A practical look at what’s shaping Canadian real estate heading into 2026

The Economic Backdrop

“Stability for now, uncertainty ahead.”

It’s been a challenging year for the Canadian economy. As we move toward 2026, the landscape is shifting again—interest rates, policy decisions, and market sentiment are pulling in different directions. From entrepreneurs to homeowners, many Canadians remain cautious amid trade tensions and global uncertainty. While a recession does not appear imminent, expectations for a strong rebound are also limited.

The Bank of Canada ended the year holding the overnight rate at 2.25%, one full point below where 2025 began. This sits at the lower end of the “neutral” range, offering stability without stimulating excess borrowing or saving. Major real estate forecasters, such as Royal LePage, anticipates prices for GTA single-family detached homes will drop 4.5 per cent by end of 2026 before demand slowly improves enough to absorb existing inventory. Further rate cuts in 2026 remain possible but are not expected unless economic conditions change materially—particularly with respect to U.S. trade policy.

Yet Canadians see a different side of the story. Private-sector job losses continue, GDP per capita has declined for eight straight quarters, and both national to GDP and household debt to income levels sit among the highest in advanced economies. Even the Bank of Canada acknowledges the economy is being reshaped for structurally higher costs and slower growth—conditions that lower interest rates alone can’t fix. Several major institutions, including RBC and Scotiabank, warn that inflation risks may tilt upward in 2026, which could put rate hikes back on the table.

What does this mean for real estate? Elevated debt levels, weak population growth, and soft consumer confidence will continue to weigh on demand. Consumers are prioritizing essentials over discretionary purchases, and real estate activity—particularly in higher price brackets—may continue to feel the pressure.

For homeowners and buyers, the near-term takeaway is straightforward:

• Variable-rate borrowers should expect stable payments for now.

• Fixed-rate shoppers won’t see immediate changes, as bond yields drive those rates more than Bank announcements.

• More than 1.1 million mortgages are renewing in 2026, and nearly 940,000 in 2027. Anyone renewing should follow inflation trends closely, as renewed price pressures could increase borrowing costs again.
  

Residential Homes

“Buyers take the driver’s seat as confidence softens.”

A year ago, market sentiment was surprisingly upbeat. Buyers raced to get ahead of what many thought would be a competitive spring, and sellers felt confident holding firm on price. That changed almost overnight on February 1st, when the U.S. announced a 25% tariff plan on Canadian goods. Economic optimism gave way to caution, and uncertainty spilled directly into the housing market.

As we head into 2026, the key question is whether demand will stabilize—or whether economic concerns will keep buyers on the sidelines. Inventory continues to build, and without a broader economic rebound, downward price pressure is expected.

According to TRREB, November sales reached 5,010, marking a 15.8% year-over-year decline. Toronto-area home prices dropped for the 10th month in a row as sales plummeted further in November.

Detached homes were the most active segment, yet still saw an 8% price decrease and a 14.8% drop in sales. Condo apartments remain the most challenged segment with a 21.7% decline in sales. Townhomes and semis followed similar downward trajectories.

Zoocasa’s analysis of the sales-to-new-listings ratio (SNLR) confirms a noticeable shift toward buyer’s markets in key regions. The GTA, Niagara, and Windsor-Essex have all tipped below the 40% threshold, giving buyers more negotiating power than they’ve had in years. In places like Niagara, homes frequently sell below asking with room for favourable conditions such as inspections—something that was nearly impossible during the pandemic-era boom.

Residential Rentals

“Softening rents meet expanding supply.”

Toronto’s condo and rental market is undergoing a meaningful reset. Sales are slowing, investor sentiment is more cautious, and several pre-construction projects have paused or reevaluated timelines.

A Zoocasa survey shows that more than half of homeowners (53.8%) no longer view any neighbourhood in their city as “reasonably priced,” while over 26% are considering relocating to smaller cities. This shift in mindset is reshaping demand patterns across the country.

According to Rentals.ca and Urbanation, average asking rents across Canada fell 3.1% year-over-year in November, marking 14 consecutive months of declines. Toronto rents dropped 5% to $2,508, the lowest since mid-2022.

With population growth slowing and a record number of purpose-built rentals hitting the market, supply is overtaking demand—pushing rents downward and giving tenants more options. Industry analysts expect this trend to continue through the winter as new inventory completes and the usual seasonal slowdown takes hold.

Multifamily

“From growth story to value story.”

