Canadian CRE investment trends - Q3 2025

Economic drivers and monetary policy

The third quarter of 2025 was characterized by sustained economic deceleration within the Canadian economy. This trend culminated in a decisive monetary policy shift by the Bank of Canada (BoC) on September 17, 2025, when the key overnight rate was reduced by 25 basis points to 2.50%. This action effectively restarted the easing cycle that had commenced in 2024. The decision was necessitated by accumulating evidence of a weakening economy and was aimed at better balancing risk within the BoC’s monetary policy framework.

Key indicators that prompted the cut included a notable deterioration of the labour market. Specifically, employment declined for two consecutive months through August 2025, according to the Labour Force Survey data. Canada’s unemployment rate climbed to 7.1%, signalling diminished labour demand. Job losses were heavily concentrated in trade-sensitive sectors, highlighting the vulnerability of the Canadian economy to external pressures.

Furthermore, a gross domestic product (GDP) contraction indicated growing underutilization of economic capacity. As reported in the second quarter 2025 GDP figures, the Canadian economy shrank by 0.4% from the previous quarter, primarily attributed to the US tariffs and trade uncertainty, which caused exports to decline significantly.

Finally, while the headline inflation rate remained below the BoC’s 2% target, an upward trajectory was observed. Data from the August 2025 Consumer Price Index showed that inflation stood at 1.9%, an increase from the 1.7% recorded in July. This upward movement, despite the overall low rate, signalled that cost pressures persisted. However, the federal government’s removal of most retaliatory tariffs on US goods was noted as having reduced upside risk to future inflation.

The BoC acknowledged that while the rate reduction was intended to stimulate business activity, the disruptive effects of trade volatility were expected to persist, which kept capital markets cautious and highly sensitive to economic forecasts.

Investment intent and capitalization rates

Reflecting the high cost of capital and persistent economic uncertainty, Altus Group’s latest Canadian Investment Trends Survey (ITS) results indicated that the OCR for the four benchmark asset classes increased to 5.93% (Figure 1). This modest increase signified a moderate adjustment to asset pricing across the market, driven by higher debt costs and dampened investor confidence.

Figure 1: National markets - OCR trends for four benchmark asset classes

Meanwhile, the 10-year bond yield, a benchmark for longer-term borrowing costs, fell 12 basis points from the previous quarter to 3.20% in September 2025. This decrease in bond yields typically indicates lower financing costs, which could, in turn, influence investment decisions and property valuations across the market.

Cap rate movements varied across the primary asset classes, reflecting distinct investor responses to the prevailing economic landscape and the specific operational risks inherent to each sector.

For instance, downtown Class AA office properties saw cap rates rise to 6.84%, a 14 basis point increase quarter-over-quarter. While these properties continued to attract interest, investors demanded a higher risk premium to compensate for perceived operational and market uncertainty. This higher yield requirement stemmed from a confluence of factors: the systemic uncertainty surrounding shifting return-to-office mandates, which compromised long-term leasing visibility; softened labour market conditions, which reduced the organic demand for additional space; and the persistent bifurcation within the office market. This segmentation placed a greater, almost exclusive, demand on only the most modern and high-quality spaces, leaving even some Class A assets susceptible to pricing pressures if they did not meet the most stringent criteria. Consequently, the increased cap rate reflected a need for stronger returns to justify new acquisitions in this segment.

By contrast, single-tenant industrial cap rates plateaued quarter-over-quarter at 5.91%, recording the sharpest year-over-year decrease among the primary asset classes, down five basis points. This relative stability suggested that, despite the broader economic uncertainty, investors maintained long-term confidence in the fundamental value and income stability of modern, well-located industrial assets. This cap rate compression persisted and was driven by the sector’s defensive qualities and its links to essential e-commerce and logistics networks. This positioning cemented the sector as a preferred inflation-hedging asset outside of necessity-based retail, ensuring that investor competition for these assets remained elevated.

Canadian commercial investment activity and market sentiment

By the end of the first half of 2025, Canada’s commercial real estate investment activity had fallen sharply, with total dollar volume transacted at $24.2 billion, a 22% decline year-over-year.. This pullback reflected investor caution in deploying capital amidst ongoing economic uncertainty. Rather than a lack of interest, this uncertainty signaled a pause in deployment, with substantial institutional capital accumulating on the sidelines as investors awaited clearer economic and rate signals. Given the persistent economic headwinds and cautious monetary policy stance, a further contraction in investment volume was widely anticipated for the third quarter of 2025.

Investor sentiment, however, displayed geographical variation, which was quantified through the momentum ratio derived from investor sentiment surveys. This ratio reflected the respondents’ intentions to buy or sell across the various commercial real estate markets.

