Toronto commercial market update - Q2 2025

In the first half of 2025, commercial investment in the Greater Toronto Area contracted amidst economic headwinds, down 22% year-over-year

The Greater Toronto Area (GTA) commercial real estate market experienced a pronounced decline in investment activity in the first half of 2025, with the total dollar volume transacted reaching nearly $7.2 billion (Figure 1). This figure represented a 22% decrease compared to the corresponding period in the preceding year, thereby underscoring a significant shift in market dynamics.

Figure 1 - Greater Toronto Area property transactions- All sectors by year

A primary driver contributing to this seemingly subdued activity was the now-cancelled increase in the capital gains inclusion rate, originally proposed to take effect on June 25, 2024. This impending change prompted investors to finalize deals ahead of its anticipated implementation, contributing to a significant increase in nationwide investment volume during the second quarter of 2024, despite a generally sluggish market at the time. Consequently, this reactive surge created an anomalous spike in Q2 2024 data, making the subsequent 22% decline in the first half of 2025 appear more pronounced when compared year-over-year, as the earlier period’s volume was not indicative of underlying market strength.

Another key factor was amplified investor uncertainty, predominantly stemming from a perceived deterioration of Canada’s economic outlook. This uncertainty was largely attributable to geopolitical tensions with the United States. Consequently, the Bank of Canada (BoC) maintained interest rates at 2.75%, a decision influenced by the unpredictable nature of projected tariff policies from the Trump administration. Furthermore, shifts in immigration policy and stagnant employment growth further dimmed the demand outlook. These cumulative factors prompted investors to adopt a more strategic and cautious approach to capital deployment.

In response, a considerable number of investors adopted a “wait-and-see” stance, opting to postpone major investment decisions until greater clarity emerged in the economic and political landscape. Other investors reallocated their portfolios, redirecting their focus toward more resilient asset classes perceived as less susceptible to market fluctuations. Additionally, another segment of investors actively pursued opportunities in more affordable regions, thereby diversifying their holdings away from the historically higher-priced GTA market in pursuit of better value and mitigated risk. Despite the broader economic caution, the latest Altus Group Investment Trends Survey (ITS) revealed a significant shift in investor preferences. The GTA recovered to third position in investors’ market preference, up from fifth place in the previous quarter.

Retail investment activity

The retail sector in the GTA remained relatively stable in the first half of 2025, with $1.3 billion in dollar volume transacted. This represented a 5% year-over-year increase, indicating a modest start to the year for the sector. This growth was primarily concentrated in the first quarter of 2025. However, transaction activity began to taper off by the second quarter, with a 55% quarter-over-quarter decline primarily due to escalating trade tensions between the US and Canada. These tensions impacted consumer demand and disrupted supply chains, leading to a deceleration in consumer confidence. This hesitancy subsequently manifested as a slowdown in transactions for retail properties.

A major development poised to significantly impact shopping centres across the GTA was the closure of all Hudson’s Bay department stores nationwide. This historic departure created a substantial amount of vacant anchor space in numerous shopping centres. Given the extremely limited pool of tenants capable of absorbing such large-format units, landlords will be compelled to undertake innovative redevelopment and revitalization strategies for their properties. This situation mirrors the industry’s response to previous major anchor tenant exits, where property owners successfully reimagined and diversified their retail offerings, often incorporating experiential elements, mixed-use components, or a curated selection of smaller, more specialized retailers to attract new customers and drive foot traffic. The ability of landlords to adapt swiftly and creatively will be paramount in mitigating the profound impact of these significant vacancies and ensuring the continued vibrancy of these key retail hubs.

Industrial investment activity

The GTA’s industrial sector encountered significant headwinds by the end of the second quarter, experiencing a contraction in dollar volume, recording nearly $2.6 billion. This represented a 13% year-over-year decrease, reflecting a notable shift in market conditions. Investor confidence softened amidst a challenging economic climate, as the broader Canadian economy grappled with the disruptive impact of recently imposed tariffs by the United States, further compounded by an observable weakening of domestic economic conditions.

Following two consecutive quarters of positive absorption, the industrial market in the GTA reversed course, returning to negative territory during the second quarter of 2025. This signified an ongoing rebalancing of supply and demand within the sector at what appeared to be an unpredictable juncture. Supporting this trend, the latest Canadian industrial market update from Altus Group reported that Toronto’s industrial availability rate rose by 40 basis points year-over-year, reaching 4.9%.

