Investor interest is likely to return to Canada’s real estate market in 2025, according to experts who say more capital could be allocated to the industry amid falling borrowing costs.
Reid Taylor, the senior vice-president of capital markets at Colliers Canada, says that investor sentiment in Canada’s real estate industry is improving, alongside a macroeconomic picture characterized by lower interest rates and inflation. As a result, he is predicting 2025 to be the start of a new cycle, with increased activity across various commercial sectors.
“We’re still in the midst of a period of quite sluggish investment activity after both 2023 and this year. So some patience is required,” Taylor said in an interview with BNNBloomberg.ca in December.
“We’re not going to see a surge of activity necessarily in Q1, Q2, but I can tell you, the consensus certainly seems to be that this is the start of a new cycle, like the worst is over.”
He added that he predicts continued broad interest in Canadian real estate from global capital and is hoping to see Canada’s larger domestic institutions as active buyers and sellers in 2025.
“We’re already seeing an increase in investment interest and activity for retail properties, so specifically, necessity-based retail centres (like) grocery-anchored properties,” Taylor said.
“This is anecdotal, but those top the priority list for new acquisitions in many of the conversations that we’re having with our institutional clients today. Industrial and multi-family (properties), those will, we think, continue as a staple in many of the diversified investors portfolios.”
More ‘individual landlords’
Royal LePage president and CEO Phil Soper said he sees more investors returning the market acting as landlords, coupled with increased residential activity.
Soper said in a December interview what he sees investors gradually returning, many of which are highly leveraged.
“There is the slowly returning investment market as well. By investment market, I mean those small businesses or individuals who are landlords, who own an investment property or a handful. They make up a majority of our rental stock in the country, and it’s been a really tough couple of years for them,” he said.
According to Soper, many of those investors left when interest rates rose and “their condos were flat or losing value and they were cash negative.” Based on research from Royal LePage, Soper said, there are around 4.4 million Canadians with an investment property today and about nine million say they would like to be an investor within the next three years.
“Now that’s an aspirational number, but it shows you just how the message that owning real estate is a solid way to produce something equivalent to an RRSP, a savings vehicle that you can make a little bit of money (from) and then the underlying property will gain in value,” Soper said.
He added that Canadians “are not deaf” to the fact that over time, home prices have been sharply rising alongside a housing shortage.
“We anticipate that there’ll be an even stronger investment market once we settle in at neutral interest rates, when the Bank (of Canada) gets to the point where they’re neither slowing nor stimulating the economy, which hopefully occurs sometime in the second half of 2025. I believe we’ll see more small investors, individual landlords in the country,” Soper said.
“It is a growth market.”
Residential real estate sales
According to Soper, the “excess” that occurred in the housing market during the pandemic gave way to a “supersized” downturn as high interest rates weighed on activity. He noted that the downturn following the Great Recession in 2008-09 lasted about half the length of the downturn that just occurred.
“So, it’s quite long, and volumes in our biggest cities like the GTA were back to 2008 levels,” Soper said.
Despite the downturn, he said, home prices “hung in there” due to the housing shortage in the country.
“And so, we knew that the post-pandemic market correction would be material. It was longer than we anticipated, mostly because of the high interest rates that were necessary to curb the really unusual spike inflation as well,” he said.
Going into 2025, Soper said, he is expecting a strong recovery in the residential market, due partly to first-time buyers entering the market amid lower borrowing costs.
“It’s a very important core, particularly in a recovery market, and they have been sitting on the sidelines at first because interest rates were too high,” he said adding that first-time buyers are often large borrowers relative to the value of the home they are buying.
As the Bank of Canada began its rate cutting cycle in June, Soper said, first-time buyers were not incentivized to enter the market as rates were coming down around “every six weeks.” However, he said, this trend changed with the 50-basis point rate cut in October, which drove more people off the sidelines.
“I think that’s going to be one of the primary drivers of market activity: people wanting to get ahead of a wave, a return to the uncomfortable normal in shopping for homes in particularly in our most expensive markets in B.C. and Ontario, where you’re dealing with multiple offers, call it bidding wars where prices are rising faster than incomes,” Soper said.
Home price predictions
Overall home prices are expected to rise by about six per cent by the end of 2025, Soper said based on Royal LePage forecasts. Across property types, he said, single-family detached homes are expected to increase by around seven per cent and condos by 3.5 per cent.
Soper said aggregate prices in Toronto are expected to rise by five per cent, with a seven per cent increase in single-detached homes and condo prices expected to fall by about one per cent. Aggregate prices in Vancouver are expected to rise by four per cent, with single-detached units gaining two per cent and condos gaining 4.5 per cent.
“So, a little bit of a different story on the condominium side in Vancouver that has less to do about demand and more to do with the amount of new properties that are coming onto the market,” Soper said.
Meanwhile aggregate home prices in Montreal are anticipated to increase by 6.5 per cent, according to Soper, with single-family homes rising by 7.5 per cent and condos rising by six per cent.
Office properties
According to Taylor, the Canadian office market recovery has lagged, but could see some improvements in 2025.
“I would say there certainly are green shoots for office in Canada in 2025. A good example (is) we’ve seen an uptick in office trades here in Toronto, particularly for suburban office products, and that’s on the back of improving leasing headlines,” he said.
He said there has been a “flight to quality” in the office market, with higher-quality buildings that are professionally managed in Toronto preforming well.
“But I think probably the real indicator of where our office market is and where it’s going, just as a proxy, is downtown office. That’s always been the bulk of office transaction volumes in Canada,” Taylor said.
He added that as sales of other property types improve, more capital will also be allocated to the office market.
“That’ll spur a new cycle of activity, help to right-size valuations, where a lot of these institutions especially are carrying off office on their books, and in turn, act as maybe a better catalyst for more investment activity, which is really what we’ve been lacking in recent years,” Taylor said.