Optimism has returned to Canada’s commercial real estate market and the industry can expect greater investment stability in 2025, says CBRE Canada Chairman Paul Morassutti.

“The main reason for that optimism is that the cost of capital crisis — which has played havoc with liquidity and decision-making — is finally abating,” Morassuti told the Toronto Real Estate Forum.

The cost of capital has declined due to five consecutive Bank of Canada interest-rated cuts, with the latest two being oversized 50-basis-point reductions.

Despite the cuts, investment has been relatively slow to pick up as buyers take a wait-and-see approach on further drops. But Morassuti is confident that it will increase.

“Yield-seeking capital is now returning to real estate, which is one reason REITs had a near-record rebound in the third quarter of 2024, posting the strongest quarter since Q2 2009,” said Morassutti.

This recovery is expected to drive increased market activity in 2025.

“Falling rates will provide more stability to the market and will undoubtedly nudge buyers and sellers closer together,” he said. “Deal flow is already picking up. Capital formation is improving. Lending sentiment is better.”

Although Canada’s office market continues to post high vacancy rates, Morassutti is bullish on the sector. With new office supply reaching a 20-year low in 2025, he anticipates a “profound positive effect on vacancy and rents, as it has in every cycle in memory.”

He dismissed the notion that the office market is oversupplied in the aftermath of the COVID-19 pandemic and the hybrid-work. He pointed to a lack of modern, sustainable assets as a key issue for office occupants.

“We are not oversupplied, we are under-demolished,” he said, referring to older B and C class office assets that are viewed as unsustainable and driving most of the vacancy.

CBRE’s occupier survey supports the renewed-optimism theory, showing an increase in companies planning to grow rather than downsize, he noted.

“Sublet availability is going down, which is usually a precursor to a more stabilized market as fewer tenants look to shed space,” said Morassutti.

Meanwhile, retail leasing is booming, with vacancies below 4% and rents appreciating across the country, he noted. However, he warned, economic challenges such as rising interest rates and slowing wage growth pose threats to household spending.

“Cutting the GST on Christmas goodies might provide a bit of a sugar rush to consumers but nothing more,” Morassutti quipped.

He was referring to the federal government’s decision to provide a G.S.T. pause on food and other items during the holiday season and traditional post-Christmas shopping lull.

In the multi-family sector, rental growth is slowing, driven by high affordability concerns and reduced immigration targets. Still, Morassutti emphasized the sector’s long-term potential, noting.

“Canada’s population growth, even accounting for reduced immigration targets, is expected to lead the G7,” he pointed out.

While acknowledging political dysfunction, housing affordability issues, and falling productivity, Morassutti urged the audience to maintain perspective.

“As the world becomes less stable, Canada — little, safe, secure Canada — will look even better in comparison,” he said, emphasizing the country’s strengths and future potential.

With 2025 poised to bring increased market activity and stability, Morassutti advises commercial industry leaders to remain confident about Canadian commercial real estate investment opportunities.

“The strengths and the potential of this country far outweigh its weaknesses,” he said. :”Don’t believe the hype.”

(Editor’s Note: Connect Canada CRE did not cover the Toronto Real Estate Forum in person. CBRE provided Morassuti’s comments.)