During the quarter, the GTA added an estimated 2.2 million square feet of new industrial supply. Notably, 67% of this newly delivered space remained available for lease, indicating a pullback in pre-leasing activity and signalling short-term oversupply and waning market demand. Looking ahead, the construction pipeline has moderated with 8.3 million square feet of industrial space under construction. A significant portion of this future supply, approximately 87%, was still available for lease, indicating that the market could continue to experience elevated availability rates as these projects reach completion. A potential rebound in overall industrial demand will largely hinge on the performance of the broader Canadian economy, including key indicators like a clearer direction regarding Canada-U.S. trade policies, retail sales, and employment figures.

Multi-family investment activity

The multi-family sector in the GTA recorded $698 million in dollar volume during the first half of 2025, a figure that remained flat compared to the same period last year. A confluence of factors contributed to this relative stability in transaction volume. Softened broader economic conditions directly impacted investor financing costs and return expectations. Simultaneously, the GTA’s condominium market experienced an observable oversupply, with a substantial influx of new completions. This put downward pressure on prices and rents for new units. The oversaturated condominium market indirectly affected the broader multifamily sector by offering more rental options and, in some cases, shifting buyer preferences away from immediate ownership.

Compounding these dynamics, the persistent housing affordability crisis, while generally supportive of rental demand in the long term, also reshaped the landscape for potential buyers and investors. High ownership costs continued to push a significant portion of the population towards rental housing, yet the sheer volume of new condominium supply created a more challenging environment for landlords, eroding both rental income stability and the prospect of consistent capital appreciation. This increased risk, coupled with higher carrying costs for investors, contributed to a reduction in overall investor confidence and a more cautious approach to acquisitions, as market participants refocused their strategies in response to these evolving supply and demand fundamentals.

Office investment activity

The GTA’s office sector experienced a continued downward trend in investment volume during the first half of 2025. Investment activity was significantly curtailed, resulting in a $510 million decrease in dollar volume transacted, representing a 39% year-over-year decline. This limited activity was predominantly skewed towards Class A office space, as investors continued to prioritize premium assets amidst an evolving market. Class A office transactions accounted for 93 deals, totalling nearly 3.1 million square feet of space, while Class B office space comprised only 20 transactions, totalling nearly 462,000 square feet.

This preference for high-quality space also influenced market dynamics beyond investment, impacting absorption rates. After two consecutive quarters demonstrating positive absorption, the office sector within the GTA experienced a reversal in the second quarter of 2025, returning to negative absorption. This shift occurred as new supply entered the market, outstripping the already limited demand. Despite the negative absorption in the quarter, Toronto’s overall office availability rate, according to Altus Group’s latest Canadian office market update, decreased by 50 basis points year-over-year to 18.3%, suggesting that while demand for new space was soft, some existing vacancies were still being absorbed over the longer term.

On the development front, the second quarter saw the completion of two new office projects, collectively adding 527,657 square feet to the market. Notably, 38% of this newly delivered space remained available for lease upon completion, indicating a cautious approach to new commitments from tenants. Looking ahead, the GTA still had over 2 million square feet of office space under construction. Of this future supply, 42% was available for lease, suggesting continued, albeit selective, demand for new, modern office accommodations, particularly those designed to meet evolving tenant requirements for collaboration, technology, and employee well-being. The market continued to grapple with balancing new supply against broader shifts in office utilization.

Land investment activity

The land sector in the GTA, encompassing both residential and ICI land, experienced a significant contraction in the first half of 2025. The total transaction volume for this period reached nearly $1.8 billion, marking a substantial 38% decrease compared to the same period last year. A closer examination revealed that the residential land sector bore the brunt of this downturn, with transaction volumes totalling nearly $1.1 billion, representing a considerable 44% year-over-year decrease. Similarly, the ICI land sector also experienced a notable decline, recording $769 million in dollar volume transacted, a 27% decrease compared to the first half of the previous year. This indicated a broader hesitation in commercial and industrial development plans.

