Canadian commercial real estate market update – Q4 2024

Strategic patience amidst market fluctuations

Canada’s commercial real estate investment volume in 2024 reached $53 billion, falling slightly short of 5% compared to 2023’s level (Figure 1). This moderation reflected the impact of elevated interest rates, high construction costs, a skilled labour shortage, and a persistent bid-ask gap between buyers and sellers, leading many investors to adopt a wait-and-see approach.

Figure 1 - Canada’s total investment activity – All sectors by year

Regional variations were evident: Vancouver and Montreal experienced increased investment, while Toronto, Calgary, Edmonton, and the Greater Golden Horseshoe (GGH) saw declines; and Ottawa remained stable (Figure 2). A significant surge in investment activity occurred in the second quarter as investors hurried to close deals ahead of the announced capital gains tax increase on June 25th, 2024. Consequently, the third quarter witnessed a return to first-quarter investment levels as deals were brought forward into the second quarter.

Figure 2 - Canada’s total investment activity – All sectors by region (2023 vs. 2024)

According to Altus Group’s Q4 2024 Canadian Investment Trends Survey (ITS), Toronto, Vancouver, and Edmonton emerged as the top three preferred markets by investors, respectively (Figure 3). Notably, food-anchored retail strips and multifamily properties surpassed industrial as the most sought-after property type in 2024 (Figure 4). Moreover, Tier I regional malls and hotel properties witnessed increasing investor interest throughout the year, driven by improving operating fundamentals, redevelopment potential, and expectations of higher discretionary spending as well as a resurgence in travel and tourism in 2025. These preferences are evidenced by positive year-over-year growth in the hotel, multifamily and retail sectors (Figure 5). These trends underscore investors’ focus on stable, low-risk opportunities and portfolio diversification amid economic uncertainty.

Figure 3 - Investment Trends Survey (ITS) – Location barometer (Q4 2024)

Figure 4 - Investment Trends Survey (ITS) - Property type barometer (Q4 2024)

Figure 5 - Canada’s property transactions by asset class

Throughout 2024, the Canadian commercial real estate market demonstrated responsiveness to the Bank of Canada’s (BoC) commitment to easing interest rates. This stance fostered a gradual, albeit cautious, sense of optimism among investors, despite prevailing economic and geopolitical uncertainties.

Canadian industrial sector faces adjustments in 2024

The Canadian industrial sector experienced a slowdown in 2024, primarily driven by the substantial influx of new supply delivered in 2023, resulting in a temporary oversupply. This, coupled with ongoing economic uncertainty and rising industrial availability rates, has negatively impacted investor confidence. According to Altus Group’s Q4 2024 Canadian industrial market update, the national industrial availability rate rose by 200 basis points to 6.3% year-over-year, the highest level since 2011 (Figure 6). Consequently, investment volume declined to $12.3 billion, an 18% decrease compared to the previous year. This investment dip coincided with a market shift, where new supply surpassed demand. Notably, the market experienced three consecutive quarters of negative absorption before returning to positive territory in the fourth quarter.

Figure 6 - Canada’s industrial availability rates (quarter-over-quarter, year-over-year)

Montreal and Ottawa were the only markets to observe positive growth in their industrial sectors year-over-year. The Montreal market showcased the most robust industrial sector in 2024 compared to other major markets, achieving $2.6 billion in dollar volume transacted, representing a 34% year-over-year increase, with half of the transactions concentrated on small bay properties under 20,000 square feet. Altus Group’s Q4 2024 ITS revealed that multi-tenant industrial was the most preferred property type among investors in Montreal. Ottawa followed with $224 million in dollar volume transacted, a subtle 7% increase year-over-year. Conversely, Edmonton, Vancouver and Toronto’s industrial sectors experienced some volatility, with a 36%, 28%, and 27% decrease, respectively.

On the construction front, Altus Group’s Q4 2024 Canadian industrial market update reported that 96 projects were under construction, totalling 17.8 million square feet, with 77% of the space available for lease. Toronto led with 10.8 million square feet, representing 61% of the industrial space under construction. Moreover, pre-leasing activity has gradually pulled back, with 77% of the space available for lease nationwide due to diminished demand.

