Ontario's Commercial Real Estate Reset: 2025-2026

Ontario's commercial real estate (CRE) sector is currently navigating a significant recalibration, transitioning from rapid growth to a more nuanced, opportunity-driven market. This "reset mode" is defined by persistent economic uncertainty, evolving workplace dynamics, and strategic adjustments by investors and developers. While facing headwinds like affordability challenges, labor shortages, rising operational costs, and US tariffs, the market shows signs of resilience. The year 2025 is expected to see increased activity, boosted by improving capital market sentiment and projected interest rate cuts. Success will hinge on strategic, selective investments prioritizing strong fundamentals, long-term growth potential, and adaptive properties.

The next 1-2 years present a complex interplay of forces. Lower borrowing costs are anticipated to draw capital, potentially leading to modest cap rate compression in certain asset classes. However, US trade policies are increasing construction costs and dampening economic confidence. Demographic shifts, including recent immigration curbs, will reshape demand, particularly in the multi-family sector, while labor shortages continue to challenge development timelines. This report provides an in-depth analysis and outlook for Ontario's commercial real estate market through 2026.

Macroeconomic Landscape: Influencing Factors

The broader economic environment profoundly influences Ontario's commercial real estate market.

Interest Rates & Inflation

The current interest rate environment is crucial for CRE investment. As of April 2025, the Bank of Canada's policy rate was 2.75%, following 225 basis points of cuts since June 2024. Further reductions are expected in 2025, possibly reaching 2.25% by Q2 2025, implying 100-125 basis points of cuts in H1 2025. This downward trend is generally positive for real estate.

However, US tariffs introduce uncertainty, potentially leading the Bank of Canada to be cautious with further rate cuts, delaying the full impact of monetary easing.

Canada's CPI rose 1.7% year-over-year in April 2025, down from 2.3% in March, indicating moderating inflation. Yet, tariffs could push inflation higher, affecting consumer purchasing power and municipal project costs.

Lower interest rates reduce mortgage costs, making investments more accessible and refinancing viable, encouraging capital deployment and modest cap rate compression. Conversely, if tariffs reignite inflation, prompting rate hikes, borrowing costs for developers would increase, slowing approvals and reducing profitability, especially for highly leveraged projects.

A notable "interest rate rebound paradox" suggests that expectations of further cuts might lead some developers to a "wait-and-see" approach in early 2025, temporarily suppressing transaction volumes as they await lowest borrowing costs.

Furthermore, inflation creates a "dual squeeze" on CRE profitability. Rising material, labor, insurance, and maintenance expenses can outpace income growth, compressing Net Operating Income (NOI). Older Class B/C properties, lacking inflation-linked rent escalations, are particularly vulnerable.

The Canadian Dollar

The weakening trend of the Canadian dollar (CAD) in 2025, partly due to capital outflows, has significant implications. A weaker CAD makes Canadian real estate more attractive to international investors, boosting foreign capital inflow for projects and supporting property values.

Conversely, a weaker dollar increases the cost of imported construction materials, pressuring developers' margins and contributing to higher property prices. This creates a "foreign capital versus domestic cost tug-of-war": foreign investment boosts demand for existing assets, but rising import costs for new construction can constrain speculative builds, creating a disconnect.

Consumer Confidence & Economic Growth

Consumer confidence profoundly impacts retail and residential sectors. In H1 2025, escalating Canada-U.S. trade disputes and economic uncertainty significantly eroded Canadian consumer confidence, contributing to a slowdown in residential sales.

Declining consumer sentiment led to a 0.3% decrease in household spending in Q1 2025, affecting retail sales and demand for commercial properties reliant on consumer spending. Businesses may scale back expansion due to higher operational costs and reduced purchasing power.

Canada's GDP growth for 2024 is projected at 1.0%, below historical trends. The labor market is cooling, with unemployment at 7% in May 2025, the highest since 2016 (excluding COVID-19), and expected to peak around 7.5% later in 2025. Declining productivity is a long-term concern.