During the third quarter, Vancouver, Halifax, and Quebec City emerged as the top three markets for attracting investor interest across all asset classes, suggesting their perceived stability and long-term growth potential. These three markets, alongside Edmonton, reported a positive momentum ratio, indicating that the collective sentiment of investors leaned towards acquisition.

Figure 2: Location barometer - All available products (Q3 2025)

In contrast, Toronto, Calgary, Ottawa, and Montreal all reported negative momentum ratios, suggesting that the dominant investor sentiment in these core markets had shifted toward a more defensive posture, characterized by divestment rather than new acquisitions. The mixed results underscored the geographically segmented risk tolerance within the Canadian commercial real estate capital markets during the period.

Risk aversion and the pursuit of defensive assets

Throughout the third quarter of 2025, the Canadian commercial real estate market continued to reflect strong investor interest in stable, lower-risk assets amidst complex economic headwinds. Capital deployment remained highly selective, producing varied performance and sentiment across the core asset classes.

Food-anchored retail strips remained the most sought-after property type, continuing a trend first noted in the first quarter of 2024 (Figure 3). Their sustained popularity reflects shifts in Canadian consumer behaviour, as economic pressures redirected discretionary spending toward essential goods and services. This fundamental spending shift made the food-anchored retail property type relatively resistant to broader economic fluctuations and instability. From the investor’s perspective, this asset class offered a highly defensive profile, typically demonstrating higher occupancy rates, lower tenant turnover, and stable financial performance, as consistent foot traffic and sales generated reliable cash flow. Moreover, the high performance and perceived safety of these property types resulted in an acute inventory shortage. Owners largely held onto these valuable assets, while constrained lending and a high cost of capital environment limited new development, thereby restricting the amount of inventory available for sale and further intensifying competition for existing products.

Figure 3: Property type barometer - All available products (Q3 2025)

Despite ranking second in investor preference, suburban multiple-unit residential assets faced significant challenges, with sales volumes hitting record lows in the first half of 2025. Persistent economic uncertainty kept prospective buyers out of the market, resulting in low sales figures and elevated inventory levels, particularly from the condominium apartment sector, which pushed developers to delay or cancel new projects. This oversupply generated a challenging operating environment for existing property owners, as both rental income stability and the expectation of consistent capital appreciation deteriorated. Consequently, investor confidence fell in this segment, leading market participants to adopt a more cautious approach and refocus their strategies on mitigating the risk and carrying costs associated with these evolving supply and demand fundamentals. Only Vancouver reported a positive momentum ratio for this property type.

The industrial sector also encountered headwinds from the US tariffs and ongoing trade tensions, which generated considerable volatility within the sector, affecting manufacturing output, logistics planning, and overall business confidence. According to Altus Group’s latest Canadian industrial market update, the availability of industrial space maintained an elevated level, peaking near 6.2%, signifying a softening of market conditions compared to the previous years’ lows. Consequently, capital deployment became more selective, with investors concentrating on premium, well-located industrial assets that maintained robust valuations. This nuanced market sentiment was evidenced by both single-tenant and multi-tenant industrial assets registering a majority negative momentum ratio across various product types and market segments. Elevated availability rates and economic uncertainties created an opportune environment for disposing of older or less essential inventory. Overall, this trend underscored a short-term market apprehension regarding the execution of new transactions, even as the sector’s long-term fundamentals remained attractive.

The office sector demonstrated a pronounced bifurcation of investment interest, with a clear “flight-to-quality” trend dominating the market. Specifically, downtown Class AA office property types exhibited a gradual, but notable, increase in investor interest. This segment moved from eighth place with a negative momentum ratio in the same period last year, to securing fourth place with a positive momentum ratio in the third quarter of 2025. This momentum was further evidenced by downtown Class AA office in Halifax and Vancouver, ranked 10th and 11th, respectively, in the national product/market barometer. The heightened demand for newer, high-quality, amenity-rich Class AA space substantiated a widening disparity between modern buildings and older stock, as tenants sought space capable of supporting return-to-office mandates and evolving employee expectations regarding environment and technology. This intense competition for premium space was underscored by Class A direct vacancy rates in core downtown areas of Vancouver and Toronto falling below 2%.

Conversely, office land and Class B office-related property types continued to experience very little investor interest on the national level, consistently registering negative momentum ratios. This consistent lack of confidence in older, less amenitized assets firmly indicated a clear investment divergence within the office market, where capital is exclusively targeting resilient, premium-grade core product.

