Is Canada's commercial real estate market poised for recovery in 2025?

The Canadian commercial real estate market is heading into 2025 with cautious optimism following a year of interest rate relief, according to Avison Young’s latest Q4 2024 market report. After the Bank of Canada cut rates by 175 basis points in 2024, the stage is set for continued recovery, though significant challenges remain.

“2025 will begin where 2024 left off, continuing incremental recovery across the industry, setting the markets up for a longer-term bull run going into the last half of the year,” said Mark Fieder, principal and president of Avison Young Canada. However, he noted that trade policy concerns and central bank decisions remain key risk factors.

The report identifies several key trends across major property sectors. In multi-residential, markets are showing signs of easing after years of tight conditions, with vacancy rates increasing from 1.5% to 2.2% in 2024. The sector is also seeing a shift in investment patterns, with institutional investors and REITs returning to make significant acquisitions in the latter half of 2024.

The industrial sector faces uncertainty from potential US-Canada trade tensions, with 74% of Canada’s merchandise exports heading south of the border. However, the sector saw a notable surge in owner-occupier acquisitions in 2024, rising to nearly 40% of transactions by Q4, while institutional investors are showing renewed interest in small- and medium-bay facilities and data centres.

Office markets continue to adapt to post-pandemic realities, with average lease terms dropping from 74 to 66 months and landlords offering increased concessions. The report notes significant regional variations, with markets like Vancouver seeing cap rate compression while others remain stable or face increases.

In retail, the sector is grappling with stagnant consumer spending, though grocery-anchored shopping centres remain highly sought after by investors. An interesting trend has emerged in major Canadian markets, where retail square footage per capita has declined since 2022 as population growth outpaces new supply.

The report suggests that lower interest rates and improving market conditions have helped narrow the bid-ask spread, facilitating more transactions. However, uncertainties around trade policy and monetary policy decisions continue to weigh on the market outlook for 2025.

Looking ahead, consensus forecasts predict the Bank of Canada’s policy rate to fall to 2.25% by year-end 2025, potentially supporting further market recovery in the latter half of the year.

Source: Canadian Mortgage Professional