The trade war marks a sharp setback in what otherwise would have been a better year for Canadian commercial real estate.
Highlights
After rebounding from the pandemic, the industrial segment has returned to more normal activity. Factories and warehouses that were poised to strengthen on cheaper credit and a low-valued currency must now confront a temporary downturn in exports.
The multi-family residential market was recovering on lower mortgage rates, but the trade war has paralyzed buyers. A saturated condo market in the Greater Toronto Area will take time to clear, especially with aggressive immigration curbs. However, the market should recover next year as the economy improves.
The retail property market was gaining traction prior to the trade war but is now expected to regress as the jobless rate rises.
With more companies requiring in-person work, the office segment was starting to heal. Vacancy rates were steadying, albeit at sky-high levels. But expected layoffs and business losses will delay the recovery.
Macro Backdrop
The trade war could tip Canada’s economy into a shallow, two-quarter recession this year, with real GDP contracting by 0.4% on a Q4/Q4 basis. The unemployment rate is expected to rise by one percentage point to 7.7%, before tariff reductions and lower interest rates support a return to moderate 1.8% growth in 2026. Despite some retaliatory tariffs, CPI inflation is expected to remain near the central bank’s 2% target on average. The federal election result did not change our economic forecast. We assumed expansionary fiscal policy would cushion the effect of tariffs, and the incumbent Liberal Party ran on a platform of increased spending, modest personal income tax cuts, and larger deficits. The Bank of Canada is projected to lower rates three more times this year by a total of 75 basis points. The Canadian dollar could weaken modestly to 71.5 U.S. cents by year-end, before strengthening against a softer greenback in 2026.
Industrial
After two years of torrid growth, Canada’s industrial segment has cooled due to an earlier rise in interest rates and, more recently, trade war concerns. Among all segments, industrial is the most vulnerable to trade protectionism. Many industries—such as steel, aluminum, chemicals, machinery, and computers—derive over half their revenue from U.S. sales, with motor vehicles exceeding 90%. National industrial cap rates have normalized and leveled off in 2024 (Chart 1). The availability rate rose from around 1% in 2023 to 5.0% in Q1 (CBRE), still near long-run norms but the highest since 2016 as new supply continues to outrun leasing demand. Construction has slowed, reducing pressure on vacancy rates. Both industrial property prices and rents have softened, led by the three largest markets—Toronto, Montreal, and Vancouver—although some cities are seeing increases. Average asking rental rates fell 3.3% year-over-year in Q1. The industrial segment was poised to recover this year on the back of cheaper credit and a low-valued currency, but the recent slowing will likely persist until the trade war eases. The expected shallow recession should lead to a milder increase in the industrial availability rate than the 3 ppts spike witnessed in the 2008 recession, though some sectors—autos and steel—are at greater risk. Amazon’s warehouse closures in Quebec are an additional blow to the province.
Multifamily
Canada’s housing market was on the mend prior to the trade war. But fear of job losses and lingering affordability issues sent sales tumbling and prices softening in Southwestern Ontario and parts of British Columbia. Meantime, more affordable markets in Quebec, the Prairies and Atlantic Canada are showing more resilience—with sales stabilizing near normal levels and prices scaling new heights in some cities. Residential mortgage delinquency rates are rising but remain below normal.
The high-rise sector is lagging behind the detached market, especially in Southwestern Ontario. Still, rental vacancy rates remain low (Chart 2), and cap rates, though rising, are below normal and other property segments. An affordability edge over detached homes helps. Despite this, benchmark condo resale prices fell 3.4% year-over-year in March (Chart 3). Even end-users are shunning the small units that flooded the market after the pandemic, which were largely purchased by investors who are now juggling falling rents and negative cash flow. Although average asking rents on apartments and condos rose in March, they are down 2.8% year-over-year. Rents on purpose-built apartments have been more resilient but are also down 1.5%. With more condo completions scheduled for 2025, the high-rise market will remain under intense pressure. A rising jobless rate, a slowing population, and a spike in construction costs due to tariffs will compound the challenge; nowhere more than in the Toronto area where the new condo market has gone from bad to worse. Despite incentives, Urbanation reported the lowest sales in the region since 1990 in Q1. It could take 78 months—over six years—to absorb the glut. A record 31,000 units will be completed this year, further saturating the market. The average selling price of new condos in Toronto has fallen 7% year-over-year, pressuring builders. Eventually, lower interest rates and plunging new construction will support multifamily prices in the Toronto region, but this will take time.
Retail
Canada’s retail sector gained momentum in 2024 due to lower interest rates and improved consumer spending. Vacancy rates plumbed new lows, rents rose, and cap rates fell from 14-year highs. But the trade war brings new challenges. Consumer sentiment is near all-time lows. Rising unemployment will curb spending and lift consumer insolvencies above pre-pandemic levels. Retailer insolvencies will likely push further above normal levels, aggravated by immigration cuts. The downfall of storied Hudson’s Bay speaks to broader challenges facing the sector, though it might also strengthen competitors. Retailers focussed on everyday essentials and services may fare better than those offering discretionary products now made more expensive by tariffs. Strip malls anchored by grocers and benefiting from ease of access are likely to outperform indoor malls. Thrift stores and second-hand shops will benefit as tariffs raise the cost of new products. The domestic hospitality sector, including restaurants, stands to benefit from ‘Buy Canadian’ sentiment.
Office
Canada’s weakened office market is in a holding pattern. Rents rose 1.3% year-over-year in December 2024. After reaching multi-decade highs, cap rate increases slowed, while 2024 marked the first year of positive net absorption since the pandemic. Sublet space shrank as new construction evaporated. Downtown office vacancy rates fell in Q1 for the first time in five years, but remain sky-high in some cities, notably London (32%) and Calgary (30%). The national vacancy rate has largely stabilized, albeit at a lofty 18.7% (Chart 4). But net absorption turned negative in the quarter, largely due to weak demand in Montreal. A recent study suggests that Canada leads the world in working from home. A survey of college-educated workers by the Stanford Institute for Economic Policy Research found the nation had the highest number of work-from-home days, at 1.9 days per week, compared with a 40-country average of just over one day and a U.S. norm of 1.6 days. Long commute times in some regions might be a reason.
Trophy and Class A buildings continue to outperform lower tiers, with the former commanding higher rents. Tenants see the value of high-quality office space in attracting and retaining talent, and are willing to pay for it. Suburban properties are generally healthier than downtown markets. The lowest active construction in two decades should eventually reduce vacancy rates. While the conversion of office space to housing and other uses (such as education and data centres) is on the rise, CBRE believes it has yet to leave a meaningful mark on vacancy rates. The national vacancy rate will likely stay elevated this year due to expected job and business losses, before retreating in 2026.