Canadian CRE valuation analysis - Q2 2025

Altus Group’s Q2 analysis shows retail leads in value gains

Some of the initial volatility following US President Trump’s April 2 “Liberation Day” announcement on tariffs has settled, along with de-escalation around retaliatory tariffs. However, there is still an overhang of uncertainty that is weighing on transaction volume and decision-making more broadly.

“We’re continuing to see the impact of tariffs play out, and because of the uncertainty, investors are doing more diligence on underwriting of deals with greater scrutiny on rent growth,” says Robert Santilli, Altus Group’s Director of Valuation Advisory, Canada.

The red line in Figure 1 shows the quarterly value change of Altus Group’s valuation dataset. The bars represent the relative contribution to overall change from office, retail, industrial and retail sectors.

Figure 1 - All assets value change

Inflation is starting to show up in the numbers, rising 20 basis points to 1.9% in June. The concern is that some of the inflation effects have been delayed, in part because of the pull-forward effect with increased inventories and consumers that were buying to get ahead of potential price increases.

A big driver for real estate moving forward is whether the resurgence of inflation causes the Bank of Canada to pause on additional rate cuts. “Higher cost of capital will continue to be a headwind to real estate values as the expectation of rate cuts and lower cost of capital is a catalyst to increase transaction activity,” says Santilli. The 10-year GOC bond was hovering at 3.50 at the end of July, as bond yields moved higher during the second quarter.

“One thing that’s interesting to note with the recent run-up in bonds is that the spread on some real estate valuations is now lower than it was pre-COVID,” says Santilli. Bond yields are moving higher due to inflation concerns, resulting in lower real estate spreads for discount rates and cap rates. Looking at discount rate spreads compared to the 10-year GOC, the spread is lowest for retail at 393 bps, followed by 420 bps for industrial, and 470 bps for office.

Figure 2 - Discount rate spreads versus 10-Year GOC Bond

Slowing pace of investment sales

Despite a carryover in sales activity from year-end 2024 that propelled an increase in sales activity in Q1, momentum slowed during Q2. The expectation is that volume will remain subdued during the second half of the year. Transactions are still occurring, and both sellers and buyers remain active across major metros. Toronto was the clear leader in Q1 transaction volume with $3.6 billion in total sales.

Industrial and apartments remain the top two categories by sales volume, which is a reflection of what’s available to buy. Retail and food-anchored retail centres are the most sought after by investors, but existing owners are reluctant to sell or are holding out for premium prices. “What investors want to buy isn’t showing up in the data because of a lack of for-sale retail product, but retail, industrial, and multifamily are all the main property types that people want to buy,” says Ray Wong, Altus Group’s Vice President of Data Solutions. According to Altus Group’s Q2 Investment Trends Survey, cap rates remained relatively flat in Q2, which is due in part to the uncertainty and more limited transaction volume.

Figure 3 - Transactions by Property Type

Analyzing CRE valuation trends across property types

Supply-demand dynamics, along with uncertainty surrounding the outlook for macroeconomic conditions, are influencing transaction activity and near-term trends in property valuations. Food-anchored retail centres, and top enclosed malls are exhibiting strong fundamentals, while rent growth has been relatively flat in both industrial and multifamily. During periods of uncertainty there is always a flight to quality and bifurcation across property sectors, which is especially evident in office. Office fundamentals continue to stabilize, with best-in-class AA assets that are seeing rent growth as weaker properties continue to struggle.

Figure 4 shows quarterly value change for each sector. The blue bars represent how much the appreciation was influenced by cash flow changes, and the orange bars represent how much change resulted from changing pricing expectations.

Figure 4 - Property valuation

Retail

Good quality retail assets performed well in the second quarter with rent growth and strong demand from investors. Valuations increased 0.2% over Q1 and are up 3.2% on a YoY basis. Greater Montreal posted the biggest YoY gains at over 9.0%, followed by Metro Vancouver at 4.2%, and Greater Toronto at 3.9%. Calgary was the outlier with values that declined -1.1%.

The sector is benefiting from virtually no new construction. “There hasn’t been a lot of movement in rents over the last couple of years, but we’re getting to a point now where rent growth is occurring because of the lack of supply for good quality retail assets,” says Santilli. Food-anchored retail is the strongest category, while enclosed malls remain highly bifurcated. The premier malls are outperforming, while B malls continue to face challenges and value erosion. Pen Centre recently sold in the Niagara Region in Ontario, sold for $127 per square foot to a buyer seeing value in mixed use redevelopment.

Industrial

Industrial valuations have remained relatively flat on both a QoQ and YoY basis. Valuations rose a slight 0.05% compared to Q1 with a slight decrease on a YoY basis of -0.2%. Edmonton was the leader in valuation growth over the past 12 months at 2.3%, while both Greater Montreal and Greater Toronto saw a decline in values, at -1.3% and -1.2% respectively.

Industrial fundamentals during Q1 were supported somewhat by retailers and other companies that were taking on more inventory to buffer potential cost increases from looming tariffs. “During second quarter we saw higher TI inducements and rents moving lower, which is providing a drag on industrial values,” says Santilli.

The amount of sublet space as a percentage of available space also began increasing in second quarter, especially in Toronto, southwestern Ontario and Calgary. “What we’re seeing is a bit more softening on the industrial despite new supply that is at a near standstill,” adds Wong.

Office

Office valuations fell another 0.54% compared to Q1 and dropped -3.27% on a YoY basis. Ottawa reported the biggest decline at -9.9% YoY, followed by Edmonton at -5.8% and Calgary down -4.3%. Office remains highly bifurcated with values on AA assets holding better than B and C properties.

Despite persistent challenges, a few green shoots are emerging. Leasing activity in 2024 was very similar to 2019, and companies are mandating that workers come back to the office. “Office has seen a slight bounce off the bottom with some increases in rents in high-quality space, while the A-, B and C space continues to drag on the overall market,” says Wong. Another positive for the office market is that the volume of available sublease space is declining.

Multifamily

Multifamily values are holding firm in the midst of softening rent growth. Valuations inched 0.12% higher compared to Q1 and climbed 0.9% on a YoY basis. However, a closer look at major metros shows some bigger positive changes. In Alberta, Calgary values increased 5.5% and Edmonton values increased 6.8%, followed by Montreal at 4.3%, and Vancouver at 2.0%. Greater Toronto posted a decline in valuations of -1.7%.

Toronto and Vancouver have experienced the biggest headwind from slowing rental rate expectations and increasing incentives, whereas more affordable markets have experienced less pressure on rents over the last 12 months.

Property valuation outlook

The commercial real estate market is continuing to navigate through an unusual period of uncertainty where there is heightened risk because of tariffs and residual impacts on inflation and monetary policy that could result in higher capital costs for borrowers. One positive in the CRE market is that, while there may be slowing economic growth, the consensus from economists is that recession risk is lessening. “If we do go into a recession, it likely will be short and more of a technical recession,” says Wong. “The challenge right now is, technical or not, consumers are spending less and they’re also afraid of losing their jobs.”

The current blanket of uncertainty is slowing investment activity, and decision-making generally from consumers and tenants. That hesitation could continue to slow investment sales activity in the second half of the year. If the Bank of Canada sustains a pause on interest rate cuts, the higher interest rates could create some pain points for some owners with maturing debt. Another key positive is that, despite some softening in fundamentals, valuations in most sectors are generally holding up well under macro pressures.

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