Canadian CRE investment trends – Q4 2024

Canadian commercial real estate recorded a slight uptick in activity in the fourth quarter

The latest results from Altus Group’s Canadian Investment Trends Survey (ITS) for the four benchmark asset classes show that the Overall Capitalization Rate (OCR) was largely flat, decreasing by three percentage points to 5.88% in Q4 2024 (Figure 1). The cap rates reflected fewer transactions in Canada due to the residual effects of elevated interest rates and the continued bid-ask price gap between buyers and sellers. Investors may be more cautiously optimistic until there is more certainty about the proposed US tariffs, interest rates, and economic growth.

According to Statistics Canada’s Labour Force Survey (LFS), as of December 2024, employment increased by 91,000 (0.4%) and the unemployment rate declined by 0.1 percentage points to 6.7% from the previous month. The November 2024 rate was the highest since January 2017, excluding the pandemic years, with the December unemployment up 0.9 percentage points year-over-year. Gains in employment were noted primarily in: (1) educational services (2) transportation and warehousing (3) finance, insurance, real estate, rental and leasing and (4) health care and social assistance. Meanwhile, losses in employment were noted in (1) professional, scientific and technical services (2) wholesale and retail trade, (3) natural resources, and (4) public administration.

The Bank of Canada’s (BoC) bond rate, as of December 2024, was 3.29%, increasing by 28 basis points compared to the previous quarter's 3.01%. As the annual inflation rate hit the Bank’s 2% target in August, it continued to lower interest rates, with the first 50-basis point cut in December, bringing it down to 3.25%, indicating concerns about Canada’s slowing economic growth. The average OCR for the four benchmark asset classes was primarily down, except for Tier I regional mall, which increased by 10 basis points compared to the previous quarter.

Figure 1 - Canadian markets - OCR trends for four benchmark asset classes

Commercial investment activity 

In 2024, the Canadian commercial real estate market has been sluggish, with approximately $50.5 billion in dollar volume transacted, a nearly 8% decrease compared to last year. While activity from a few capital-rich investors looking to get ahead of the inevitable pickup in the market was observed, the residual effects of elevated interest rates and a persistent bid-ask gap between buyers and sellers have had most investors adopt the wait-and-see approach for more favourable conditions forecasted in 2025.

In the fourth quarter, Toronto, Vancouver, and Edmonton were the top three preferred markets by investors across all asset classes, respectively. Moreover, the location barometer has reported a mostly negative momentum ratio (percentage of investors looking to buy/percentage of investors looking to sell) across all markets.

Figure 2 - Location barometer - All available products (Q4 2024)

In the fourth quarter of 2024, investors' top three preferred property types were food-anchored retail strip, suburban multiple-unit residential, and multi-tenant industrial, respectively (Figure 3). Retail centres with grocery or big box store anchors continued to be thriving investment opportunities in response to the changing consumer behaviour. Moreover, Tier I regional malls and downtown Class “AA” offices have begun to attract the attention of investors in the latter half of 2024.

Figure 3 - Property type barometer - All available products (Q4 2024)

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

1. Multi-tenant Industrial in Montreal

2. Suburban Multiple Unit Residential in Montreal

3. Food-anchored Retail Strip in Toronto

 The 15 least preferred combinations largely revolved around Class-B office and office land assets.

Figure 4 - Product/Market barometer - All available products (Q4 2024) – Top 15 preferred/least preferred

Market highlights for the quarter include:

• Cap rates for suburban multiple unit residential decreased to 4.60%. The suburban multiple-unit residential cap rate decreased by eight basis points quarter-over-quarter. Cap rates across all markets were mixed. Edmonton and Montreal remained unchanged. Vancouver and Toronto reported increases, while Calgary, Ottawa, Quebec City and Halifax reported decreases.

• Cap rates for single-tenant industrial decreased slightly to 5.85%. The national industrial availability rate flattened at 6.3% as conditions eased due to a short-term oversupply. Cap rates across all markets were primarily down. Edmonton remained unchanged. Calgary and Ottawa reported increases, while Vancouver, Toronto, Montreal, Quebec City, and Halifax reported decreases.

• Downtown Class “AA” office cap rates decreased slightly to 6.68%. The national office availability rate decreased by 60 basis points to 17.5% quarter-over-quarter. Cap rates across all markets were primarily up. Toronto and Halifax remained unchanged. Vancouver, Edmonton, Calgary, and Quebec City reported increases, while Ottawa and Montreal reported decreases.

• Tier I regional mall cap rates increased to 6.38%. The Tier I regional mall was the only product type to report an increase in cap rate, with a 10 basis point increase quarter-over-quarter. Cap rates across all markets were split between increases and unchanged. Vancouver, Edmonton, and Calgary remained unchanged. Toronto, Ottawa, and Halifax reported increases, while Montreal and Quebec City reported decreases.

Barometer highlights

• Of the 128 combinations of products and markets covered in the Investment Trends Survey:

  • 60 had a “positive” momentum ratio (i.e., a higher percentage of respondents said they were more likely to be a buyer than a seller in that particular segment), up 9 from what was reported in Q3 2024; 68 had a “negative” momentum ratio, down 9 from what was reported in Q3 2024.

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

• Calgary – Multi-tenant industrial, Suburban multiple unit residential, and Food-anchored retail strip

• Toronto – Food-anchored retail strip

• Ottawa – Food-anchored retail strip, Suburban multiple unit residential, Multi-tenant industrial and Single-tenant industrial

• Edmonton – Food-anchored retail strip and Multi-tenant industrial

• Halifax – Suburban multiple unit residential

• Vancouver – Food-anchored retail strip

• Montreal – Multi-tenant industrial, Suburban multiple unit residential, and Food-anchored retail strip

Conclusion

Looking ahead, while geopolitical and economic uncertainty still weighs on the market outlook for 2025, additional interest rate relief will aid further market recovery. By the end of the fourth quarter, investors who had been on the sidelines regained a sense of cautious optimism and took advantage of the lower borrowing costs as momentum picked up after a sluggish summer and fall period.

View the Canadian CRE investment trends for Q3 2024 

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 on investor preferences and valuation parameters for 32 asset classes in Canada’s eight largest markets.

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