{"id":92421,"date":"2025-02-14T14:16:33","date_gmt":"2025-02-14T19:16:33","guid":{"rendered":"https:\/\/www.rbcroyalbank.com\/en-ca\/?post_type=rbc_my_money_matter&p=92421"},"modified":"2025-02-19T14:38:22","modified_gmt":"2025-02-19T19:38:22","slug":"is-2025-the-year-commercial-real-estate-bounces-back","status":"publish","type":"rbc_my_money_matter","link":"https:\/\/www.rbcroyalbank.com\/en-ca\/my-money-matters\/business\/right-sized-business-advice\/commercial\/is-2025-the-year-commercial-real-estate-bounces-back\/","title":{"rendered":"Is 2025 The Year Commercial Real Estate Bounces Back?"},"content":{"rendered":"\n
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After a bumpy journey investorsare hopeful Canada\u2019s commercial real estate sector will enjoy smoother sailing in 2025, but some headwinds remain.<\/p>\n\n\n\n

Skyrocketing borrowing and construction costs, a glut of inventory, a decline in permits issued, and a weakening employment market made 2024 a particularly challenging time for the sector, according to the Canadian Real Estate Association (CREA)<\/a>.<\/p>\n\n\n\n

The slowdown began at the end of 2023<\/a>, when non-residential building permits dropped 3% on an annual basis, and more than 13% from the previous quarter, with the sharpest declines in British Columbia, Ontario, New Brunswick, and Newfoundland and Labrador. Despite falling interest rates and lower inflation, the market remained skittish through 2024.<\/p>\n\n\n\n

There were, however, some early signs of optimism to close out the year. According to CBRE Canada\u2019s Market Outlook for 2025<\/a>, momentum in the commercial real estate (CRE) investment market built steadily through the second half of last year, with transaction volumes and activity trending higher.<\/p>\n\n\n\n

\u201cWith each decrease to the policy interest rate, investors grew more confident that the market was shifting back into a stable and more accommodating financing environment,\u201d the report explains, noting commercial real estate volumes for 2024 are on track to total $45 billion. \u201cThis would be the third consecutive annual decrease in investment volumes since the record high in 2021 but also represents what is expected to be the trough before a recovery in 2025.\u201d<\/p>\n\n\n\n

Lingering short-term uncertainty for Canada\u2019s commercial real estate market<\/h2>\n\n\n\n

Though a recovery is far from certain, the CBRE report concludes that market conditions are favourable for a comeback in the latter half of the year, assuming interest rates continue their decline.<\/p>\n\n\n\n

That, however, is far from certain, as the Bank of Canada announced plans<\/a> to end quantitative tightening following January\u2019s 25bps rate cut, and suggested future changes were contingent on the results of President Trump’s tariff threats. Though a tariff war was averted in late January, the matter is far from settled, as the temporary agreement is only in place for 30 days<\/a>.<\/p>\n\n\n\n

\u201cProjections in the January Monetary Policy Report (MPR) published today are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States,\u201d the Bank wrote in its interest rate announcement on January 29.<\/p>\n\n\n\n

The Bank warned that a trade war with the country\u2019s biggest trading partner could have a significant impact on inflation\u2014and with it, interest rates\u2014adding some uncertainty to the future of the CRE market.<\/p>\n\n\n\n

\u201cI think commercial real estate has been challenged for some time, so I think that this is kind of built into the pricing,\u201d Kevin Meyler, a partner and national leader of business restructuring and turnaround services at BDO Canada, told BNN Bloomberg<\/a>. \u201cI think commercial real estate is still going to have some headwinds and struggles.\u201d<\/p>\n\n\n\n

Despite potential challenges in the short and even medium-term, however, Meyler remains confident of the longer-term outlook. \u201cI have to believe it will rebound,\u201d he said. \u201cIt traditionally has. So, I do think it\u2019s an opportunity. And I think if it\u2019s priced right, [investors] may want to look at it.\u201d<\/p>\n\n\n\n

Commercial Real Estate sectors on different trajectories<\/h2>\n\n\n\n

As the market shifts towards a recovery some commercial real estate sectors are expected to bounce back faster than others.<\/p>\n\n\n\n

Return to office<\/h3>\n\n\n\n

After hitting record highs<\/a> in the summer of 2024 experts suggest vacancy rates are poised to come down through this year.<\/p>\n\n\n\n

According to a recent report<\/a> by Altus Group, demand for office space has been trending downward since the pandemic, due to the rise of remote work, business downsizing, and general economic uncertainty. However, the CRE research and analytics firm suggests \u201cthe office sector now appears to be turning an important corner.\u201d<\/p>\n\n\n\n

According to the report, a recovering economy, positive leasing momentum and an increase in return-to-office mandates will drive up demand in the months ahead. At the same time, the significant slowdown in construction in recent years is poised to take a bite out of supply, especially for tenants seeking newer accommodations.<\/p>\n\n\n\n

The CBRE report<\/a> came to a similar conclusion, suggesting that tenants will \u201cshift back to a growth mindset\u201d in 2025, noting the recent slowdown in construction will result in \u201can under-supply of modern, amenitized and environmentally sustainable buildings.\u201d<\/p>\n\n\n\n