This persistent slowdown in land sales, a trend that began in 2024 and extended into the current year, was primarily attributable to developers in the GTA postponing commitments to new projects. This cautious approach stemmed from their close monitoring of prevailing market conditions, which were significantly influenced by economic uncertainties and evolving demand forecasts. A key contributing factor to this hesitation was Canada's response to US tariffs on Canadian goods, which created ripple effects across various sectors, including the cost of construction materials and broader economic confidence. The decision to defer new acquisitions and developments reflected a strategic re-evaluation in response to these challenging market conditions and the heightened risk associated with long-term investments.

The trend of dwindling land sales and a contracting construction pipeline carried significant long-term implications for the GTA’s real estate landscape. This reduction in new development could lead to pent-up demand for both housing and commercial spaces. Ultimately, this could constrain future supply in both residential and commercial sectors, worsening housing affordability and limiting options for businesses seeking new premises in the region. The sustained decline in land transactions signalled a critical period of adjustment for the development community and could reshape the future growth trajectory of the GTA.

Figure 2 - Greater Toronto Area property transactions by asset class (2024 vs. 2025)

Notable Toronto property transactions

The following are the notable transactions for the Q2 2025 Toronto commercial real estate market update:

1375, 1383, 1393 North Service Road East – Office

The largest office transaction of the second quarter involved the sale of a portfolio of three single-storey office buildings for $31 million, located at 1375, 1383, and 1393 North Service Road East, totalling approximately 109,106 square feet. Enticor Properties Inc. acquired the property for $285 per square foot. The purchaser indicated an intention to maintain existing tenancies, with leases in place for an additional four years, reflecting a commitment to stability and long-term occupancy.

7634, 7650, 7676, 7686, 7720 Kimbel Street and 2299 Drew Road – Industrial

Crestpoint Real Estate Investments acquired a 395,567 square foot small-bay industrial centre for $120 million, which comprised six buildings and 61 tenants under an average three-year lease term. This was a notable and strategic acquisition, as small-bay industrial spaces are no longer commonly developed and are becoming an increasingly rare asset in the GTA. At the time of sale, the property was 93.3% occupied, with Crestpoint actively marketing the remaining vacant space for lease.

5166 - 5170 Lakeshore Road – Apartment

Homestead Land Holdings acquired this multifamily property for $92.5 million, marking the largest apartment transaction of the quarter. The acquisition includes two 10-storey apartment buildings, collectively totalling 203 units across 5.67 acres of land. With a portfolio spanning over 26,000 rental units across more than 20 cities, this purchase represented one of the most significant multifamily acquisitions of the quarter for Homestead Land Holdings, further expanding its presence in the region.

1500 Conlin Road – Residential Land – Residential Land

Representing the largest residential land transaction of the second quarter, Minto Group acquired a 106-acre site at 1500 Conlin Road East for $100 million. This transaction is a key component of the City of Oshawa’s broader development plan to deliver 23,000 new homes by 2031. The proposed development for this site includes approximately 612 residential units, comprising 370 single detached homes, 170 block townhomes, and 72 street townhomes, thereby contributing significantly to Oshawa’s provincial housing target.

Figure 3 - Greater Toronto Area OCR trends across 4 benchmark asset classes

Conclusion

The first half of 2025 presented a challenging environment for the GTA’s commercial real estate market, marked by a pronounced decline in overall investment activity. This downturn was largely driven by amplified investor uncertainty, broader macroeconomic headwinds and the effects of the now-cancelled capital gains inclusion rate increase, which had pulled forward transactions into early 2024.

Looking ahead to the second half of 2025, the GTA will be navigating an intricate interplay of economic forces and evolving regional market dynamics. The anticipation of potential interest rate adjustments by the BoC, influenced by both domestic conditions and the unpredictable nature of U.S. tariff policies, will be a critical determinant of investor sentiment and financing costs across all sectors. The persistent “flight to quality” trend is expected to continue driving demand for premium assets. Furthermore, the retail sector’s ability to innovate and repurpose large-format vacancies, along with a rebalancing of supply and demand in the industrial market dependent on broader economic recovery and trade policy clarity, will be crucial for recovery.

Ultimately, success for market participants in the coming months will hinge on strategic agility and a nuanced understanding of these evolving conditions. While underlying demographic growth provides long-term support, particularly for the multifamily sector, the immediate focus for investors and developers will be on capital deployment, pursuing value-add opportunities and assessing risk in a landscape still marked by uncertainty. Balancing new supply with shifting demand outlooks across all asset classes will remain a central challenge, shaping the future growth and resilience of the GTA’s commercial real estate market.

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