A "lagged effect of softening consumer confidence on retail and industrial CRE" means that while retail is immediately impacted, industrial real estate's demand for storage and distribution space diminishes with a delay as consumer spending weakens. This suggests current industrial market softening is also a proactive adjustment to anticipated lower consumer demand.

Population & Labour Dynamics

Population growth and labor market conditions are fundamental drivers of CRE demand. Recent immigration curbs are expected to lead to modestly lower economic growth and impact the rental market, as the federal government reduced permanent resident targets by over 20% for the next two years. Despite near-term adjustments, Canada's long-term population growth outlook remains strong, favorable for long-term CRE demand.

Labor shortages persist in construction and skilled trades, increasing costs and delaying new builds. While overall shortages are less intense, employment growth lags labor force expansion, making it harder for younger Canadians and newcomers to find work. Federal policies prioritizing Canadian workers could further impact labor availability.

The housing needs-construction gap continues to grow. Slower population growth and changing employment conditions may lead to increased vacancy rates in newer purpose-built rentals in Ontario, especially near post-secondary institutions.

This creates an "affordability-supply-labour feedback loop." Immigration curbs, aimed at affordability, simultaneously exacerbate construction labor shortages, which increase costs and project delays. This self-reinforcing cycle means demand cooling might not accelerate supply sufficiently to truly improve affordability, maintaining a structural imbalance across CRE asset classes.

The Shadow of Tariffs: US Trade Policy Impact

US trade policies, particularly tariffs, significantly impact Ontario's CRE market through direct costs and broader economic ripple effects.

Direct & Indirect Costs

Tariffs on imported building materials are directly increasing construction and renovation expenses. US tariffs on steel and aluminum are 25%, while Canadian softwood lumber tariffs exceed 50%. These duties affect essential components, leading to anticipated project price hikes of 10-15%, impacting developer margins.

Beyond construction, tariffs increase raw material and machinery costs, fueling inflation that can be passed to tenants as higher rents, challenging businesses already facing economic pressures.

A "cost-push inflation on existing versus new supply" dynamic means tariffs disproportionately increase new construction costs, making existing stock more attractive short-term. However, persistent tariffs eventually raise replacement costs, pushing up values and rents for all properties across the CRE market.

Economic Ripple Effects

The economic repercussions of US tariffs extend severely to Ontario's economy. Ontario is projected to lose 106,000 jobs and experience a $21 billion economic contraction by mid-2026. Consumer consumption in Ontario is estimated to reduce by $23 billion over 2025-2026.

Specific industries are disproportionately affected: construction faces a $2.6 billion loss by 2026, and Ontario's manufacturers, especially automotive exporters to the US, could see sales drop by $16.6 billion by 2026. Half of small-to-medium-sized automotive businesses have already paused investments due to trade war uncertainty.

Tariffs reduce overall economic confidence, leading to decreased consumer spending and business investment, challenging CRE as reduced business activity impacts demand. This creates "tariff-induced investment deferral" and long-term supply implications: delayed or canceled investments, particularly in manufacturing and industrial sectors, will lead to significant long-term supply reductions across CRE asset classes once economic conditions stabilize.

Supply Chain Disruptions

Tariffs are actively disrupting supply chains, causing material import delays and increased labor costs, significantly slowing project timelines. Businesses incur additional expenses seeking new supply chains.

Retail businesses are negatively impacted by price increases, demand shifts, and supply chain disruptions from trade tensions, affecting operational viability and demand for commercial space.

This highlights "supply chain vulnerability amplification." Tariffs expose and intensify existing vulnerabilities, compelling businesses to diversify suppliers. While potentially fostering long-term domestic manufacturing resilience, this introduces short-to-medium term inefficiencies and higher operational costs for industrial and retail tenants, impacting their ability to absorb higher rents or expand.