The industrial sector underwent a period of adjustment, marked by increased supply, rising vacancy rates and a subsequent decline in investment volume. While challenges persist, particularly concerning oversupply, economic uncertainty, and the potential tariffs with the US, regional variances indicate pockets of strength. The market continued to navigate a shift towards a new equilibrium, and investor sentiment remained cautiously optimistic for the year ahead.

Multifamily investment surges, challenging industrial dominance

The Canadian federal government’s strategic shift in immigration policy announced on October 24th, 2024 noted the planned 21% reduction in permanent resident targets from 500,000 to 395,000 by 2025, coupled with a continued downward trajectory for 380,000 in 2026 and 365,000 in 2027, has initiated a noticeable deceleration in temporary immigration. This effect was evidenced by Statistics Canada’s latest Canada’s population estimates report, which revealed the fourth quarter of 2024 saw the slowest population growth rate since the fourth quarter of 2020 when border restrictions were in place due to the pandemic. This deliberate pullback, however, is unfolding against a backdrop of persistently tight market conditions. Canada continued to grapple with a severe housing affordability crisis, exacerbated by years of record-breaking population growth creating significant pent-up demand. Furthermore, major changes in Canada’s immigration program coupled with persistently high construction costs, a skilled labour shortage, and restrictive planning policies have injected a degree of short-term volatility into the housing sector. Developers, facing uncertainty about 2025’s demand outlook are likely to pause or delay new construction projects, potentially further constraining supply.

Despite these challenges, the multifamily sector has demonstrated remarkable resilience, recording a substantial rebound in investment activity following the slowdown observed in 2023. The announcement of the capital gains tax increase triggered a surge in transactions, resulting in $11.4 billion in dollar volume transacted, a 37% increase compared to the same period last year. This upswing in investment underscores the sector’s stability and potential for growth. Comparing the major markets, Calgary reported the highest growth, with $781 million in dollar volume transacted, representing a 64% increase, primarily driven by Alberta’s strong population growth and the city’s commitment to streamline building processes. The ongoing demand for rental housing, driven by demographic shifts and affordable constraints in the homeownership market, signifies a sustained need for affordable multifamily dwellings. Furthermore, this enduring demand and strong long-term fundamentals make the multifamily sector a key area of focus for investors as they navigate the broader economic and policy adjustments.

Canada’s office sector reached a turning point

The Canadian office sector in 2024 experienced significant shifts driven by evolving workplace preferences and return-to-work mandates. According to Altus Group’s Q4 2024 Canadian office market update, national office availability rates stabilized at a high of 17.5%, reflecting a trend of businesses downsizing, reconfiguring or relocating (Figure 7). A pronounced flight-to-quality phenomenon emerged in recent times, creating a stark divide between Class-A and older Class-B and -C buildings. Class-A properties dominated leasing activity in 2024, evidenced by 12.8 million square feet of leased space, which far surpassed the nearly 3 million square feet of leasing in Class B, and roughly 550,000 square feet in Class C. This highlights the need for landlords to invest in upgrading older, functionally obsolete spaces. Sublet space, after peaking in Q2 2023, has declined for six consecutive quarters as businesses reoccupied these spaces.

Figure 7 - Canada’s office availability rates (quarter-over-quarter, year-over-year)

Regional disparities were evident. Vancouver demonstrated resilience with a 123% year-over-year increase in investment volume, the highest among major Canadian markets, and reported the lowest office availability rate at 13.2%, with the lowest Class-A availability rate at 12.7%. This strength is attributed to a robust technology and business sector and a reliable public transportation system. Conversely, Toronto’s office sector faced turbulence, with a 46% decrease in investment volume, the largest decline nationally. Toronto’s office availability rates remained elevated at 19.0%, with Class-A availability at 20.1%. While the influx of new supply played a significant role in the rise of availability rates, the flight-to-quality trend not only widened the gap between Class-A and Class-B and -C buildings but also created a complex segmentation within the Class-A market itself, specifically between Class-A and Class-AAA properties, as tenants increasingly sought out buildings with the highest quality and most desirable location.

Nationally, the office market appears to be at an inflection point. The construction pipeline is shrinking with 4.9 million square feet of office space under construction and 37% of the space available for lease, which coupled with stabilized availability rates, suggests the potential for positive absorption and lower vacancy rates. However, the dwindling availability of top-quality Class-A space, particularly in new developments, may pose a challenge for tenants seeking high-quality office space in prime locations.

