The outlook for Canadian commercial real estate in 2025 is the brightest it has been since the pandemic. Market activity is expected to rebound, with more companies expanding office spaces. However, challenges remain due to evolving work patterns, advancements in artificial intelligence (AI), growing sustainability concerns, and economic uncertainties tied to global factors.

Markets Primed for Action

After years of historically rapid interest rate hikes that slowed market activity, a recent cut in the Bank of Canada’s key interest rate is expected to stimulate acquisitions and investments aimed at keeping properties competitive and sustainable. Surveys indicate optimism among executives, with a significant increase in expectations for transaction volumes and capital availability compared to previous years.

Return-to-Office Gains Momentum

The shift back to in-office work is gaining traction. Surveys reveal that more companies are looking to expand office spaces and fewer are downsizing compared to the previous year. Sublease availability is decreasing, a sign of market stabilization. Premium office buildings, often referred to as ‘Class A’ properties, are experiencing some of the lowest vacancy rates in years, coupled with rising rents. Additionally, many organizations are incentivizing employees to return to the office with benefits like favourable assignments, pay raises, or promotions.

High Costs Chill New Construction

Rising construction costs and an oversupply in certain property sectors, such as office, retail, and industrial spaces, have led to a slowdown in new developments. This trend is expected to continue throughout 2025. Some real estate companies have shifted their focus toward optimizing existing assets through zoning changes and other enhancements. The speculative boom in warehouse construction during the pandemic has resulted in high vacancy rates in this sector, leading to a slight decline in rents, which could benefit businesses seeking more affordable warehousing options. Meanwhile, retail properties have seen low vacancy rates and rent appreciation, driving increased investor interest.

Proptech and AI Take Centre Stage

Property technology, increasingly driven by AI, is playing a key role in improving operational efficiency, reducing costs, and enhancing decision-making. Reports suggest that a significant portion of executives view AI as a transformative force for their businesses, particularly in streamlining processes and monitoring market trends. However, many real estate employees are hesitant to adopt AI, citing uncertainties about its career benefits. Despite this, efforts are underway to better structure data to enable effective use of AI-based technologies for workflow optimization, investment strategies, and energy management.

Sustainability and ESG

Sustainability and the integration of environmental, social, and governance (ESG) principles are gaining prominence in the commercial real estate sector. AI technologies are being utilized to optimize building operations, forecast outcomes, reduce waste, and achieve sustainability goals. Decarbonization efforts, such as replacing fossil-fuel heating with heat pumps, are being adopted as cost-saving measures, offering immediate energy savings and reducing operational expenses.

Will 2025 Mark a Turning Point?

Despite economic uncertainties and external pressures, Canada’s commercial real estate sector is poised for a resurgence. Falling interest rates are expected to stabilize the market, with an uptick in deal flow, increased capital formation, and improved lending conditions. Industry insiders predict that 2025 will be a more active and optimistic year compared to recent ones, reflecting renewed confidence in the market’s potential.