Retail therapy<\/h3>\n\n\n\n

The retail sector is positioned to benefit from many of the same trends that are expected to drive a recovery in office space\u2014including lower interest rates, improving demand and limited supply of new spaces\u2014but the sector also faces some unique challenges.<\/p>\n\n\n\n

According to the CBRE report, high construction costs have constrained building activity in recent years, driving up the demand\u2014and rental costs\u2014of retail spaces, especially those with fixture units. Retailers are also poised to expand further into secondary markets this year.<\/p>\n\n\n\n

At the same time, the sector is perhaps the most exposed to macro-economic challenges and more local economic sentiment. For example, a trade war with the United States would hit the retail sector the hardest<\/a>, and quickest, not only in terms of internal financial operations, but the impact on consumer confidence. Longer term trends, like the planned slowdown in immigration<\/a>, are also expected to negatively impact consumer spending, putting even greater pressure on retailers.<\/p>\n\n\n\n

While the sector will likely see some improvement from last year, retail remains on the front lines of Canada\u2019s most pressing economic uncertainties and will be more susceptible to market shocks in the year ahead.<\/p>\n\n\n\n

Industrial wasteland<\/h3>\n\n\n\n

After an unprecedented upswing in demand for industrial spaces during the pandemic the sector has more recently seen a significant pullback in demand, as logistics companies and retailers offload some of the space they took on during pandemic expansions. According to Colliers Canada, however, industrial new construction has fallen 30% from its peak<\/a>, setting up some potential supply changes down the road.  <\/p>\n\n\n\n

At the same time, the retailer and logistics pullback is being balanced out by strong demand from the food and beverage industry, and data centres, with demand also surging in Alberta on the back of its recent economic expansion.<\/p>\n\n\n\n

According to CBRE<\/a> the market has begun showing signs of improvement as rents begin to moderate and the market continues to absorb new supply, setting the stage for a potential turn around by mid-2025.<\/p>\n\n\n\n

The bigger picture for commercial real estate in 2025<\/h2>\n\n\n\n

Despite varying trajectories across property types, institutional capital is set to return and infuse the market with increased liquidity in 2025, which could help drive commercial real estate investment volumes to an estimated $48 billion, according to CBRE. The group says high potential for significant merger and acquisition activity is also adding to the optimism for a commercial real estate turnaround in the coming year.<\/p>\n\n\n\n

If a turnaround does materialize later in the year there are signs to suggest it could snowball quickly, if the macro-economic conditions remain favourable.  <\/p>\n\n\n\n

\u201cWhen asked about the top geographies for investment outside their native jurisdictions, Germany, Canada, Mexico, India, and Australia emerged as top choices,\u201d wrote the authors of Deloitte\u2019s global 2025 Commercial Real Estate Outlook<\/a> report. \u201cShould transaction activity return in 2025, these areas may be where international investors look first.\u201d<\/p>\n\n\n\n

The report\u2014which surveyed 880 C-level executives worldwide\u2014found that 68% expect CRE transaction volumes and capital availability to increase significantly this year, compared to just 27% who anticipated transactions increasing the same time last year.<\/p>\n\n\n\n

Though much uncertainty remains, specifically with regards to inflation, interest rates and tariffs, Canada is expected to offer an attractive commercial real estate market for investors in 2025.<\/p>\n\n\n\n

\u201cThere\u2019s a lot of negativity and social media nonsense that says Canada\u2019s broken. But Canada remains a growth play, and there\u2019s more optimism in the market today than there has been in the past couple of years,\u201d CBRE chairman Paul Morassutti told the Globe & Mail in December. \u201cWe expect 2025 to be considerably more active than 2024.\u201d<\/p>\n<\/div>\n<\/section>\n","protected":false},"excerpt":{"rendered":"

Investors are hopeful Canada\u2019s commercial real estate sector will enjoy smoother sailing in 2025, but some headwinds remain.<\/p>\n","protected":false},"author":80,"featured_media":92429,"parent":57338,"menu_order":0,"template":"wp-custom-template-optimizely-mmm","meta":{"_acf_changed":false,"advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","footnotes":""},"tags":[574],"rbc_content_type":[31],"rbc_audience":[110],"rbc_lob_group":[35],"rbc_difficulty_level":[70],"rbc_mmm_category":[305,391,326],"class_list":["post-92421","rbc_my_money_matter","type-rbc_my_money_matter","status-publish","has-post-thumbnail","hentry","tag-commercial-insights","rbc_content_type-article","rbc_audience-business-owners","rbc_lob_group-business","rbc_difficulty_level-intermediate","rbc_mmm_category-business","rbc_mmm_category-commercial","rbc_mmm_category-right-sized-business-advice"],"acf":{"contently_publication_id":"","custom_author":"Jared Lindzon","rbc_video_header":"","rbc_media_duration":"","rbc_video_keywords":"","rbc_video_description":"","rbc_video_upload_date":"","rbc_toc_for_mmm_tag":"h2","rbc_toc_for_mmm_limit":6,"rbc_toc_for_mmm":null,"rbc_toc_for_mmm_action":""},"yoast_head":"\n\n\n\n\n\n\n\n\n\n\n\n\n\t\n