Canadian CRE investment trends – Q2 2025

Global uncertainty shapes Canadian real estate in Q2 2025

The second quarter of 2025 saw the Canadian real estate market operating in a highly turbulent and unpredictable environment. This volatility was largely driven by shifting international trade dynamics and Canada’s proactive response to what it viewed as an unprecedented challenge to its economic security.

The Bank of Canada (BoC) maintained its target for the overnight rate at 2.75% as of June 4, 2025, marking the second consecutive meeting at which the rate had remained steady. This decision followed a consistent reduction from a peak of 5.00% since June 5, 2024. A key factor in this pause was the ongoing volatility surrounding pending trade deals, primarily with the United States and China, which introduced considerable uncertainty into global economic forecasts.

Government strategies for Canadian economic resilience

Against this backdrop of heightened economic uncertainty fuelled by shifts in Canada’s immigration policy, faltering economic growth and rising employment rates, the Canadian government pursued a comprehensive strategy to enhance its economic resilience. While reducing its dependency on the US market was a key aspect, these efforts were extended beyond the immediate actions of announcing new counter-tariffs and diversifying international trade relationships.

Domestically, the government initiated a broader suite of economic strategies. These included, but were not limited to, the introduction of new legislation aimed at building a “One Canadian Economy” by further removing federal barriers to internal trade and labour mobility and accelerating major nation-building projects. Simultaneously, the focus was on strengthening Canada’s innovation, science and economic development (ISED) ecosystem, supporting research security and strategically promoting Canadian educational institutions abroad to attract foreign talent and investment. These diverse measures collectively aimed to bolster the country’s overall productivity and resilience in a turbulent global economic landscape.

Capitalization rates and bond yields: Reflecting a market under pressure

Despite a complex economic environment characterized by volatile international trade, stalled interest rate cuts, and the government’s proactive economic measures, the Canadian real estate market demonstrated resilience. It managed to retain a degree of equilibrium despite significant pressures. Altus Group’s latest Canadian Investment Trends Survey (ITS) results indicated that the Overall Capitalization Rate (OCR) for the four benchmark asset classes experienced a slight increase to 5.89% (Figure 1). This modest movement, within a challenging period, suggested that while caution prevailed, a catastrophic repricing or widespread loss of investor confidence had not materialized.

Figure 1: National markets - OCR trends for four benchmark asset classes

Concurrently, the 10-year bond yield, the bellwether for longer-term borrowing costs, with the BoC bond rate, rose by 20 basis points from the previous quarter to 3.32% as of June 2025. This increase in bond yields typically indicates higher costs of financing, which could, in turn, influence investment decisions and property valuations across the market. The interplay between these factors painted a nuanced picture of a market holding steady yet navigating underlying pressures from both economic policy and global finance.

Further illustrating this nuanced market, cap rate movements varied across the primary asset classes, reflecting distinct investor responses to the prevailing economic climate. For instance, Tier I regional shopping centres experienced increased cap rates, rising to 6.36%. This rise, a 10-basis point increase quarter-over-quarter, indicated that while these properties continued to attract a level of interest, investors were concurrently demanding a higher yield to compensate for perceived elevated risks. These risks stemmed from a confluence of factors, including broader economic uncertainties, the ongoing structural shifts in the retail landscape impacting larger enclosed formats, and a higher cost of capital influenced by rising bond yields. Consequently, the market required a more attractive return for new acquisitions in this specific retail segment.

Conversely, suburban multiple-unit residential cap rates decreased to 4.60%, a 6-basis point reduction quarter-over-quarter. This continued trend of recording the lowest cap rates compared to the other asset classes was primarily due to the imbalance between supply and demand. This ongoing robust demand for multi family, despite broader economic caution and evolving buyer preferences, underscored the enduring fundamental need for housing, a critical pressure point often discussed in relation to Canada’s immigration policies and ongoing national affordability crisis.

The BoC’s decision to pause interest rate cuts, influenced by persistent global economic uncertainty and domestic inflation concerns, had led markets to price in a less aggressive easing path. Furthermore, while the battle to reduce inflation had made some progress, underlying inflation, particularly core Consumer Price Index (CPI), remained a key concern for the BoC, with expectations of a potential uptick due to the uncertain geopolitical landscape. As a result, the prevailing sentiment in the real estate market was one of caution, as stakeholders awaited greater clarity on future interest rate movements and the broader political and economic outlook, all of which continued to be shaped by Canada’s proactive economic measures and evolving global conditions.

