What persistently high bond yields could mean for the commercial mortgage market

Persistently high long-term bond yields are shaping up as the deciding variable for Canada’s commercial mortgage market, with Avison Young warning that capitalization rates may struggle to hold if borrowing costs stay elevated into 2027.

In its Q3 2026 Canadian cap rate and investment trends report, the real estate services firm said yields no longer move on central bank policy alone, with persistent inflation, government borrowing, trade disruptions, energy markets and geopolitical tension lifting financing costs and investors’ required returns.

The cap rate, a property’s net operating income divided by its value, is where that pressure lands. Higher cap rates mean lower valuations and smaller loans for income-property clients.

National benchmarks sat at 4.55% for high-density urban multifamily, 5.85% for new single-tenant industrial and 6.90% for downtown class A office in the third quarter, following a second quarter in which Toronto anchored Canada’s commercial real estate rebound.

The five-year Government of Canada bond yield closed at 3.60% on October 2, up from 3.35% on September 1, according to Bank of Canada data, extending an oil-fuelled bond selloff that pushed Canada’s 10-year yield to 3.9% in September. 

“Bond markets are essentially doing some of the Bank of Canada’s job for them,” RBC economist Carrie Freestone said on the bank’s The 10-Minute Take podcast, as bond yields are already repricing Canada’s fixed mortgage market.

How are lenders pricing commercial mortgage risk?

Credit is still flowing, but on tighter terms. Conventional multifamily loans price 130 to 200 basis points over the five-year Government of Canada yield.

Loans insured by Canada Mortgage and Housing Corporation (CMHC) price 55 to 100 basis points over it, the survey said.

Office spreads run 150 to 250 basis points. Multifamily arrears are trending up, and CMHC-insured applications fell from the prior quarter.

“While capital remains available across all asset classes, uncertainty related to geopolitical tensions, trade disruption, and rising bond yields is beginning to reduce borrowing capacity and increase lender caution,” said Ron Dezman, senior vice-president, debt capital and advisory, at Avison Young in Edmonton.

"In the CMHC lending market, underwriting assumptions for rental growth and threshold interest rates are becoming more conservative as supply risk deepens across several markets."

What higher yields mean for brokers’ commercial clients

Private investors made 48% of third-quarter acquisitions worth $5 million or more, according to CoStar data in the report. Mortgage renewal or maturity ranked as the second-most common reason owners sold multifamily assets.

“For multifamily pricing, bond yields will be the dominant story for the remainder of 2026, as a persistence of higher yields will likely place upward pressure on cap rates, especially with the relatively flat near-term income growth expectations,” said Carey Buntain, principal, capital markets, at Avison Young in Vancouver.

Grant Armstrong, chief growth officer at WealthOne Bank of Canada, flagged the move at MortgageFest Canada in Toronto in September.

“I think rates will probably go up in October. GIC rates are up 35 points in the last sixty to ninety days. Bank of Canada bond rates are up 60 points. Like everything’s been going up already. So it’s just a natural part of the market,” Armstrong said.

Source: Canadian Mortgage Professional