Commercial real estate is a channel for some of the capital the Canadian government is strategizing to attract via enticements unveiled in the newly released 2025 federal budget. That’s to be targeted through incentives, financial instruments and regulatory adjustments.

“Budget 2025 is a plan to catalyze investments from provinces, territories, municipalities, Indigenous communities and the private sector,” Finance Minister François-Philippe Champagne advised during his Nov. 4 budget address. “With this plan, in five years, we will see one trillion dollars in total investments in this country.”

Measures that could spur contributions from, or activity in, the commercial real estate sector include:

• a $20-billion top-up to annual Canada Mortgage Bond issuance, to be exclusively applied as CMHC-backed debt security for multifamily development;
• $6 billion over 10 years for the private sector stream of the new Build Communities Strong Fund, to support “regionally significant” projects, including large building retrofits and climate resilience initiatives, that involve private sector investment;
• a $10-billion expansion of Canada Infrastructure Bank’s spending allocation, taking it up to $45 billion;
• temporary 100 per cent capital cost allowance (CCA) in the first year for manufacturing and processing buildings acquired after Nov. 4, 2025 and in use by Dec. 31, 2029;
• replacement of statutory limits on federally regulated insurers’ and financial institutions’ ability to invest in commercial loans and real property with promised “more flexible guidance” from the Office of the Superintendent of Financial Institutions (OFSI);
• new flexibility for the First Nations Finance Authority to lend to Indigenous special purpose vehicles to gain equity stakes in economic and resource development projects; and
• promised “new ways to attract” private sector investment in Canadian airports, potentially related to lease extensions, ground lease rent formulas and allowing more economic development activities on airport lands.

There are implications for commercial real estate in the government’s courting of pension funds, reiterated support of sustainable investment guidelines and aspirations for economic growth tied to cleantech, the energy transition and artificial intelligence (AI). The rising profile of data centres in the alternative asset class, robust returns on infrastructure and real estate market bifurcation in favour of high-performance buildings could all complement the government’s ambitions. Evidence that institutional investors — particularly those in Canada, Europe and Asia Pacific — remain committed to ESG (environmental, social, governance) principles could also bode well for the goal of doubling exports to trading partners outside the United States by 2035.

Sustainable investment context

The budget document confirms that Canada is proceeding with plans to implement a voluntary sustainable investment framework, known as a taxonomy, to give financial market participants a standardized means to categorize and verify investment that is compatible with decarbonization targets and does not undermine environmental, social and Indigenous objectives. The previous iteration of the government launched work on the framework and identified buildings as one of six priority sectors for investment.

It’s now expected that an arm’s length, third-party organization with the expertise to fill out the details will be selected before the end of this year. As a next step, the government indicates it will explore the issuance of green and transition bonds aligned with various categories of investment in the taxonomy. There is also a pledge to engage the provinces and territories to work toward standardized climate disclosure metrics that are in sync with international standards.

The budget announces a pending tweak to the Building Canada Act to require that the public register of projects deemed to be of national interest contains information to describe how each of those projects can contribute to clean growth and climate change action. The government has additionally committed to “develop and communicate new metrics to show how companies and households are reducing their carbon footprint, how the clean economy is growing and how exports are tracking to achieve world-leading emissions intensity”.

Many institutional investors are on a similar track. The GRESB global assessment and benchmark of ESG performance of commercial real estate portfolios counts them in roughly 150 investor members that have full access to the data that 2,382 real estate entities and 805 infrastructure entities, worldwide, reported this year. Roxana van den Berg, GRESB’s chief product officer, stresses that this group is focused on long-term strategies and value creation tied to sustainability and resilience.

“We’ve seen some unprecedented shifts in the way that capital allocations work and we’ve seen some bold statements coming from large institutional investors, primarily from Europe, in the way that they choose to allocate capital,” she observes in an online commentary, released earlier this fall in tandem with the 2025 benchmark results. “Institutional investors have a lot of power in defining the dynamics. They’re the ones that innovate a lot, especially in the sustainable finance sector where they’re accessing capital rooted into the idea that sustainable investments are actually here to stay.”

Standardized measurement, verification and disclosure are increasingly in demand as a means to send consistent signals to the market about risk exposure and how sustainable performance translates into value. Notably, Prime Minister Mark Carney played a key role in the genesis of one such framework, through the Task Force on Climate-related Financial Disclosures (TCFD), during his tenure as chair of the international Financial Stability Board.

“Finance and sustainability are merging in terms of accounting. When we talk about physical or transitional risk around decarbonization, we are essentially being forced to understand financial reporting,” Karen Jalon, vice president, sustainability, energy and smart technology, with Cadillac Fairview Corporation, reflected during a panel discussion at the Building Owners and Managers Association (BOMA) of Canada’s annual conference in September. “What we are seeing, too, is the request for data from our direct stakeholders: investors; our co-owners; our owner (Ontario Teachers’ Pension Plan, a GRESB investor member); and tenants.”

Tax perks and incentives

Newly available accelerated capital cost allowance (CCA) for manufacturing and processing buildings, including data centres, adds to the existing slate of CCA-related tax perks for energy-efficient, cleantech and data management equipment announced in recent years. Until now, the annual deduction rate has been 10 per cent if at least 90 per cent of the building area is used for manufacturing/processing purposes, and 4 per cent if more than 10 per cent of the space houses non-manufacturing/processing functions.

As of Nov. 4, 2025, owners who acquire or commission newly constructed manufacturing/processing buildings can claim 100 per cent depreciation on the asset in the first tax year it is operational. Immediate expensing will also be available for expansions and alterations to buildings owned prior to budget day.

In both cases, at least 90 per cent of a building’s area must be used for manufacturing/processing functions to qualify. For acquisitions, taxpayers will not be eligible if they or a non-arm’s length entity previously owned the building or if the property has been transferred to them on a tax-deferred basis.

