, it was uncertain whether this would remain in positive territory as the market continued to navigate towards a new equilibrium.

On the construction front, Altus Group’s Q1 2025 Canadian industrial market update reported 110 projects under construction, totalling 17.2 million square feet. A significant 73% of this upcoming space remained available for lease as demand has continued to decline. This represented a 10 million square foot (36%) contraction compared to the same period last year as investors awaited a clearer demand outlook. Toronto remained the most active market, accounting for the majority of the construction activity at 9.6 million square feet, with Vancouver following at 2.9 million square feet.

Retail investment: Essential demand drives growth

Canadian consumers adopted a cautious spending approach throughout the pandemic, a trend that persisted into the first quarter of 2025. This behaviour was primarily driven by ongoing concerns regarding the rising cost of living, which led consumers to prioritize essential goods and services. While household spending initially experienced a 1.2% increase in the fourth quarter of 2024, largely attributed to a temporary GST/HST tax break, this proved to be short-lived. Declining consumer sentiment, driven by elevated living costs, a softer labour market, and rising trade tensions with the United States, led to a 0.3% decrease in household spending. This drop was reported in Statistics Canada’s Gross Domestic Product by Income and Expenditure report for the first quarter of 2025.

In response to this sustained focus on essential spending, investors strategically prioritized specific retail properties. This encompassed neighbourhood and regional shopping centres anchored by grocery or general merchandise retailers, as well as properties identified for their redevelopment potential. The appeal of essential goods and services was further substantiated by Altus Group’s Q1 2025 Investment Trends Survey, which identified food-anchored retail strips as the most preferred property type among investors for the fifth consecutive quarter. These property types maintained their attractiveness as investment opportunities, reflecting the enduring demand for destinations that fulfilled essential shopping needs.

This targeted investment strategy significantly contributed to the gradual recovery of the retail sector, which reported $1.7 billion in dollar volume transacted. This represented a 21% increase year-over-year, marking the highest growth observed among the primary real estate sectors. Regionally, all markets, with the exception of the Greater Golden Horseshoe, reported year-over-year growth within their real estate sector. Ottawa emerged as a leading market, experiencing a notable 476% increase in investment volume, approaching $48 million in dollar volume transacted. Vancouver followed with a 140% increase, representing nearly $350 million in dollar volume transacted. Conversely, the Greater Golden Horseshoe observed a 52% year-over-year decrease in investment volume, signalling potential regional challenges or shifts in local investor behaviour.

The Canadian retail investment landscape in the first quarter of 2025 continued its strategic focus on essential goods and services, thereby stimulating a recovering national market despite regional disparities. The sustained strong interest in food-anchored retail properties underscored the critical role consumer necessities played in shaping investor decisions.

However, the Canadian retail sector faced a potential headwind with the impending closure of Hudson’s Bay, a long-standing Canadian department store chain known for its large anchor retail spaces in major shopping centres. This situation evoked parallels with the past closures of Zellers, Sears, and Target, which collectively generated over 35 million square feet of vacant retail space across Canada. Given the limited pool of single tenants capable of occupying such large anchor spaces, Hudson’s Bay’s departure was likely to necessitate that landlords explore innovative redevelopment and revitalization strategies for their properties, mirroring responses to previous major anchor exits and the evolving retail landscape.

Canadian multi-family: Adapting to immigration adjustments

In a strategic effort to mitigate rapid population growth, the Canadian federal government announced a planned 21% reduction in permanent resident targets, decreasing the intake from 500,000 to 395,000 by 2025. Further downward adjustments were projected for subsequent years, signalling a sustained shift in immigration policy. This policy initiative was observed to have initiated a noticeable deceleration in temporary immigration, a trend evidenced by Statistics Canada’s latest Canada’s population estimates report. As of January 1, 2025, Canada’s population had grown to 41,528,680. The quarterly growth rate of 0.2% represented the slowest rate since the fourth quarter of 2020, a period when stringent border restrictions were imposed due to the pandemic.

As Canada continued to contend with a severe housing affordability crisis, which had been exacerbated by years of unprecedented population growth, additional challenges further injected short-term volatility into the housing sector. These difficulties encompassed, but are not limited to, persistently high construction expenses, elevated land costs, an ongoing skilled labour shortage in the construction industry, restrictive planning policies, and significant development charges and municipal fees. Furthermore, a discernible increase in buyer hesitancy contributed to developer uncertainty regarding the demand outlook for 2025. This uncertainty was anticipated to lead to the pausing or delaying of new construction projects, most notably within the condominium market, which was then characterized by low sales volumes and significantly elevated inventory levels. This trend was reflected in the moderation of multifamily investment volume, which registered a modest 6% increase year-over-year, alongside notable regional disparities.