Canadian commercial investment activity and market sentiment

By the close of the first quarter of 2025, Canada’s commercial real estate volume saw an increase, registering a total of nearly $11.7 billion in dollar volume transacted. This represented a 10% year-over-year increase. While seemingly positive, this figure reflected a market that continued to contend with persistent economic headwinds.

In the light of the prevailing economic conditions, a further contraction in investment volume was widely anticipated for the second quarter. Several factors were expected to contribute to this projected decline, including a cautious approach from investors driven by elevated capital costs and the potential for a repricing of assets. The full impact of these economic pressures on deal flow and property valuations was expected to become clearer as second quarter data emerged. However, a more subdued investment landscape was broadly predicted for the near term.

During the second quarter, Halifax, alongside Vancouver and Toronto, emerged as the top three markets for attracting investor interest across all asset classes, indicating their perceived stability and long-term growth potential (Figure 2). A mixed trend was observed across the major markets’ momentum ratio, which, despite investor interest in specific hubs, generally reflected a higher percentage of investors expressing intent to sell versus buy across the broader market.

Figure 2: Location barometer - All available products (Q2 2025)

Risk aversion drives investor choices in Q2 2025

Throughout the second quarter of 2025, the Canadian commercial real estate market reflected an ongoing investor interest in stable, lower-risk assets. Food-anchored retail strips, consistently ranked as the most sought-after property type, continued a trend first seen in the first quarter of 2024 (Figure 3). This sustained popularity was directly linked to the Canadian consumers' consistent focus on essential goods and services, which made tenants within these retail centres, such as grocery stores and general merchandise retailers, relatively resilient to current economic conditions.

Figure 3: Property type barometer - All available products (Q2 2025)

Suburban multiple-unit residential products ranked second in investor preference. However, this segment encountered increasing headwinds. While the persistent housing affordability crisis broadly supports long-term rental demand, it concurrently reshaped the landscape for both potential buyers and investors. Elevated ownership costs continued to redirect a significant portion of the population towards renting, which, coupled with the substantial volume of new condominium supply, created a more challenging environment for landlords. This eroded both rental income stability and the prospect of consistent capital appreciation, leading to increased risk and higher carrying costs for investors. As a result, overall investor confidence in this segment was reduced, necessitating a more cautious approach to acquisitions as market participants refocused their strategies in response to these evolving supply and demand fundamentals.

The Canadian industrial sector faced significant challenges in early 2025 due to U.S. tariffs. The imposition of tariffs by the U.S introduced considerable volatility into the Canadian economy, which subsequently dampened investor confidence and led to delays in capital deployment. This was largely attributable to the deeply intertwined nature of the Canada-U.S. trade network. Consequently, investors appeared to adopt either a temporary wait-and-see or highly selective approach as they strategically assessed the potential ramifications of committing to new investments during this volatile period. Specifically, demand for multi-tenant industrial properties in markets such as Vancouver and Ottawa remained attractive, as activity for larger single-tenant spaces was traded for smaller to medium-bay spaces. Tenants prioritized greater flexibility in leasing and space usage, reflecting the cautious approach of businesses amid trade uncertainties.

The consistent selection of these property types in 2025 highlighted a discerning and methodical investor approach, focusing on properties that offered reliable income and possessed strong fundamental demand in the then-prevailing economic environment.

Product/Market barometer highlights:

According to the Product/Market barometer (Figure 4), the top three preferred combinations were:

• Food-anchored retail strip in Vancouver

• Multi-tenant industrial in Vancouver

• Food-anchored retail strip in Montreal

Investor disinterest in Class-B office and office land assets was evident, as these segments comprised the majority of the 15 least preferred product/market combinations. This trend reflected a clear ‘flight-to-quality’ within the office market, contributing to a widening disparity in value and demand between premium Class A properties and the older Class B stock.

Figure 4: Product/Market barometer - All available products (Q2 2025) - Top 15 preferred/least preferred

Market highlights for the quarter include:

• Cap rates for suburban multiple unit residential decreased to 4.60%. The suburban multiple-unit residential cap rate decreased by 6 basis points quarter-over-quarter. Cap rates across all markets were mixed. Vancouver, Ottawa, Montreal, and Quebec City reported decreases. Toronto and Halifax reported increases, while Edmonton and Calgary remained unchanged.