Full CCA can be claimed for qualifying buildings and expansions that are operational in the tax years from 2025 to 2029. After that, the incentive will be incrementally reduced — allowing for 75 per cent depreciation in 2030 and 2031, and 55 per cent in the 2032 and 2033 tax years.

Other budget measures could potentially flow through to demand for data centres and life sciences facilities. Nearly $926 million over five years has been earmarked to support the development of “large-scale sovereign public AI infrastructure” meant to provide capacity for public and private research. As well, the Business Development Bank of Canada will be allocated $1 billion to launch the Venture and Growth Capital Catalyst Initiative, intended to incentivize pension funds and other institutional investors to augment private venture capital for the technology and life sciences sectors.

Some onlookers express skepticism about institutional investors’ willingness to participate. On stage as a keynote speaker at BOMA Canada’s national conference, David Cohen, the former United States ambassador to Canada, tallied some competitive weaknesses — noting that Canada has the lowest rate of GDP growth and the second highest unemployment rate among G7 nations, and that Canadian pension funds’ domestic asset allocation has dropped from 75 to 80 per cent 20 years ago to about 12 per cent today.

“They’re going to go where the returns are. Canadian pension funds are not going to invest in Canadian assets just because Prime Minister Carney is asking,” Cohen said. “About half of Canadian pension fund assets are now invested in United States assets.”

However, his analysis leaves out other points that the federal budget document highlights. Canada has:

• the lowest marginal effective tax rate (METR) in the G7;
• the lowest debt-to-GDP ratio in the G7; and
• the second lowest deficit-to-GDP ratio in the G7 (after Japan), at 2.2 versus 7.4 in the U.S..

Nor does Cohen’s critique acknowledge the switch to active management strategies, occurring in the early 2000s, that has propelled Canada’s largest pension funds (known as the Maple 8) to be ranked among the world’s 100 largest. In 2023, for example, Canada Pension Plan reported that its fund had grown to $570 billion from $100 billion in 2006 — an increase of 470 per cent over 17 years. In that context, the percentage drop in domestic allocations is far less dramatic than implied.

Investor motivations and complications

Industry insiders participating in a September panel discussion at a NAIOP North American convention in Toronto shared some thoughts on where it could be attractive to invest now. They concurred that institutional investors are likely to take a fairly constrained approach to new commercial real estate development in the near future as they continue to absorb interest rate reverberations and suss out geopolitical uncertainty. At the same time, they’ve become more active on the lending front.

Milos Dajic, head of Canadian investments with Oxford Properties Group, the real estate arm of the Ontario Municipal Employees Retirement System (OMERS) pension plan, recounted how debt gained stature as a business line to balance out slipping values and income in the built portfolio.

“I am certain it was helpful to a lot of portfolios as they were looking around the world at investment opportunities. Credit is going to continue to be a big part of our story. I’d say 50 per cent of our deals right now are going to go into credit,” he said. “It’s not just the income; it’s also how we can gain exposure to sectors that we otherwise don’t invest in. We typically lead with credit as a more structured, safer bet. If and when we get comfortable with that, we may or may not go into the equity.”

“Private credit is, for sure, a rapidly scaling source of funding. The general dynamic that is happening is that capital is consolidating and, inherently, deals will need to get bigger for that consolidated capital to be placed efficiently,” added Michael Brodie, managing director of real estate investment banking with BMO Capital Markets. “There are capacity limits with bank money so there is a need for these private structures.”

Data centres are one example of where Oxford has been an active lender, but has not yet made an equity investment. Although data centres are both integral infrastructure for the kind of economic growth the Canadian government envisions and an asset type identified to hold promise for the commercial real estate sector, panellists enumerated some challenges for prospective investors.

On top of the increasingly arduous logistics of securing adequate energy supply and grid connections, Danny Kaufman, a senior managing director with JLL, noted that there is a miniscule pool of potential purchasers for the “absolute magnitude” of such developments, so investors must look at them as a perpetual vehicle. Illustrative of that point, Brodie gave the example of a recent deal that required $30 billion in financing for one U.S.-based facility.

“The scale is going to limit how many people can actually play in this asset class,” he cautioned.

Other trends could line up with the goal of encouraging infrastructure investment in general. Recent MSCI research points to an average annual rolling return of 11.8 per cent between Q1 2009 and Q1 2025, but finds a greater divergence in performance across the four analyzed asset types — renewable energy, water, airports and public facilities — and from country-to-country. Regulatory regimes and market structures are considered an influential factor in the latter case, along with the differing quotients of each asset type within each country.

“Findings suggest a substantial opportunity for sector-based allocation strategies in infrastructure investing and highlight the importance of using granular data to examine performance and better inform investors making allocation decisions in real assets,” concludes Will Robson, MSCI’s executive director of research.

Meanwhile, investors and asset managers have been salving recent wounds and adjusting their game plans.

“Globally, we all went on that risk curve, chasing total return. When the rate environment flipped on us, overnight seemingly, a lot of that no longer pencils. We were somewhat caught with a portfolio with an oversized development book not producing enough cash flow,” Dajic acknowledged. “Certainly, in the next three to five years, future development acquisitions will probably be highly, highly, highly selective, very much tilted toward income.”

Brodie describes a shift away from large core open-ended funds into a more targeted deployment of capital. Closed-end funds, focused on one asset class and specific regions, are now more prevalent. So, too, are large anchor investors accounting for 30 to 40 per cent of capital raised.

“It’s becoming much more bespoke,” he said. “A lot of money was put out leading up to this rethink, and a lot of lessons were learned by some of these money managers in terms of where putting their money worked and where they were overstretched in some kind of way.”