Multifamily has long been the dependable outperformer in Canadian real estate, but 2025 revealed some early cracks. Rent growth has softened in several markets, driven by slower population growth and a wave of newly completed rental units. Toronto—once defined by chronic undersupply—is now seeing rents ease from peak affordability constraints.

A standard 1-bedroom unit in Toronto still consumes roughly 42% of an average earner’s take-home pay. At an average rent of $2,295, a renter needs an annual income of roughly $86,000 to remain within affordability guidelines.

StatCan reports that two-bedroom rents fell in 24 of Canada’s 40 largest CMAs, including a 3.9% decline in the Toronto CMA. CMHC notes that GTA vacancy rates have climbed to 3%, driven by slowing immigration, fewer international students, and competition from investor-owned condo rentals.

For owners and investors, softening rents and rising vacancies mean tighter yields, longer lease-up periods, and increased use of incentives. Newer, high-end buildings may experience short-term value adjustments, while older buildings face rent-control limitations that cap revenue growth.

That said, investors remain active. Q3 investment sales reached $1.3 billion, with buyers showing particular interest in high-rise and newer assets. The market narrative is shifting from rapid growth to asset-level performance and long-term value preservation.

Retail

“Essential retail holds firm as consumer strain grows.”

Toronto’s retail investment market has enjoyed a strong run, but signs of cooling are emerging. Capital that once migrated from office to retail may begin shifting again as investors reassess risk across asset classes.

Consumer confidence is weakening. Oxford Economics expects unemployment to surpass 7%, and the Bank of Canada notes that the perceived risk of job loss has doubled to 20%. Canadians are spending more cautiously as savings rates fall and economic strain becomes more evident.

This environment will challenge retail categories dependent on discretionary spending or high turnover—particularly enclosed malls. Necessity-based and grocery-anchored retail, however, remains resilient and continues to attract investor interest.

Escalating trade tensions may ironically benefit domestic retailers. Higher import costs could dampen cross-border e-commerce, giving Canadian brands with strong domestic supply chains a competitive advantage. Companies such as Canadian Tire, Indigo, and LCBO may see increased demand as consumers turn local.

Industrial

“Demand rebounds, but risks cluster around key export markets.”

Industrial leasing has recovered since the spring slowdown, and national leasing activity is on pace for its strongest year since 2022. Still, performance varies widely by region.

Southwestern Ontario felt tariff impacts early, with leasing activity slowing in Q2 before rebounding in Q3. Markets with heavy exposure to steel, aluminum, and automotive industries remain more sensitive to trade policy uncertainty.

Across the country, nearly half of all industrial tenants searching for space are targeting the GTA and surrounding regions—a concentration that reinforces the GTA as Canada’s industrial bellwether.

E-commerce continues to drive demand. Roughly one-third of incremental retail spending is expected to shift online over the next five years. Amazon, Walmart, and major 3PL providers (FedEx, DHL, Purolator) remain major space users, with ongoing requirements for fulfillment, reverse logistics, and last-mile delivery hubs. Industrial demand tied to consumer goods and logistics should remain durable even as broader economic conditions fluctuate.

Office

“Quality wins as the market begins to rebalance.”

Signs of recovery continue to emerge in Canada’s office market. National net absorption is positive, and asking rents are holding steady. But this recovery is far from even—the overwhelming demand is concentrated in Class A and AAA buildings with strong amenities and transit connectivity.

The “flight to quality” is reshaping downtown markets. In Q3, Toronto’s Class AAA vacancy rate dropped to 3.4%, compared with the overall downtown rate of 16.6%. These premier assets remain near capacity, supported by employers seeking attractive work environments to encourage office attendance.

Older and lower-tier buildings face more challenges, but with virtually no new supply coming to market, demand is expected to spill over into Class B and C inventory as top-tier space becomes scarce. This may help rebalance the market gradually over the next few years.

Return-to-office mandates are becoming more common, particularly in finance and professional services. Still, economic pressures mean organizations are cautious about expanding footprints, and hybrid work remains the prevailing model. The result is a slow but steady recalibration rather than a dramatic rebound.

Investment

As 2025 draws to a close, Canadian commercial real estate investors are navigating a markedly different economic environment than in recent years. The Bank of Canada has adopted a more supportive monetary policy stance, with interest rates stabilizing and inflationary pressures continuing to ease. This shift has begun to relieve borrowing costs and improve underwriting assumptions, offering renewed optimism for both developers and long-term investors.

Office Investment:

“Early Signs of a Turning Point”

Toronto’s office investment market continues to face notable challenges. Sales volumes totaled just $1.05 billion in the first 11 months of 2025, down sharply from $4.28 billion in 2022 and marking the lowest level of activity since the onset of the pandemic. Despite these headwinds, investor sentiment toward office assets is gradually improving.