A comparison of the major markets revealed distinct investment trends. Montreal reported the highest growth, with $1 billion in dollar volume transacted, a substantial 128% increase. The Greater Golden Horseshoe followed with a 58% year-over-year increase, marking nearly $301 million in dollar volume transacted. Conversely, Toronto, Ottawa, and Vancouver observed a contraction in investment volume, experiencing year-over-year decreases of 25%, 12%, and 10%, respectively.

In response to these evolving market dynamics, a discernible shift in development focus emerged, favouring purpose-built rental properties, as well as student and senior housing. Developers increasingly recognized the consistent demand for these segments, primarily due to a significant lack of available products in the market. Furthermore, the observed deceleration in residential land transactions foreshadowed a future moderation in multifamily construction starts. The first quarter recorded only $965 million in dollar volume transacted for residential land, marking a substantial 41% decrease year-over-year, as volumes remained below historical averages.

A critical juncture for the Canadian office sector amidst evolving dynamics

In the first quarter of 2025, the Canadian office sector remained profoundly influenced by evolving workplace preferences and return-to-work mandates. The national office availability rate remained elevated at 17.1%, a figure that, according to Altus Group’s latest Canadian office market update, clearly indicated the ongoing trend of businesses downsizing, reconfiguring, or relocating their office spaces (Figure 6). This period was further marked by the “flight-to-quality” phenomenon, which created a stark divide between premium Class A properties and the older Class B and C buildings.

Figure 6: Office availability rates (Q1 2024 vs. Q4 2024 vs. Q1 2025)

Class A properties conspicuously dominated leasing activity during the first quarter of 2025, with nearly 3.3 million square feet of space leased. This volume significantly eclipsed the approximately 742,000 square feet leased in Class B buildings and roughly 197,000 square feet in Class C properties. This disparity underscored a critical need for landlords to invest in substantial upgrades for older, functionally obsolete spaces. Furthermore, the flight to quality trend not only widened the gap between Class A and Class B and C buildings but also fostered a complex segmentation within the Class A market itself. This was particularly evident in the growing distinction between Class A and Class AAA properties, as tenants increasingly prioritized buildings offering the highest quality amenities and most desirable locations.

Regional disparities in investment volume were also pronounced. Vancouver demonstrated remarkable resilience, experiencing a 140% year-over-year increase in investment volume, the highest among major markets. This surge was primarily attributed to several high-quality Class A office buildings. Montreal also showed strength, with a 23% year-over-year increase in investment volume. Conversely, Ottawa’s office sector faced considerable turbulence, registering a 72% year-over-year decrease in investment volume, which represented the largest decline nationally.

By the close of the first quarter of 2025, the national office market appeared to be at a critical juncture, displaying cautious signs of stabilization despite persistent shifts. The office construction pipeline continued its contraction, with approximately 4.7 million square feet of office space under construction. Of this new supply, 37% remained available for lease. The metric, when considered alongside the stabilization of overall availability rates, suggested the potential for positive net absorption and a subsequent reduction in national vacancy rates, indicating a movement towards a healthier market equilibrium. However, this cautiously optimistic outlook was tempered by an emerging scarcity of premium Class A office space, particularly within the limited new developments. This presented a growing challenge for tenants requiring high-quality premises in prime locations, intensifying competition for premium office space.

Looking ahead: A cautious equilibrium and future adaptations

The first quarter of 2025 painted a picture of a Canadian commercial real estate market marked by prudence and strategic adjustments. Despite a modest increase in overall investment volume, underlying economic and geopolitical uncertainties fostered a cautious environment. While some sectors, like retail, demonstrated robust year-over-year growth driven by a focus on essential goods and services, and the industrial sector saw pockets of strength, both the multifamily and office sectors continued to grapple with significant structural shifts and persistent challenges. A pervasive trend observed was the continued investor gravitation towards premium, high-quality assets, particularly within the office sector and in certain industrial sub-markets, reflecting a pronounced preference for stability and robust fundamentals in the market. As the market moved forward, continued vigilance and adaptability were anticipated to be crucial for navigating the complex interplay of consumer behaviour, immigration policy shifts, and evolving workplace dynamics that characterized Canada’s commercial real estate landscape.

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