2025 Canada Toronto Commercial Real Estate Annual Report
©Copyright by Toronto/GTA top 1% real estate agent, senior broker, Daisy Huang, July 2025.
Where is Canada and Toronto’s real estate market headed? Seemingly so foggy. Should we wait and see, or actively seek early indicators? A perspective from the commercial real estate sector may help provide some clarity.
Recently, external tariff conditions and internal macroeconomic and immigration policies have posed headwinds for Canadian industries. However, the direction of these changes is becoming clearer, with uncertainty declining. This is mainly reflected in the inevitable renegotiation and adjustment of U.S.-Canada tariffs and the ongoing tightening of immigration and international student policies. Fortunately, falling interest rates are expected to offset some of these headwinds. Industry and commercial sectors are often the first to sense environmental changes and respond instinctively, triggering a chain of effects that impact demand for commercial real estate. These changes, in turn, affect local consumer wallets and confidence—eventually influencing housing demand and supply. Therefore, some leading indicators are first reflected in commercial real estate and can help inform our understanding of the residential market.
Commercial real estate is complex, with a wide range of categories and participants, requiring a structured way of thinking and analysis. Based on her extensive experience in commercial real estate transactions and research from leading firms such as CBRE, Daisy Huang summarizes the analytical structure and participant dimensions as follows: Participants include the fund sources like investors and lenders, developers, tenants, and brokerages. Property types including office buildings, industrial buildings and warehouses, retail stores, hotels, multi-family rental residences, and development land. Below, we examine key snapshots of Canada and Toronto’s commercial real estate landscape and indicators.
All capital is profit-chasing, and the capitalization rate (cap rate) is a key metric indicating the value and return of a commercial property. It reflects asset valuation, income performance, and risk trends over time. Higher-risk assets have higher cap rates, while government bonds—considered risk-free—have the lowest cap rates. Looking at Canadian commercial real estate cap rate trends, assets, from lowest to highest risk, are generally ranked as follows: multi-family residences, industrial, retail, office, and hotels. Over the past five years, cap rates for industrial and office properties have increased the most, indicating the market perceives increased risk in these sectors, thus lowering their valuations.
Let’s examine investment volumes by property type. According to CBRE data, in Q1 2025, industrial and warehouse properties had the highest investment volume in Canada, though significantly down from the past three-year average. Multi-family residential ranked second. Retail followed, with investment volume showing a notable increase over historical averages. Investment in development land and office properties declined significantly compared to recent years, while hotel investment—typically the lowest—has increased from historical levels.
Investor profiles also reflect the appeal of Canadian commercial real estate to different risk appetites. In Q1 2025, investor type by share, from lowest to highest, was: general institutions, pension funds, foreign investors, private equity, real estate investment funds (REITs), and Canadian private investors. Notably, risk-averse pension funds have significantly reduced their share in recent years, along with institutional and foreign investors. In contrast, REITs and Private Canadian Investors have increased their presence.
Looking at the geographic origin of foreign capital: 24% came from North America, mostly the U.S., while Europe and the Middle East combined made up only 6%. Funds from the Asia-Pacific region dominated, accounting for 70%, reflecting the region’s strong influence on Canada.
By city, commercial real estate investment volume ranked as follows: Toronto (31%), Vancouver (17%), Montreal (17%), followed by Edmonton, Waterloo, Calgary, and Ottawa. In the Greater Toronto Area, Q1 2025 investment was highest in industrial properties, followed by retail, development land, office, multi-family, and finally hotels.
Banks play a vital role in commercial real estate projects and are among the most sensitive to market shifts. Recently, banks have shown increased willingness to lend, signaling growing confidence in the sector—over 90% of banks expect to increase lending to commercial real estate in 2025.
Of course, lenders have their preferences and risk biases. CBRE’s latest survey shows banks prefer increasing loans to single-family homes, retail stores, and industrial properties; they intend to maintain lending for high-rise apartments and hotels, and reduce loans for office buildings and development land. This aligns with credit risk assessments showing increasing risk for development land and office assets, while retail and industrial are considered lower-risk.
Moreover, 48% of lenders indicated a willingness to expand lending for retail properties—a significant jump from recent years. This is likely tied to the broader macroeconomic shift toward domestic consumption under changing tariff circumstances.
The industrial and service sectors are the pillars of a nation’s economy. Industrial and warehouse vacancy rates are indicators of manufacturing activity, just as office vacancy rates reflect service sector prosperity. Over the past three years, both industrial and office vacancy rates have risen in Canada and Toronto, with office space in Toronto seeing the largest increase—putting pressure on valuations. Interestingly, Toronto’s downtown financial district maintains a much lower vacancy rate for Class A office space compared to lower-grade or suburban offices, indicating that large companies and banks still actively seek premium office space amid the “return to office” trend.
Now let’s look at the hotel sector, which reflects both personal consumption and business demand. Hotel occupancy rates across Canada and Toronto have rebounded from 2021 lows to around 70%. Occupancy rates, average room rates, and revenue per room are all stable, with Toronto outperforming the national average in all metrics.
Conclusion: Despite economic headwinds and unavoidable tariff adjustments with the U.S., uncertainty is decreasing. The U.S. Federal Reserve is likely to initiate rate cuts, which will ripple globally and lead to further rate cuts in Canada—providing a boost to industry, services, and commercial real estate. While many real estate participants remain cautious, doing nothing is not an option. Strategic planning and activity within the industry continue, as good deals and opportunities still emerge. Commercial real estate risks and valuations have changed significantly in recent years, especially in the office sector, which requires caution. For small and medium-sized businesses with office space needs, leasing may be the wiser choice. The outlook for industrial properties is neutral, while retail real estate appears relatively optimistic, with more active market activity expected.
About Creator: Daisy Huang
– Top Realtor in the Greater Toronto Area
– KOL for GTA real estate market
Cell Phone +1 647 899 0888 (WeChat/WhatsApp/LINE/Telegram)