Optimism remains concentrated in high-quality downtown core properties and is being driven more by leasing fundamentals than by transaction activity. Recent gains in occupancy are strengthening tenant demand and reinforcing confidence that the Toronto office market may be approaching an inflection point. With pricing becoming more transparent and investor confidence slowly returning, the narrative may be shifting from one dominated by “Work From Home” policies to one increasingly supported by “Back to Work” mandates.

As leasing conditions move from negative to positive and valuations begin to reflect improved fundamentals, renewed investment activity is expected to follow.

Multifamily Investment:

“Short-Term Pressure, Long-Term Structural Support”

In the multifamily sector, declining rent growth is beginning to pressure property values. As revenue assumptions soften, investors are demanding higher capitalization rates, placing downward pressure on pricing in the near term. However, there is meaningful regulatory change on the horizon that could materially improve the outlook for landlords beginning in 2026.

Ontario’s proposed Bill 60, the Fighting Delays, Building Faster Act, represents one of the most significant shifts in landlord-tenant legislation in years. Many of the proposed reforms are designed to address longstanding inefficiencies and risks faced by housing providers.

Key proposed improvements include:

• Faster enforcement for non-payment of rent

• Shorter timelines for appeals

• Stronger measures addressing rent arrears

• Revised rules governing landlord own-use evictions

• Overall streamlining of administrative processes
  

While Bill 60 has not yet passed and remains in second reading—where further amendments may be introduced—the direction of policy is clear. These reforms represent meaningful steps toward rebalancing the landlord-tenant framework and could materially improve investor confidence in the multifamily sector over the medium term.

Industrial Investment:

“Supply Digesting, Fundamentals Stabilizing”

Industrial market activity across the Greater Toronto Area rebounded in the third quarter, posting over 1.3 million square feet of positive absorption alongside a decline in sublease availability. Although a significant amount of new supply delivered during the quarter, construction starts have since fallen to their lowest level since mid-2020.

As newly completed and currently vacant space is absorbed over the next several years, net operating incomes are expected to recover. Capitalization rates may also experience modest compression as buyer demand continues to exceed available inventory. Investor sentiment toward industrial assets remains cautiously optimistic, and the current environment may present a compelling opportunity for well-capitalized investors to acquire assets at discounted pricing amid reduced liquidity.

Retail Investment:

“Selective Risk in a Slowing Economy”

Toronto’s retail investment outlook has softened due to broader macroeconomic pressures. Slower consumer spending and a moderation in projected population growth could place strain on leasing fundamentals and property values, particularly for retail formats dependent on tenant turnover or percentage rent structures, such as enclosed shopping centres.

Development, Land, and Capital Markets:

Land transactions have declined sharply, contributing to an estimated 15% year-over-year reduction in overall commercial transaction volume. Outside of a few resilient segments—most notably high-end hotels—the development pipeline remains subdued. Construction cost indices continue to reflect annual inflation of approximately 4–6% in major urban markets such as Toronto, further constraining new development feasibility.

Hotel Investment:

“A Standout Performer”

Hotel transactions remain one of the few bright spots in an otherwise subdued commercial real estate market. National transaction volumes are up 46% through the first 11 months of 2025, reflecting a sector that has largely returned to full operational strength.

The recovery has been supported in part by reduced outbound travel to the United States amid ongoing trade tensions, helping to bolster domestic hotel demand. Hotel revenues reached approximately $30 billion last year, returning to pre-pandemic levels. As operators increasingly rely on nightly room revenue rather than catering and event income, performance metrics point to stronger, more resilient fundamentals across the sector.

Conclusion

As 2025 comes to a close, Canada’s commercial real estate market remains in a period of transition rather than recovery. Stabilizing interest rates and easing inflation have improved visibility for investors, but capital remains selective and disciplined. Office and multifamily sectors are still adjusting to structural and regulatory shifts, though improving leasing fundamentals and proposed legislative reforms point to more balanced conditions ahead. Industrial assets continue to benefit from long-term demand drivers despite near-term supply digestion, while retail faces pressure from softer consumer spending. Against this backdrop, hotels stand out as a clear out-performer, supported by resilient operating fundamentals and renewed investor interest. Overall, while transaction volumes remain muted, improving transparency, stabilizing fundamentals, and selective pricing opportunities suggest the market may be laying the groundwork for renewed investment activity in 2026.