In its final monetary policy decision of 2024, the Bank of Canada cut the policy interest rate by 50 basis points to 3.25%. This marked the second consecutive “jumbo” rate cut and brought the year’s total reductions to 175 basis points, making Canada the global leader in aggressive monetary easing in 2024.
However, this pace of cuts is expected to slow as the central bank adopts a more cautious approach, stating it will evaluate “the need for further reductions in the policy rate one decision at a time.”
Monetary Policy in Transition
The policy interest rate now sits at the upper bounds of the estimated neutral range of 2.25% to 3.25%. Economists predict the rate will continue to decline, reaching 2.25% by the end of 2025. Meanwhile, the Canada 10-year bond yield, influenced by U.S. market conditions, is projected to average 3.00% in 2025.
Despite these adjustments, uncertainty remains, particularly concerning potential U.S. tariffs on Canadian goods, which could impact economic momentum.
A Promising Outlook for Commercial Real Estate
Against this backdrop, Canada’s commercial real estate market is positioned for growth, supported by strong GDP, population, and employment forecasts that place it among the top-performing G7 nations.
Investment and Leasing Activity
- Cost of Capital Easing: The financial environment is expected to stabilize, alleviating the cost-of-capital crisis that hindered market activity in recent years.
- Improved Sentiment: Investment activity is set to rise as sidelined capital is reintroduced, with transaction volumes likely to strengthen.
- Cap Rates: Certain asset classes may see modest cap rate compression, depending on global bond market trends.
- Debt Availability: Credit conditions are anticipated to normalize, making real estate financing more accessible.
Sector Highlights
- Industrial Properties: Demand for logistics and distribution facilities remains robust, driven by e-commerce growth and supply chain adjustments.
- Multifamily Assets: Population growth and housing affordability challenges support continued investment in residential properties.
- Retail and Office: While select segments face challenges, prime and mixed-use locations remain attractive due to sustained consumer and business activity.
Economic Highlights
- Employment Growth: Canada added 50,500 jobs in November 2024, though the unemployment rate ticked up to 6.8%.
- GDP Performance: Real GDP grew by an annualized 1.0% in Q3 2024, slightly below expectations.
- Inflation Trends: Headline inflation fell to 1.9% in November, with core inflation measures remaining stable.
Looking Ahead to 2025
CBRE’s Canada Real Estate Market Outlook for 2025 paints an optimistic picture of increasing activity across the sector. With economic fundamentals stabilizing and the cost of capital easing, investors and occupiers have a unique opportunity to capitalize on Canada’s growth potential.
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