The Canadian Commercial Real Estate Outlook for 2025: A Promising Turn
As we gear up for 2025, the Canadian commercial real estate landscape is on the verge of significant transformation. A recent CBRE survey reveals a notable shift, with more companies looking to expand their office spaces this year compared to the previous year. The forecast appears brighter than it has since the onset of the pandemic, marking a potential revival, yet several challenges remain on the horizon.
An Evolving Market Landscape
Following a period marked by historic interest rate hikes that effectively froze the market, the Bank of Canada has taken steps to reinvigorate the economy by cutting its key interest rate. This decision is integral as it encourages both Canadian and international investors to pursue acquisition opportunities. According to Paul Morassutti, Chairman of CBRE, this renewed optimism is grounded in a significant increase in investor sentiment. A Deloitte survey highlighted that 68% of C-suite executives globally expect a notable uptick in commercial real estate transactions in 2025—a sharp increase from just 27% last year.
A New Era of Office Spaces
The push to return to in-office work is gathering momentum. Major firms like Amazon and McKinsey are leading the charge, mandating a greater in-office presence for their employees. This trend is echoed in a CBRE survey indicating that fewer companies are looking to downsize their office spaces. The decline in office sublet availability serves as an encouraging sign, indicating a potential market stabilization. Additionally, Class A office towers are experiencing the lowest vacancy rates in four years, often resulting in rent increases. A KPMG survey corroborates this trend, revealing that 83% of Canadian CEOs desire employees to return to the office full-time, with 90% likely to offer incentives for compliance.
Challenges in New Construction
While the market displays these positive indicators, challenges persist, particularly in new construction. Increased construction costs and an oversupply of office, retail, and industrial spaces have led to a slowdown in new projects. Real-estate investment trust RioCan’s recent decision to indefinitely postpone several projects highlights this trend. As Scott Figler of JLL notes, these conditions are expected to persist, resulting in high vacancy rates and possibly lower rents, which could benefit consumers in the long run.
The Rise of Proptech and AI
Technology is reshaping the commercial real estate sector, with property technology (Proptech) and artificial intelligence (AI) taking center stage. These innovations aim to reduce operational costs and enhance decision-making. A PwC report indicates that 59% of Canadian CEOs believe AI will revolutionize how companies generate documentation and monitor market conditions. Despite the potential, approximately 45% of employees in the real estate sector remain hesitant about adopting AI due to concerns about its relevance to their careers. As an industry, however, there is a growing acknowledgment of the need to structure data better to leverage AI’s capabilities in the future effectively.
Sustainability and ESG Initiatives
As the market evolves, there is a rising emphasis on sustainability and Environmental, Social, and Governance (ESG) principles. AI-driven technologies are increasingly being utilized to analyze data for better operational management and waste reduction. Decarbonization is no longer a long-term goal but rather an immediate strategy for operational efficiency. The JLL report notes that energy expenses constitute a considerable portion of operating costs, emphasizing the importance of sustainable practices in the sector.
A Renaissance for Canadian CRE?
With uncertainties like the U.S. political climate looming, many in the Canadian commercial real estate sector are questioning whether 2025 could herald a renaissance. Morassutti believes that, contrary to popular narratives of decline, Canada remains an attractive market. The optimism fueled by falling interest rates and improving lending sentiments suggests that 2025 could witness heightened activity compared to the previous year.
Conclusion
The Canadian commercial real estate sector stands at a crossroads as it embarks on 2025. With a blend of optimism and caution, stakeholders must navigate evolving workplace dynamics, technological advancements, and sustainability imperatives. While challenges remain, the opportunities for growth and transformation in this sector are vast. As Morassutti encapsulates, “We expect 2025 to be considerably more active than 2024.” This sentiment reverberates through the market, promising an exciting year ahead for Canadian commercial real estate.