Table 3: Impact of US Tariffs on Ontario CRE - Key Effects

Area of Impact	Specific Effect	Quantitative/Qualitative Data
Construction Costs	Increased cost of materials (steel, aluminum, lumber), higher project prices	Steel/aluminum tariffs 25%, lumber >50% ; 10-15% project price hikes ; construction sector loses $2.6B
Supply Chains	Disruptions, delays, increased costs for seeking new suppliers	Increased costs for imported materials ; "costs associated with seeking out new supply chains"
Economic Output (GDP)	Ontario's economy shrinks by $21B by mid-2026	1.7% smaller GDP in Ontario by 2026
Employment	Ontario loses 106,000 jobs by 2026, including ~5,000 in construction	106,000 fewer jobs in Ontario
Investment	Ontario businesses invest $11.4B less in 2025-26, businesses pause/cancel investments	$11.4B less investment in Ontario ; Half of automotive businesses paused/cancelled investments
Specific Asset Classes	Industrial/manufacturing hit hardest, retail sales contraction	Ontario manufacturers sell $16.6B less to US ; industrial market "outsized negative effect" ; retail businesses negatively impacted
Consumer Spending	Reduced purchasing power, decreased overall consumer demand	Ontario consumption reduced by $23B

Policy & Political Currents: Government Influence

Government policies at federal and provincial levels are actively shaping Ontario's CRE landscape, focusing on housing affordability and economic growth.

Federal & Provincial Initiatives

Housing affordability is a central policy focus for both federal and provincial governments. Ontario's 2025 budget strategically positions infrastructure spending as a cornerstone of its economic response to US tariffs and a long-term growth strategy.

While housing approvals and zoning are primarily provincial/municipal, the federal government influences through funding and tax policy. Federal proposals include eliminating GST on new home construction and the Housing Accelerator Fund to speed up municipal approvals.

Provincially, Ontario's 2025 budget allocates over CA200billionforinfrastructureoverthenextdecade,withCA33 billion specifically for 2025-2026, targeting highways, public transit, health, long-term care, and education. CA2.3billionisdedicatedtohousing−enablinginfrastructure.Otherpoliciesincludebusinesstaxreforms,encouragementoftownhomes,ADUs,andmixed−useprojects,plusskilledtradesinvestments.ThenewCA5 billion Building Ontario Fund will co-invest in strategic infrastructure.

This substantial provincial infrastructure spending, particularly on transit and housing-enabling infrastructure, creates an "infrastructure-enabled development" opportunity. These government investments de-risk private development, making previously less viable land attractive, especially for mixed-use and higher-density projects around transit hubs.

Regulatory & Zoning Changes

Ontario's regulatory landscape is streamlining construction processes. The updated Ontario Building Code, effective January 1, 2025, aims to simplify construction by resolving over 1,730 variations, boosting efficiency and reducing costs. Mass timber buildings can now reach 18 storeys, promoting sustainable construction and accelerating housing supply.

Bill 17, the Protect Ontario by Building Faster and Smarter Act, 2025, defers development charges (DCs) for residential development until occupancy, helping developers manage cash flows. It also reduces procedural requirements for DC bylaw amendments and permits minor variances "as-of-right" for setbacks on urban residential lands.

At the municipal level, Toronto implemented updated licensing and zoning bylaws for restaurants/bars as of January 1, 2025, and strict Airbnb regulations have redirected over 1,200 units to the long-term rental market since 2023.

The implementation of these provincial legislative changes highlights a "regulatory efficiency versus local control" tension. Their success depends on consistent and effective municipal implementation. If municipal processes don't align with provincial mandates, the intended benefits could be diluted or delayed, creating persistent challenges despite legislative intent.

