The commercial real estate (CRE) market in 2024 has shown us mixed results. Some areas have seen higher property values, while others are still declining. These ups and downs are being driven by factors like the type of property, its location, how space is being used, and larger economic and political changes—such as new government policies and trade rules. If interest rates stay where they are, it will take more time for the market to fully recover and adjust to these shifts.

Looking ahead to 2025, many investors see it as a key year to get more involved in CRE. For the third year in a row, distressed properties (those in trouble or priced lower) are expected to present the best opportunities, attracting more attention. Overall, CRE values have generally dropped over the last year, but retail properties—especially essential ones like grocery anchored centres—are holding strong. Investors are mainly interested in two types of properties:

1. High-quality, fully leased properties at market value (preferably secured with lower interest rates).

2. Distressed properties that can be bought at a discount.

Capital Markets: Higher Bond Yields Affect Return Expectations

In Toronto, cap rate expectations (the return on investment for real estate) range between 4.68% and 7.95% depending on the risk. But with bond yields also rising quickly, it’s uncertain whether these numbers will hold for good measure. Investor expectations for returns are higher relative to the ‘risk-free rate’ of the 10 Year Canada Bond. According to Altus Group, Canadian investment activity in 2024 was similar to the year before, indicating that investors are taking a cautious approach.

Rents for multifamily, industrial, and office properties have slowed down, and operating costs have been rising. Because of this, there has been a wider gap between cap rates, showing uncertainty among investors. Canada’s real estate market generally has a risk premium above the 10 Year Canada Bond of around 3.75% for commercial properties and 2.75% for multifamily.

Even with higher risk associated with higher cap rate expectations, we expect investors will still be in search of buying properties at a discount because it is felt borrowing costs will continue to decrease over time. However, financing and refinancing is still tight, with banks offering loans based on the lower amount between loan-to-value ratios (LTV) and stricter debt service coverage ratio (DSCR) requirements.

Multifamily Properties: Slower Growth in the GTA

In 2024, rent growth in many parts of Canada slowed as demand for rental properties eased. However, newly built apartments still saw record high rents, keeping prices elevated in some areas. According to CMHC, rents on existing properties that turned over increased by 23.5%, driving much of the overall rent increase.

Rent increases were slower across most of Canada, but in provinces like Alberta, Saskatchewan, and Manitoba, rents remained strong due to migration from other areas. In the Greater Toronto Area (GTA), average rents dropped to $2,109 in December, marking a 17-month low.

Vacancy rates for purpose-built rentals remained low at 2.2% (up from 1.5% in 2023), still below the 10-year average of 2.7%. Looking ahead to 2025, demand for multifamily properties is expected to outpace supply, continuing the trend we've seen in recent years.

Retail: Strong Demand Despite Challenges

The Canadian retail market has some risks, like a shrinking population, rising unemployment, and higher living costs. However, demand for retail space is still high. Many national and international retailers are rolling-out new physical stores, albeit at smaller footprints, despite economic challenges. The lack of new construction has led to a shortage of retail space, with vacancy rates remaining low and rents rising as a result.

Canada’s retail market will remain tight, with vacancy rates expected to stay below 2% in 2025. Millennials (aged 25-40) make up a large portion of Canadian shoppers, and they’re increasingly influenced by social media when making purchasing decisions. Many brands are shrinking their store sizes to adjust to online shopping trends, rising rents, and uncertain consumer spending. 

Discount stores and essential retail like grocery and pharmacy will likely continue to perform well in this economic climate.

Industrial Properties: Slower Leasing, but Steady Demand

Canada’s industrial market is stabilizing. Job gains in transportation, warehousing, and manufacturing are expected to boost demand for warehouse space. As supply slows down, industrial availability will likely stabilize around 4% by mid-2025.

Industrial properties with high ceilings (over 35 feet) continue to be in high demand and have seen consistent growth in recent years. While vacancy rates increased from a low of 1% in 2022 to 3.5% in 2024, demand for these types of spaces remains strong.

Office Sector: Signs of Recovery in 2025

The Canadian office market is starting to recover. After several tough years, vacancy rates and building values are stabilizing, and more businesses are looking for office space. The pandemic’s impact is still being felt, but with fewer subleases available and more businesses bringing employees back to the office, tenant activity is picking up.

In downtown areas, weekly occupancy is averaging 71% as employees return to the office mainly Tuesday, Wednesday and Thursdays. As more CEOs plan to grow their teams in 2025, demand for office space is expected to rise, supporting positive absorption rates across major markets.

Asset Classes to Watch in 2025: Investor Priorities

Here’s how we expect interest in different real estate asset classes to rank in 2025:

1. Multifamily – With strong demand, low vacancy, and healthy rent increases.

2. Industrial – Steady demand for high-clearance spaces and stable performance.

3. Retail – Resilient, especially for essential and discount-focused properties.

4. Land – Potential for long-term development and value growth.

5. Office – Poised for recovery with rising demand for flexible office space.

6. Hotel/Hospitality – Recovery is underway but still carries some risk due to economic uncertainty.

Trends to Watch in 2025

1. Construction – High costs, long construction times, and interest rates will slow new projects across all sectors in 2025.

2. Interest Rates – While the Bank of Canada’s rate cuts help with variable-rate mortgages, mortgage and lending costs are mainly determined by the bond market. We expect the gap between bond yields and the Bank’s rate to continue shrinking, making things a bit easier for real estate companies.

3. Investors – Over the past few years, institutional investors have been selling weaker assets (like offices) and focusing on other opportunities. In their place, high-net-worth individuals and private equity groups are stepping in, looking for discounted or distressed properties. This trend is expected to continue, especially as Canadian pension funds look for international diversification.

If you're considering making changes to your real estate strategy or exploring passive investment opportunities, we’re here to guide you every step of the way.

Why Partner with Us?

With the real estate market constantly changing, having a trusted advisor can make all the difference. We have over 30 years of experience in commercial real estate, we’re here to help you navigate this evolving landscape and find the right spaces for your company and the best investment opportunities for you. Whether you’re an institutional investor or an individual looking to grow your portfolio, we have the expertise to guide you.

Visit www.paramountrealestate.ca or watch our video below to learn how we can help you grow your business and make smart investments in 2025. 

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