• Cap rates for single-tenant industrial decreased to 5.91%. According to Altus Group’s latest Canadian industrial market update, the national industrial availability rate reached 6.2%, a 50-basis point increase year-over-year. Cap rates across all markets were mixed. Vancouver, Calgary, Toronto and Quebec City reported increases. Meanwhile, Edmonton, Ottawa, Montreal and Halifax reported decreases.

• Downtown class “AA” office cap rates increased to 6.70%. According to the Altus Group’s latest Canadian office market update, the national office availability rate decreased by 100 basis points to 16.6% year-over-year. Cap rates across all markets were mixed. Montreal remained unchanged. Edmonton, Quebec City and Halifax reported increases. Meanwhile, Vancouver, Calgary, Toronto and Ottawa reported decreases.

• Tier I regional mall cap rates increased to 6.36%. The Tier I regional mall recorded a 10-basis point increase quarter-over-quarter. Cap rates were down in Ottawa and Vancouver, while the remaining markets reported an increase.

Barometer highlights include:

• Of the 128 combinations of products and markets covered in the Investment Trends Survey:

  • 75 reported a “positive” momentum ratio, indicating a higher percentage of respondents intended to be buyers rather than sellers in those segments. This represented an increase of 9 positive segments compared to Q1 2025.

  • 53 reported a “negative” momentum ratio, with more respondents leaning towards selling than buying, a decrease of 9 such segments from Q1 2025.

    
    

• The top 15 products/markets that showed the most positive momentum were:

  • Calgary - Food anchored retail strip

  • Toronto - Food anchored retail strip and suburban multiple unit residential

  • Ottawa - Food anchored retail strip, multiple-tenant industrial, single-tenant industrial and suburban multiple unit residential

  • Edmonton - Food anchored retail strip

  • Halifax - Food anchored retail strip and suburban multiple unit residential

  • Quebec City - Food anchored retail strip

  • Vancouver - Food anchored retail strip and multi-tenant industrial

  • Montreal - Food anchored retail strip and suburban multiple unit residential

Navigating the path ahead

The second quarter of 2025 demonstrated the Canadian real estate market’s relative resilience and ability to navigate turbulence amidst a complex and uncertain global and domestic economic landscape. While the BoC’s pause in interest rate reductions, influenced by persistent inflation concerns and international trade volatility, instilled a cautious sentiment, core market indicators like the OCR maintained a steady trend. The government’s proactive strategies, aimed at bolstering economic security through internal trade initiatives and attracting foreign talent, underpinned efforts to counter external pressures.

Looking ahead, the Canadian real estate market is poised for strategic adaptation. Stakeholders will closely monitor the evolving geopolitical landscape, particularly the resolution of US-China trade dynamics, which will significantly influence global economic forecasts and, by extension, Canada’s trade-dependent economy. Domestically, the interplay between Canada’s shifting immigration policies, the trajectory of economic growth, and the BoC’s future interest rate decision will remain paramount. Further clarity on these fronts could either reinforce the market’s observed stability or necessitate a more pronounced shift in investment strategies.

The discerning approach demonstrated by investors in the second quarter of 2025, favouring resilient asset classes like food-anchored retail strips and core multifamily properties, is expected to persist. However, the increased cap rates for segments like Tier I regional centres highlighted a continued demand for higher returns in areas perceived to carry greater risk or structural challenges. The industrial sector will likely continue to adapt to evolving trade policies, with flexibility and smaller and medium-sized bay options remaining attractive. As the “One Canadian Economy” initiatives gain traction and the ISED ecosystem strengthens, these domestic efforts may foster new avenues for growth and investment. Ultimately, the Canadian real estate market in the latter half of 2025 will be defined by its adaptability and the strategic responses of both government and market participants to the shifting economic landscape.

About our Canadian Investment Trends Survey (ITS):

Every quarter, senior Altus Group professionals reach out to over 300 investors, managers, owners, lenders, analysts, and other market stakeholders to survey their opinions on value trends and perspectives. Conducted with the same benchmark properties for over 20 years, the survey provides valuable insights into investor preferences and valuation parameters for 32 asset classes in Canada’s eight largest markets.

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