Institutional investors garnered anemic returns from their Canadian commercial real estate holdings in 2025. Newly released results from the MSCI REALPAC Canada Property Index peg the all-asset average total return at 1.3 per cent across 50 portfolios collectively valued at roughly CAD $160 billion. The average total return on 2,171 standing investments came in at 2.1 per cent, based on 4.9 per cent income return against a 2.7 per cent decline in capital value.
Canadian returns in 2024 were middling in the pack of countries represented in MSCI’s global property index, but are near the bottom for 2025 — likely ahead of only Luxembourg once the fourth quarter numbers are firmed up for many of the countries where MSCI produces indices. That’s also in a year when equities and bonds made significantly better gains.
“Canadian real estate is one of the worst performing markets globally, sorry to say,” Peter Koitsopoulos, MSCI’s vice president, real estate client coverage, told the gathering on hand in Toronto last week for the release of the index results.
Underperformance relative to the global benchmark is attributed to geopolitical and interest rate uncertainty, and the slower readjustment of values compared to countries where write-downs occurred earlier in the decade and recovery is now underway. This was the fourth consecutive year of shrinking capital value for the index’s standing assets, following declines of 2.9 per cent in 2022, 4.6 per cent in 2023 and 1.6 per cent in 2024. (Prior to that, the index had registered negative capital growth just three times in the 21st century, in 2008, 2009 and 2020.)
“In many cases, what we did see when properties would sell, they sold below book value in our index,” Koitsopoulos reported. “Canada has been in a market where we’ve been taking slower write-downs over a prolonged period of time.”
“We were expecting a year, maybe two, but we weren’t expecting another year of repricing so that was kind of surprising,” acknowledged Tamara Lawson, chief financial officer with QuadReal Property Group, who participated in an industry executive panel tasked with providing on-the-spot feedback on the results. “Canada has lagged in terms of repricing because our market is typically a more stable market globally. The thinking had generally been that repricing wouldn’t continue into this last year and we’d see better returns overall.”
Nevertheless, MSCI analysts and industry insiders found some upbeat elements in the results. Notably, office rebounded into positive territory, largely on the strength of income return. A 2.1 per cent average total return positioned it as the second best performer among the four main property types — trailing industrial’s 2.9 per cent total return, but ahead of retail at 1.9 per cent and multifamily residential at 1.4 per cent.
Among regional markets, Koitsopoulos identified Toronto’s “office-heavy” profile as a differentiator in surpassing Montreal’s performance, while his colleague, Jim Costello, MSCI’s chief economist, noted the office sector’s contribution to the overall 4 per cent year-over-year increase in transaction volume.
“That’s not the most fantastic growth, but growth is growth. There has been a little bit every year since the collapse following the low interest rate environment of 2022,” Costello said. “The office sector and retail had better growth than industrial and the apartment sector. Those sectors were quite negative for a time, so I view that as a bit of a positive.”
Koitsopoulos connected that trend to a steady nudging up in income return. “The yields that someone can get in terms of buying commercial real estate have improved. That does bring back activity to the market and that’s a very important story,” he submitted.
Looking for alpha
Market observers also see lurking potential for select assets to make outsized value gains in the future. A wide divergence in the performance of property sectors — illustrated in remarkable industrial returns as office dove downward — has now tightened again, and there’s no easy advantage to be found in overloading a portfolio with any one asset type. Costello advised portfolio managers to cast off the lingering mindset about “hot” sectors.
“It becomes sort of a psychological thing, knowing that money was made from being overweight in this particular sector. People get stuck thinking that’s the winning game plan and they’ve got to find the right sector to fit the plan,” he warned.
However, the conditions that spurred soaring industrial returns were a historical quirk arising from a fundamental shift in the way consumers and retailers meet in the marketplace, not a continuing trajectory.
“E-commerce sales were growing by 20 per cent a year up until the pandemic and then it just surged when everyone was stuck on their couches and shopping online, but there comes a time when e-commerce sales will just be growing like any other component of retail,” Costello said. “If you’re making an investment with the expectation of double-digit growth, you’re not going to have the same kind of demand behind you.”
Industry panellists concurred they’re spotting for spectacular gains at a niche, not a macro level. For Scott Gordon, head of asset management with Manulife Investment Management, that means looking beyond trophy assets and outside primary markets for properties where strategic investment and savvy management could significantly boost value. He suggests Halifax, Winnipeg and Edmonton and Class B office inventory could be good places to search.
“One of the themes that we’re really spending a lot of time looking at is: where do you find alpha in Canada? How do you outperform?” Gordon affirmed. “If you’re in a primary market, yes, you’re in a stable economy, but it’s hard to outperform.”
Ugo Bizzarri, chief executive officer of Hazelview Investments suggests capital has a similar quest, creating pressure for funds to buy, operate and sell accordingly. “If anyone says raising capital is easy today, they’re lying, but the question is not about the availability of capital, it is what does capital want? Capital wants alpha today. It’s not just getting core asset returns,” he asserted.
Weakened values signal it’s a good time to buy. Bizzarri expressed confidence in: small-bay industrial properties with opportunities for rent growth on turnover; existing multifamily; and new multifamily development that can tap into attractive federal financing and lower construction costs (as condominium building fizzles) and be ready to lease up in what he anticipates will be a favourable market for landlords four to five years from now. Optimal operations and disposition complete the formula.
“Waiting for 20 years to sell an asset, that’s not effective. You’ve got to sell after four or five years or else you’re just going to ride back down the cycle,” Bizzarri said. “To have more alpha in the system, you have to be more of a trader. If you think you have maximized the value of a particular asset, then you should sell it.”