Food-anchored properties attracted strong investor interest

In 2024, Canadian consumers demonstrated a cautious spending approach, prioritizing essential goods and services amidst persistent concerns surrounding the rising cost of living. This shift in consumer behaviour significantly influenced investor strategies within the retail sector. Recognizing the stability and necessity of grocery and essential services, investors strategically focused on acquiring select retail formats, particularly neighbourhood and regional shopping centres anchored by grocery or general merchandise retailers, or those with redevelopment potential. This emphasis on essential goods and services was further reinforced by Altus Group’s Q4 2024 ITS, which identified food-anchored retail strips as the most preferred property type among investors for a fourth consecutive quarter. These property types continued to be attractive investment opportunities, reflecting the enduring demand for a destination that fulfills all the essential shopping needs. This targeted investment strategy contributed to a relatively stable retail sector, which reported $7 billion in investment volume, marking a 6% increase year-over-year.

Regionally, significant variations were observed. Montreal emerged as a leading market, experiencing substantial growth with an 85% increase in investment volume, reaching $1.7 billion in dollar volume transacted. This surge highlights Montreal’s recovering retail sector, strong long-term fundamentals, and investor confidence.

Conversely, Edmonton faced a significant downturn, recording the lowest growth with $254 million in investment volume, a 46% decrease compared to the same period last year. This signalled potential regional challenges or shifts in local investor behaviour.

The 2024 Canadian retail investment landscape was defined by a strategic focus on essential goods and services, resulting in a stable national market despite regional disparities. This trend, highlighted by the sustained appeal of food-anchored retail properties emphasizes the importance of consumer necessities in shaping investor decisions.

Hotel sector dominated investment growth across major sectors

The hotel sector emerged as the top performer in 2024, reporting the highest year-over-year growth of 48%, translating into $1.2 billion in dollar volume transacted. This growth underscores a renewed investor confidence in hospitality assets, driven by factors such as rebounding tourism, increased domestic travel, and the potential for strong revenue growth and redevelopment. Notably, the majority of this investment activity, approximately 70% or $883 million in dollar volume, was transacted in the first half of 2024. This concentrated activity indicated investors getting ahead of the expected capital gains tax increase and anticipating further market appreciation. The investment landscape was heavily skewed toward the buy-side, with key players like InnVest Hotels, Manga Hotels, Artifact Group, Coast Hotels, and Sunray Group responsible for approximately 68% of the total investment volume in the hotel sector. These strategic acquisitions suggest a consolidation trend within the hotel sector, as established operators expand their portfolios to capitalize on the anticipated growth in travel and tourism.

Regionally, the Greater Golden Horseshoe experienced an extraordinary leap in hotel investment, witnessing a 278% year-over-year increase, with $166 million in transaction volume. This dramatic growth reflects the region's burgeoning economic activity, its appeal as a travel destination, and its job prospects. The Greater Toronto Area also saw significant gains, with $552 million in dollar volume transacted, representing a 173% increase year-over-year. This surge in investment highlights Toronto’s status as a top destination for leisure and business travel, and a major hub for investors to diversify their portfolios. In contrast, the Montreal market faced a significant downturn, with $68 million in dollar volume transacted, a 52% decrease year-over-year. This decline could be attributed to a variety of factors, including sensitivity to regional economic factors or as investors hold onto existing assets as the hotel sector's strong performance in 2024 signals a robust foundation for continued growth.

Looking ahead

In a year marked by hesitation stemming from economic uncertainties, elevated interest rates, evolving investor preferences, and potential trade tensions with the US, the Canadian commercial real estate market underwent a period of strategic adjustment. While overall investment volume receded compared to 2023, the year presented a nuanced picture of regional variations and sector-specific performance. The market’s demonstrated responsiveness to the BoC’s policies will continue to foster a sense of cautious optimism.

Looking ahead, investment decisions will be driven by further interest rate adjustments, regional economic strengths, and sector-specific opportunities. Despite ongoing uncertainties, the outlook for 2025 remains cautiously optimistic, supported by slow, but gradual improvements in leasing fundamentals and investors’ continued willingness to deploy capital.

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