Tariff threats bring a new source of hesitation to what had been an expected pickup in commercial real estate investment activity in 2025. Earlier last fall, Canadian industry analysts were welcoming dropping interest rates as harbingers of more amenable financing, willing deal-makers and completed transactions in the coming months, but other unknowns have now been added to the mix.
“While we remain cautiously optimistic, we recognize a degree of risk and uncertainty ahead,” Mark Fieder, Avison Young’s Canadian president, acknowledges in the firm’s newly released overview of investment trends coming out of the fourth quarter of 2024. “Trade policy and tariffs are at the forefront, in addition to the Bank of Canada’s decisions on the policy rate, given the U.S. Fed appears to have become more hawkish on its outlook.”
Cap rates are projected to remain mostly stable this winter for the four predominant asset classes across Canada’s six largest markets — except for downward pressure in Vancouver’s multifamily sector and an upward climb in Montreal’s office sector. As in 2024, private investors are expected to be the most active buyers across all asset types. Grocery-anchored retail, small-bay industrial, data centres, student housing and newer apartment buildings are tapped to be favoured assets.
The spectre of a Canada-U.S. trade war particularly casts shadow on the industrial and retail sectors, while office continues to transition through metamorphic upheaval. On the latter front, Avison Young’s investor survey identifies institutional funds, REITs and financial institutions as the most active sellers, as they jettison underperforming assets, write off losses on property value or realign their portfolio strategy.
“We are now seeing institutional investors looking to divest of high-quality assets, which rarely come to market,” observes Amy Erixon, principal and president of Avison Young investment management. “2025 may well be remembered as the best buying opportunity in Canada in many decades. Cap rates are unlikely to follow interest rates down until several major political risks are firmly in the rear-view mirror.”
Looking at deals worth at least $5 million, Avison Young tallies about $29.9 billion in office, industrial, retail and multifamily transactions across Canada’s six largest urban markets — Toronto, Montreal, Vancouver, Calgary, Ottawa and Edmonton — during 2024. That’s roughly a 6 per cent drop from $31.9 billion worth in 2023.
Private investors were the purchasers in 51 per cent of cases, followed by end-users (28 per cent) institutional investors (14 per cent) and REITs and other public companies (7 per cent). A sizeable majority of trades were for industrial or multifamily properties, with the largest share occurring in Toronto and Montreal.
“Investment volumes picked up significantly in the second half of the year as interest rates started to come down,” notes Mark Sinnett, principal with Avison Young’s capital markets group in Montreal.
Accordingly, Avison Young analysts point to a resurgence of institutional investor activity in the multifamily sector during the summer and fall, following the post-pandemic period in which private investors have been the main buyers. Deal patterns indicate some of the larger players are selling off older, smaller apartment buildings and acquiring newer purpose-built rental, while investor surveys find multifamily purchasers expressing confidence in long-term income generation and asset value appreciation. Sellers’ top motives included cashing in on profit value and portfolio rebalancing, along with a quotient of distressed and court-ordered dispositions.
Benchmark national cap rate are pegged at: 4.35 per cent for urban high-rise; 4.6 per cent for urban low-rise; 4.45 per cent for suburban high-rise; and 4.65 per cent for suburban low-rise. Within markets, cap rates are generally lowest in Toronto and highest in Edmonton and Ottawa. Current average rates are forecast to hold steady everywhere except Vancouver, where lowering rates are anticipated in all four market segments over the course of Q1.
The fundamentals that have elevated multifamily to favoured asset status are not expected to change. In contrast, Avison Young analysts flag potential issues for both industrial and retail.
“Threats of tariffs on Canadian imports pose significant and asymmetric risks to provinces and industries. The most sensitive industries are oil and gas, primary metals, motor vehicles, plastics and aerospace, especially impacting Ontario, Québec, Alberta and New Brunswick,” they advise. “Cost of living and labour market risks are the persistent headwinds on retail activity. The deteriorating Canadian dollar and a potential trade dispute with the U.S. set the stage for inflationary pressures to retail supply chains reliant on imports.”
Institutional investors were characterized as “quieter” on the industrial investment front during 2024, while owner-occupiers were considerably more active than in recent years, accounting for 40 per cent of transactions. Even so, analysts foresee institutional investors will be pursuing “targeted sub-categories” with an emphasis on small-bay and medium-bay newer facilities, storage and data centres.
Coming out of Q4 2024, benchmark cap rates are pegged at 5.95 per cent for new single-tenant facilities and 6.05 per cent for new multi-tenant buildings. Average cap rates are generally lower in Vancouver and Calgary than markets to the east, and are projected to remain relatively static everywhere during the first quarter.
On the retail front, Canada has experienced a shrinking ratio of space per capita throughout this decade related to a slowdown in new construction and surging population growth. For 2025, investor interest is expected to be focused on “non-discretionary” spending, with grocery-anchored retail that offers “long lease terms, stable cash flows and high covenant strength” topping that list. “Investor demand outpaces available supply especially in primary and secondary markets with favourable demographics,” Avison Young analysts report.
Office investors are expected to be likewise focused on particular market niches, although those are not necessarily consistent across Canada. In general, newer Class A assets continue to significantly outperform older Class B and C stock in attracting tenants and generating rental income. However, prospective investors are increasingly investigating the conversion potential of some of those struggling assets.
Benchmark national cap rates demonstrate some of the stratification across the office asset class, ranging from 7.15 per cent for downtown Class A to 8.6 per cent for suburban Class B. That’s even more pronounced within some markets — most conspicuously in Toronto, where the average cap rate for downtown Class A product is 6.5 per cent versus 9 per cent for Class B suburban buildings.
“Our cap rate surveys over the past year have indicated a clear trend of high volatility and wide spreads in cap rates between Canadian markets,” Avison Young analysts affirm. “Each market presents nuances, such as different buyer pools, conversion feasibility, tenant quality and cyclical demand.”
