My economic take of the week

Is the Canadian Commercial Real Estate Market making a comeback?

The general answer to this question is yes, however, some asset classes are rising more than others.    For instance, after bottoming out in 2024, the office market is strengthening on the back of the return-to-office mandates that many GTA companies have recently implemented after years of hybrid or fully remote work arrangements.     Saying that, the strongest buildings are the A and AAA buildings, where the vacancy rates are breaking the 10% or less mark.    The lower quality B and C buildings still have relatively high vacancy rates relative to the rest of the market.     

From a lending perspective,  bankers will look for a strong rent roll with long term commercial tenents OR newer commercial tenents that have been operating for a certain period of time in other locations.    They want as strong a guarantee of cash flow as can be obtained for an investor.    The general rule is that the net rent after deduction of expenses should cover 110 -135% of the annualized debt payments on the commercial property.    If the cash flow from the rent cannot reach this milestone, the bank will usually cut back on the loan and ask for a higher down payment.    This factor along with the capitalization rate determines the  value the bank will lend on.    

Industrial supply in the GTA is tight with vacancies at 2.2% .    Per a report by Colliers, there was an increase in newly built industrial units in 2025 which brought the available inventory temporarily higher.   This inventory was quickly being absorbed by the market, bringing the latest vacancy rate at 2.2%.     

From a lender perspective, an investor looking to purchase an industrial unit will need a strong tenant who is paying enough annual rent to cover 110-135% of the annual debt payments on the building.   The owner needs a relatively strong covenant meaning net worth and credit to get reasonable terms on the loan.    Many of these buildings are owner-occupied so the businesses cash flow should be enough to cover the annualized debt payments to get a mortgage on the property.   

There are other factors involved in the credit decision.     Please contact us for more information if you are considering the purchase of a commercial rental property .   There are lenders who have different terms and guidelines and we can find a the right lender for your situation.