Five Canadian CRE investment trends to watch in 2025

Canada’s commercial real estate investors are reshuffling their preferences. Once-dismissed asset classes are making a comeback, while former favorites are losing momentum.

What’s driving these shifts, and what do they mean for the future of Canadian real estate? Read on to learn about five Canadian commercial real estate investment trends that may surprise you.

1. Retail comes roaring back

Investors have become bullish on Canadian retail, a remarkable resurgence for an asset class that suffered scorn during the pandemic – and was declared all-but-dead for many years prior.

As Canadian consumers have returned to stores, hungry for the touch-and-feel aspect of the shopping experience, investors too are looking with renewed interest at the asset class. Many interested investors are finding that prime retail assets are hard to snag. Why? First, the construction of new retail buildings was muted for over a decade, leading to a shortage of assets available for sale. Secondly, rising demand from retailers seeking to expand has increased lease rates by as much as 15% in some markets. These compounding factors are fueling a run-up in prices.

The winners of the retail boom are grocery-anchored neighborhood shopping centers.

2. Booming industrial starts to settle as markets readjust to norm

Two years of glut added 87 million square feet of new industrial inventory, raising the vacancy rate to 3.6% from 2.4% in 2023, according to Avison Young’s Q4 2024 Canadian industrial market report. But now, industrial fundamentals are becoming more neutral and balanced.

While the market is still tight, there are now options for tenants – at least until the construction pipeline slows. Developers slowed the pace of construction by 40% in 2024, making an oversupply unlikely.

In Edmonton, industrial demand is hardly plateauing at all, as increasing demand for space continues to flow from a diverse group of tenant sectors, including distribution, manufacturing, and building supply groups. The market saw base rental rates increase in the fourth quarter of 2024, up by 10-20% compared to two years ago. Vacancy in the market is dropping towards roughly 3%. With rents increasing and cap rates falling, the past 12 months have been very positive for Edmonton’s industrial landlords.

The City of Edmonton’s population increased by a growth rate of approximately 6.3% as 76,000 new residents flocked in during 2024, attracted to the relatively low cost of living and high-paying jobs. This new growth, coupled with falling interest rates, has created an upward trajectory for industrial property values in Edmonton.

Hundreds of thousands of square feet of new industrial product are expected to be built in Edmonton this year, but it’s likely too early to predict an exact number with global economic uncertainties impacting construction.

Unpredictability is creating risk and leading to indecision – not just in Edmonton. It’s more pronounced in the industrial sector due to its close ties between performance and international trade policy.

3. Investors are ‘office curious’

The tide is turning on investors’ attitudes toward office assets after years of holding the asset class at arm’s length.

Several factors have made the Canadian office sector attractive again. New supply is very constrained in the Toronto suburbs. Many cities across Canada do not have oversupply challenges and are seeing leasable space decline as tenants and redevelopment projects reduce inventory. Because office development across most markets was relatively conservative in preceding years, today's nationwide vacancy rate is under control and on the decline.

Some older office buildings are less attractive for modern tenants but find new life with a change of use to residential. Case in point: change is underway in Montreal’s office market, alleviating pressure on fundamentals. There are 1.7 million square feet in downtown Montreal being analyzed for potential conversion or redevelopment, while 500,000 square feet have already been converted or are being converted.

Notable recent projects in the city include the conversion of 1434 Sainte-Catherine Street West to student housing and the former Standard Life building at 1245 Sherbrooke West to 208 high-end luxury rentals.

Office recovery is not developing uniformly across Canada, however. Unlike other North American markets, work-from-home trends have withstood longer in Quebec and Ontario than in Western provinces, for instance. And as always, investors need to parse the market building by building. One asset might require enormous capital improvements to make the building attractive enough to be re-leased after a major tenant vacates, while another, adjacent to it, might require little outlay. Overall, significant improvements were made to office buildings downtown while workers were still mostly at home.

4. Hotels attract non-traditional investors

An increasing number of non-traditional investors and lenders are considering investments in Canadian hotel assets, attracted by the asset class’s high-yield potential.

What do hotels have in their favor? Their performance is more transparent and predictable thanks to data sources like STR, enabling new market entrants to make more informed investment decisions and removing some uncertainty risk.

While consumer demand for hotel rooms in Toronto is high, the city’s hotel construction industry faces high barriers to entry, resulting in limited investment opportunities.

As a result, yields for Greater Toronto Area hotels remain compressed. Secondary and tertiary markets where hotels are performing well present investors with more options, particularly where deferred capital expenditures create deeper market indexing opportunities on occupancy and average daily rate (ADR).

5. Quebec bucks the trend as multifamily stays strong in Canada’s largest market of rental inventory

While there has been a softening within the multifamily market across the country, Quebec has bucked the trend. In 2024, multifamily investment volumes in Quebec held firm at CAD $3.8 billion, which is in line with 2021 and 2022.

Quebec is home to Canada’s largest rental inventory and is characterized by a culture that supports renting. Tribunal administratif du logement (TAL), the province’s body that resolves disputes between landlords and tenants, recently announced a 5.9% maximum allowable increase in rent for 2025, the highest across Canada.

While most institutional buyers are sitting on the sidelines of the Quebec multifamily market, private investors have stepped in and contributed to the shoring up of pricing. In fact, over 70% of multifamily transactions over CAD $5 million in 2024 involved private investors.

But wait, there’s more…

Overall, amidst market dislocations and geopolitical tensions, the Canadian real estate market remains well-positioned. Financing is available for the right assets at all levels of the capital stack, providing opportunities across various property types. This, coupled with Canada’s strong fundamentals, makes it a resilient and attractive market in which to invest.