Canadian CRE investment trends – Q1 2025

Canadian commercial real estate investors hold steady amid stability in cap rates and uncertainty in trade

The first quarter of 2025 revealed a Canadian real estate market navigating a landscape shaped by changing monetary policy and international trade dynamics. According to Altus Group’s latest Canadian Investment Trends Survey (ITS) results, the Overall Capitalization Rate (OCR) for the four benchmark asset classes remained largely stable at 5.87% (Figure 1). This stability in cap rates reflected the ongoing influence of previously elevated interest rates and the persistent bid-ask gap between buyer and seller pricing expectations. Investors' prevailing sentiment appeared cautious, awaiting greater clarity on future interest rate movements and the broader political and economic outlook.

The Bank of Canada’s (BoC) continued easing of monetary policy contributed to this cautious stance. As of March 12, 2025, the BoC had implemented its seventh consecutive overnight rate reduction since June 2024, bringing the rate down to 2.75%. This ongoing easing signalled the BoC’s growing concerns about the potential negative impacts of escalating US trade tensions on the Canadian economy. The central bank aimed to reduce the risk of a significant economic slowdown and manage potential inflationary pressures arising from disrupted supply chains and higher import costs.

Further underscoring these economic concerns was the February 2025 Canadian International Merchandise Trade data released by Statistics Canada. These figures showed a 5.5% decrease in merchandise exports and a 0.8% increase in imports, resulting in Canada’s trade balance with the world shifting from a $3.7 billion surplus to a $1.5 billion deficit compared to the previous month. This shift indicated potential headwinds for specific sectors of the Canadian commercial real estate market. The first decline in exports after four consecutive months, potentially driven by uncertainty surrounding tariff threats from the US, a vital trading partner, was a notable development. The significant contractions in energy exports (-6.3%) and motor vehicles and parts (-8.8%) could have repercussions for demand in industrial and logistics spaces in resource-rich regions and automotive-centric areas like Alberta and Ontario, respectively.

While the immediate impact of a single month’s trade data on the extensive commercial real estate landscape was likely lagged and multi-faceted, sustained negative trends in exports could eventually lead to reduced business investment, slower economic growth and, consequently, a softening demand for office, retail and industrial spaces. Conversely, increased imports might have suggested strong domestic consumption, potentially benefiting the retail and industrial sectors. However, the overall health of the economy and regional variances would ultimately determine the net effect on occupancy rates and investment volumes across these asset classes.

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

Canadian commercial investment activity

Canada’s commercial real estate investment volume saw a slight 1% year-over-year decline in 2024, totalling $53 billion. This moderation stemmed from a confluence of macroeconomic pressures, notably elevated interest rates that increased borrowing costs, persistently high construction expenses eroding project profitability, and a pronounced skilled labour shortage impacting development timelines. Furthermore, a widening bid-ask gap between buyers and sellers, driven by divergent expectations on asset valuations in a shifting market, contributed to the market slowdown. Consequently, a substantial portion of investors adopted a “wait-and-see” approach, delaying investment activities. This hesitancy extended into early 2025, exacerbating investor caution amidst ongoing economic uncertainty.

In the first quarter of 2025, Vancouver, Halifax, and Edmonton emerged as the top three markets (Figure 2) attracting investors' interest across all asset classes, reflecting their perceived stability and long-term growth. However, while a mixed trend was observed across the major markets’ momentum ratio, revealing a notably higher percentage of investors expressing intent to buy versus sell, the previously established bid-ask gap suggests that this buyer interest may not readily translate into increased investment activity.

Figure 2: Location barometer - All available products (Q1 2025)

The Canadian commercial real estate market in the first quarter of 2025 saw investors maintaining a preference for stable, low-risk assets.

• Food-anchored retail strips topped the list of the most sought-after property types (Figure 3), continuing a trend established in 2024. This enduring appeal reflects the ongoing emphasis of Canadian consumers on essential goods and services, making tenants in these centres, such as grocery stores and general merchandise retailers, relatively resilient to economic fluctuations.

• The strong interest in suburban multiple-unit residential properties suggests a response to the ongoing demand for rental options outside major urban areas, influenced by affordability and lifestyle considerations.

• Multi-tenant industrial properties also remained attractive, supported by their diversified tenant base and the expanding e-commerce and logistics sectors. However, the potential headwinds from developing trade tensions and increased industrial availability warrant monitoring, as demand may waver for industrial spaces.

The consistent preference for these property types in early 2025 underscores a cautious yet strategic approach by investors, prioritizing assets with stable income streams and strong underlying demand in the current economic climate.

Figure 3: Property type barometer - All available products (Q1 2025)

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

1. Food-anchored retail strip in Vancouver

2. Food-anchored retail strip in Calgary

3. Food-anchored retail strip in Montreal

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

Figure 4: Product/Market barometer - All available products (Q1 2025) – Top 15 preferred/least preferred

Market highlights for the quarter

• Cap rates for Suburban Multiple Unit Residential increased to 4.65%. The suburban multiple-unit residential cap rate increased by 5 basis points quarter-over-quarter. Cap rates across all markets were mixed: Vancouver and Montreal remained unchanged; Edmonton, Calgary, and Ottawa reported increases; while Toronto, Quebec City, and Halifax reported decreases.

• Cap rates for Single-Tenant Industrial increased to 5.93%. The national industrial availability rate decreased to 5.9% as national absorption has returned to positive territory for two consecutive quarters. Cap rates across all markets were mixed: Toronto and Montreal remained unchanged; Vancouver, Quebec City, and Halifax reported increases; Edmonton, Calgary, and Ottawa reported decreases.

• Downtown Class “AA” Office cap rates decreased slightly to 6.65%. The national office availability rate decreased by 2 percentage points to 17.1% quarter-over-quarter. Cap rates across all markets were mixed: Vancouver and Quebec City remained unchanged. Calgary, Ottawa, and Montreal reported increases; Edmonton, Toronto, and Halifax reported decreases.

• Tier I Regional Mall cap rates decreased to 6.26%. The Tier I Regional Mall recorded a 12-basis point decrease quarter-over-quarter. Cap rates across all markets were primarily down: Edmonton, Calgary, Toronto, Ottawa, Montreal, and Halifax reported decreases; Vancouver and Quebec City reported increases.

Barometer highlights

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

  • 66 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 6 from what was reported in Q4 2024; 62 had a “negative” momentum ratio, down 6 from what was reported in Q4 2024.

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

  • Calgary – Food Anchored Retail Strip, Multiple-Tenant Industrial, Single-Tenant Industrial, and Suburban Multiple Unit Residential

  • Toronto – Suburban Multiple Unit Residential

  • Ottawa – Food Anchored Retail Strip, Suburban Multiple Unit Residential, and Multiple-Tenant Industrial

  • Edmonton – Food Anchored Retail Strip and Suburban Multiple Unit Residential

  • Halifax – Suburban Multiple Unit Residential, Food Anchored Retail Strip, and Multi-tenant Industrial

  • Vancouver – Food Anchored Retail Strip

  • Montreal – Food Anchored Retail Strip

Conclusion

In summary, the prevailing economic uncertainty, compounded by an evolving political landscape, prompted investors to adopt a more cautious approach to capital deployment in the first quarter of 2025.

View the Canadian CRE investment trends for Q4 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 into investor preferences and valuation parameters for 32 asset classes in Canada’s eight largest markets.

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