Product/market barometer highlights

According to the product/market barometer (Figure 4), the top three preferred combinations were:

1. Suburban multiple-unit residential in Vancouver

2. Food-anchored retail strip in Montreal

3. Multi-tenant industrial in Vancouver

As previously mentioned, investor disinterest in Class B office and office land assets was evident, as these segments comprised the majority of the 15 least preferred product/market combinations. This trend reflected a clear ‘flight-to-quality’ within the office market, which contributed to a widening disparity in value and demand between premium Class A properties and the older Class B stock.

Figure 4: Product/market barometer - All available products (Q3 2025) - Top 15 preferred/least preferred

Market highlights for the quarter include:

• Cap rates for suburban multiple unit residential increased to 4.64%. The suburban multiple-unit residential cap rate increased by 4 basis points quarter-over-quarter. Cap rates across all markets were mixed. Calgary, Quebec City, and Halifax remained unchanged. Vancouver, Ottawa, and Montreal reported increases. Meanwhile, Toronto reported a decrease.

• Cap rates for single-tenant industrial plateaued at 5.91%. According to Altus Group’s latest Canadian industrial market update, the national industrial availability rate reached 6.2%, a 10 basis point increase year-over-year. Cap rates across all markets were mixed. Edmonton, Ottawa, and Montreal reported increases. Meanwhile, Vancouver, Calgary, and Halifax reported decreases. Toronto and Quebec City remained unchanged.

• Downtown Class AA office cap rates increased to 6.84%. According to the Altus Group’s latest Canadian office market update, the national office availability rate decreased by 160 basis points to 16.4% year-over-year. Cap rates across all markets were primarily up. Vancouver, Edmonton, Calgary, Toronto, Ottawa, and Montreal reported increases. Meanwhile, Halifax reported a decrease, and Quebec City remained unchanged.

• Tier I regional mall cap rates decreased to 6.35%. The Tier I regional mall recorded a 1 basis point decrease quarter-over-quarter. Cap rates across all markets were primarily up. Vancouver, Calgary, Ottawa, Montreal, and Quebec City reported increases. Meanwhile, Edmonton, Toronto, and Halifax reported decreases.

Barometer highlights include:

• Of the 128 combinations of products and markets covered in the ITS:

  • 78 reported a “positive” momentum ratio, indicating a higher percentage of respondents intended to be buyers rather than sellers in those segments. This represented an increase of 3 positive segments compared to Q2 2025.

  • 50 reported a “negative” momentum ratio, with more respondents leaning towards selling than buying, a decrease of 3 such segments from Q2 2025.

    
    

• The top 15 products/markets that showed the most positive momentum were:

  • Calgary - Food-anchored retail strip

  • Toronto - Food-anchored retail strip and suburban multiple rnit residential

  • Ottawa - Suburban multiple unit residential

  • Edmonton – Food-anchored retail strip

  • Halifax – Suburban multiple unit residential, downtown Class AA office, multi-tenant industrial, and food-anchored retail strip

  • Vancouver – Suburban multiple unit residential, food-anchored retail strip, multi-tenant industrial, downtown Class AA office, and single-tenant industrial

  • Montreal – Food-anchored retail strip

Market outlook

The third quarter of 2025 solidified that the Canadian commercial real estate market has entered a period of bifurcation and heightened risk aversion. While the BoC’s rate cut signalled a necessary response to economic deceleration, the pervasive influence of trade volatility, and elevated cost of capital constrained transaction velocity. In this environment, investors continued to adopt a highly selective, defensive stance. The sustained flight to quality was evident as investors competed for food-anchored retail and downtown Class AA office, while shunning less essential segments such as office land and Class B properties.

Looking ahead, investment activity is expected to remain limited through year-end. While transaction volumes were anticipated to remain subdued, the considerable amount of capital paused on the sidelines suggested substantial latent demand. Capital deployment was anticipated to remain focused on inflation-hedging assets that offer resilient, predictable cash flow, suggesting that the current market segmentation, dominated by risk mitigation strategies, will likely persist for some time.

About our Canadian Investment Trends Survey (ITS):

Every quarter, senior Altus Group professionals reach out to over 300 investors, managers, owners, lenders, analysts, and other market stakeholders to survey their opinions on value trends and perspectives. Conducted with the same benchmark properties for over 20 years, the survey provides valuable insights into investor preferences and valuation parameters for 32 asset classes in Canada’s eight largest markets.

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Disclaimer

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice or services of Altus Group, its affiliates and its related entities (collectively “Altus Group”). You should not act upon the information contained in this publication without obtaining specific professional advice.

A number of factors may influence the performance of the commercial real estate market, including regulatory conditions and economic factors such as interest rate fluctuations, inflation, changing investor sentiment, and shifts in tenant demand or occupancy trends. We strongly recommend that you consult with a qualified professional to assess how these and other market dynamics may impact your investment strategy, underwriting assumptions, asset valuations, and overall portfolio performance.

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