Commercial real estate enters a rebalancing phase
The commercial real estate industry continues to face challenges across all sectors in Canada, although the impact varies by asset class. At the same time, emerging opportunities are contributing to cautious optimism among developers and investors as market conditions begin to stabilize.
A number of factors continue to shape the current landscape. Ongoing economic uncertainty and trade tensions remain headwinds, alongside government regulation, particularly restrictions on foreign investment in residential real estate, which were introduced to address supply constraints and affordability concerns. In addition, elevated government development charges and construction costs have impacted project viability, although construction costs are showing signs of stabilization. While immigration levels in Canada have been elevated over the past several years, many new arrivals are not immediately participating in the homebuyer market, tempering the near-term impact of population growth on residential demand.
Rebalancing has become the watchword for 2026. After several years of volatility, conditions are expected to stabilize in the coming months as sectors such as office and multifamily enter a correction phase, supporting a healthier rebalancing of supply and demand and more realistic asset valuations. Industrial real estate remains comparatively strong, having sustained demand throughout the COVID-19 period.
From a development and construction perspective, some sectors are expected to experience a slowdown. Industrial and commercial construction activity, in particular, is projected to decline as markets normalize. ConstructConnect predicts that commercial construction, including offices, transportation terminals, and parking garages, will contract by 46.6 per cent between 2025 and 2027, noting that this pullback reflects a normalization of activity and a return toward historical averages rather than a deterioration in underlying demand.
According to Colliers’ 2026 Global Investor Outlook Report, retail, self-storage, and industrial properties are showing resilience and, in some cases, outperforming expectations. Other strong growth areas include medical, educational, and community construction.
On the multifamily front, observers believe 2026 will see a stronger market over the next three to four years once unsold condominium inventory is cleared out. However, large-scale high-rise projects are expected to give way to smaller, more targeted projects that appeal to the changing needs of renters and buyers. Student housing, for example, is highlighted as a growing area.
An Urban Land Institute (ULI) report states that seniors’ housing is also gaining momentum as demographic shifts accelerate demand for new and innovative care models.
Interest on the part of investors is returning as global investors are increasingly looking to Canada as a safe, stable, and predictable haven in the face of economic uncertainty.
CBRE Canada chairman Paul Morassutti has stated that an uncertain global economy might work to Canada’s advantage in the year to come, and commercial real estate could be a chief beneficiary of renewed investor focus on this country.
Colliers notes that a growing number of European-based investors are renewing mandates to expand their presence in key markets such as Toronto, Vancouver, Montreal, and Calgary. Large domestic institutions, including major pension funds, are signalling plans to increase Canadian allocations. So far, tariffs have had a limited impact on demand, as a significant portion of trade remains tariff-free under existing agreements and strong domestic demand.
Industrial
Industrial construction is one key area that will experience market adjustments, following a period of strong expansion, according to ConstructConnect. It reports that industrial construction reached a peak of starts spending of nearly $27 billion in 2024, with starts projected to decline by 34.5 per cent by 2027.
This represents a noteworthy shift in dynamics. After years of industrial supply not keeping pace with demand, rent increases, and low vacancy rates, the picture has reversed. An abundance of new supply has led to higher vacancy rates and rent decreases.
Experts expect that the sector will stabilize in 2026 in some major markets. CBRE reports for example, that Canadian industrial and logistics leasing fundamentals remain healthy, with major markets now in the final stages of absorbing an unprecedented wave of new supply.
Office
The office sector recovery is showing promise, as leasing revenues improve and activity increases. Return-to-office mandates are reviving demand for more space, following a period of COVID-era downsizing.
Colliers reports that with limited new supply across major CBDs (central business districts), leasing is gaining momentum, first concentrating on prime assets before extending to suburban and mid-grade space as demand begins to outpace available inventory.
Morguard notes that Canada’s trophy assets remained popular with tenants seeking space in highly-amenitized buildings and locations. However, availability is limited versus the broader market as construction and delivery slowed substantially over 2025. It reports that over 2.8 million square feet of new supply was under construction across the country in the second quarter of 2025, down from 11.4 million square feet two years ago.
Retail
Retail is going through a stabilization phase and is in fact outperforming expectations that the asset class was on the decline.
Tenant demand remains strong, and rents are flat or slightly increasing across the board, while consumer spending is relatively stable, driving acquisition activity, according to Colliers. Supply constraints in major markets are driving increased interest in secondary markets.
Preferred targets for institutional investors continue to be grocery-anchored retail, open-air format, and necessity-based asset types. Even enclosed malls have rebounded. CBRE reports that there have been 11 sales in the past three years following a period of non-activity.
Multifamily
Demographic and economic factors are having a significant impact on multifamily investment and development. New rental supply is coming online at a historic pace. At the same time, recent immigration restrictions and increased first-time home buyer activity are moderating demand. CBRE notes that an overabundance of unsold condominiums, combined with a pullback in immigration in 2025 is leading to poor rental market performance in newer product.
Investment activity however, remains strong in high-demand urban markets such as the Greater Toronto Area, Calgary, Vancouver, and Ottawa, due to housing shortages and high immigration populations.
Morguard predicts the rebalancing experienced in 2025 will continue into 2026 and anticipates rental demand to ease further due to a reduction in temporary worker and permanent resident admission targets. This will translate into a continuing rise in vacancies and moderated rent growth.
Emerging opportunities
While commercial real estate is undergoing this readjustment period, Colliers sees emerging opportunities for expansion in Canada’s alternatives markets. It reports that institutional investors are focusing on niched, defensive assets tied to demographic trends, including retirement homes, self-storage, and student housing.
Data centres and digital infrastructure are also drawing investor interest. Other targeted areas of opportunity include retail and industrial sectors outside primary markets that offer attractive yields and long-term upside.
Investors are coming on board. Adam Jacobs, Head of Research, Canada for Colliers, says, “There’s a huge amount of interest in assets that are construction, but less tied to the market and what’s happening right now in the economy, and more tied to demographic trends. We’re seeing bigger deals in those spaces, with institutions that never would have been involved five or 10 years ago buying entire portfolios.”
ULI notes that creative deal structures, new sources of capital, including private real estate investment trusts (REITs), family offices, infrastructure funds, and private debt, and a narrowing gap between buyer and seller expectations are fuelling renewed optimism.
It adds that innovation and strategic partnerships will play a key role moving forward as market demand shifts to new growth domains such as smart buildings, data centres, clean power solutions, modular construction, mixed-use developments, and new models of care and community living.
Despite continuing headwinds, the outlook for commercial real estate remains cautiously optimistic, particularly for investors and owners who are able to adapt strategies, reassess asset performance, and respond to evolving market conditions.
At Fuller Landau, we have deep knowledge in the real estate and construction industry, and considerable hands-on experience in advising general and niche contractors, property management companies, private developers, and landlords owning residential, industrial, and commercial properties. If you have any questions or need further information, please reach out to the Real Estate and Construction group at Fuller Landau.