Canadian Market Commentary: Q4'25 To January 2026

Using the most recent PREP Sheet indicator values, what does our latest market information tell us where we stand?

January opens with a clear split between improving financing conditions and still-elevated real estate operating and valuation risk.

Capital markets: easing at the front end, sticky term pricing

Policy and bank lending benchmarks are now materially lower year-over-year (BoC policy 2.25% vs 3.25% in Jan-2025; Prime 4.45% vs 5.45%), and posted fixed rates for residential mortgages have reset down accordingly (3-year @ approximately 4.44%; 5-year @ approximately 4.49%). That is a meaningful tailwind for buyer demand and refinancing feasibility in rate-sensitive segments.

However, the “risk channel” has not fully normalized: the 10-year Government of Canada yield remains ~3.4%, and while credit spreads tightened (BBB spread 107 bps, down from 120 bps in Dec-2025), commercial mortgage ranges still imply mid-5s to ~7% all-in cost of debt depending on asset and sponsor quality. Translation: financing is cheaper than last year, but still selective, and underwriting remains conservative.

Bottom Line for Investors: We still have negative leverage for most types of asset types in this marketplace, as shown in the graph below: The cost of borrowing (10-Yr Commercial Mortgage Rate) exceeds the Average Cap Rate for Commercial Property.

Macro: inflation and labour softening reintroduce uncertainty

CPI is back up to 2.4% (Dec), while unemployment moved up to 6.8%. The combination is important for decision-makers: it suggests demand is cooling, but price pressures are not fully extinguished. These numbers also imply the Bank Of Canada is unlikely to change their Overnight Policy Rate (2.25%) at their next monthly meeting. This environment can keep bond yields range-bound and may slow the pace of further easing, which matters for cap rates and transaction liquidity.

Real estate fundamentals: leasing looks stable, but valuation stress persists (especially office)

GTA vacancy metrics are broadly steady vs Dec-2025 (multifamily 3.5%, office 16.1% with 18.1% availability, industrial 4.0% with 5.4% availability). Stability here is constructive: it implies the market is not deteriorating sequentially.Predictability means clarity, and clarity means certainty.All that is left to desire for an Investor is more transaction volume in the market to provide a greater number of fresh deal comparables that creates certainty.With certainty comes Investor confidence.

The valuation signal is less friendly. Cap rates are now clearly segmented:

• Office cap rates at 7.95% represent continued pricing pressure and underwriting skepticism.
  

• Industrial at 6.00% remains higher than a year ago (still a headwind for sellers anchored to 2021–2022 pricing).
  

• Retail at 6.25% shows relative resilience (slight compression vs 2025 year-end), consistent with the sector’s improving cash-flow narrative in well-located nodes.
  

• Multifamily at 4.70% remains comparatively supported, but at today’s debt costs, cash-flow coverage and rent-growth assumptions still matter more than “cap rate compression” stories.
  

Pricing snapshot: residential softening; commercial pricing mixed

The GTA average residential price is down sequentially ($1,006,735M in Dec-2026 vs ~$1.04M in Dec-2025) and down year-over-year (vs ~$1.07M in Jan-2025). In the commercial proxies, office $/SF is stable month-over-month, retail $/SF corrected materially from December, and industrial is flat month-over-month—consistent with a market that is repricing, not rebounding.

Risk read (decision-maker lens)

• Investor Tailwinds: Lower policy/prime rates may pause or go down in 2026; tighter credit spreads means greater scrutiny of real estate opportunities; stable vacancy month-over-month means less erosion of rental cash flow.
  

• Investor Headwinds: Higher unemployment; negative national house price momentum; building permits down (both res and non-res); cap rates (especially office) implying ongoing valuation pressure.
  

• Overall Risk is Net: Moderate-to-elevated market risk, with the highest risk concentrated in office and levered acquisitions/refis where debt proceeds and renewal terms are most sensitive to underwriting.
  

Going Forward: Our Base-case implication

Expect more deal activity than early 2025 (rate relief helps), but pricing discipline remains: buyers will continue to demand clear cash-flow durability, and sellers will need to accept that “cheaper money” does not automatically mean “lower cap rates” in 2026.

Real estate decisions should be strategic, not reactive. Let’s ensure you’re protected, properly positioned, and not overpaying.

The best decision-makers don’t guess. If you’re leasing, relocating, buying, investing, or refinancing this year, I’ll help you pressure-test the numbers before you commit. Real estate is a long game — the right deal must work on paper and in real life.

Paramount represents tenants, buyers, and investors only (no conflicts of interest). The goal is simple: protect your downside, strengthen your position, and help you secure the right property at the right basis. Reach out when you’re ready.

Go on, entrepreneur — be great!

Mel

Disclaimer: This blog post provides general information and discussions about the commercial real estate market in Ontario. The information and other content provided in this blog post, or in any linked materials, are not intended and should not be construed as financial or investment advice. The views expressed in this blog post are those of the author and do not necessarily represent the views of any other person, company, or organization. The author does not guarantee the accuracy or completeness of any information in this blog post and is not responsible for any errors or omissions or for the results obtained from the use of such information. The author assumes no liability or responsibility for any damage to you, or other property, due to your access to, use of, or downloading of this blog post or any materials provided within.