Table 2: Economic & Policy Factors Impacting Ontario CRE (2025-2026 Outlook)

Factor	Expected Trend (2025-2026)	Impact on CRE (Positive/Negative/Mixed)	Specific Implications
Interest Rates	Falling (100-125 bps cuts H1 2025 expected)	Positive	Lower borrowing costs, increased investment appetite, easier financing for acquisitions
Inflation	Moderating (CPI 1.7% April 2025) , but potential tariff-driven increases	Mixed	Higher operating costs, pressure on NOI, but rent escalations and replacement value increase
Canadian Dollar	Weakening trend , but recovery from lows	Mixed	Attracts foreign investment, but increases import costs for construction materials
Consumer Confidence	Eroding/Cautious	Negative	Suppressed demand, slower sales, particularly in retail
Population Growth	Slower due to immigration curbs , but strong long-term outlook	Mixed	Slower near-term demand for housing, but long-term growth fundamentals support rental market
US Tariffs	Persistent threat/implementation	Negative	Increased construction costs, reduced investment, supply chain disruption, economic contraction
Key Provincial Policies	Increased infrastructure spending (CA$33B 2025-26) , streamlined construction	Positive	Enabling development, infrastructure support, accelerated housing starts, focus on mixed-use projects
Key Federal Policies	Reduced immigration targets , housing acceleration funds	Mixed	Demand moderation, but supply-side incentives for housing development

Asset Class Deep Dive: Performance & Outlook

Multi-Family

Canada's multi-family sector is transforming, driven by sustained rental demand. In 2024, GTA multi-family sales volume increased 12% year-over-year, largely due to record immigration. Chronic undersupply kept Toronto's vacancy rates near 1.7% in 2024, well below the national average.

Average two-bedroom rents in Toronto rose 4.9% in 2024 (moderating from 7% in 2023), despite 8,200 new units completed. At $3,200/month, this pushes tenants to older stock. While over 10,000 new units are expected in 2025, 3% annual population growth ensures demand outpaces supply. Advertised rents in Toronto declined 1.7% year-over-year in Q1 2025, though occupied unit rents were higher.

Investor appetite is reinvigorated by interest rate cuts. Toronto multi-family cap rates averaged 3.8-4.2% in 2024. Suburban markets like Mississauga and Vaughan offer higher cap rates (4.5-5.5%). Despite positive signals, GTA multi-residential investment in Q1 2025 dropped 25% year-over-year to $208 million, limiting supply as owners hold properties.

Policy impacts include Ontario's $300 million Rental Protection Fund and Toronto's Airbnb regulations, which redirected over 1,200 units to long-term rental. CMHC's expanded loan programs support sustainable retrofits.

"Affordability-driven turnover" means high turnover rents in rent-controlled buildings limit overall affordability improvement. This creates a two-tiered market, driving demand for older stock and potentially increasing tenant mobility.

Office

The GTA office market faces significant challenges. In Q4 2024, vacancy rose to 15.5% (projected 16% by Q1 2025), and availability climbed to 18.8% as new inventory entered. Nationally, office vacancy slightly decreased in Q1 2025.

"Flight-to-quality" concentrates demand on Class A spaces with premium amenities and transit access, supporting rents in the mid-$40s to $50s/SF. Class B and C properties face higher vacancies, particularly in suburban markets, leading landlords to offer incentives. This bifurcation will persist, with downtown Class B/C vacancies surpassing 25%.

Hybrid work models drive demand for flexible, wellness-focused premium spaces, accelerating adaptive reuse, notably office-to-residential conversions in cities like Kitchener-Waterloo to address housing shortages. In Q1 2025, over 587,000 SF across Montreal, Edmonton, and Calgary was removed for conversion.

Office investment lagged in Q1 2025, falling to $134 million in the GTA (75% QOQ decline from Q4 2024; lowest in over 15 years).

Office-to-residential conversions, while reducing vacancy, depend on municipal approvals, construction costs (exacerbated by tariffs), and residential market viability, intricately linking office market rebalancing to residential development challenges.

Industrial

Ontario's industrial market is slightly slowing after years of low vacancies and high rents. National industrial availability rose to 6.2% in Q2 2025 (5.9% YOY in Q1 2025). Toronto's availability rose to 4.9% in Q2 2025 (3.6% in Q1 2025).

New supply outpacing demand is a key factor. In Q1 2025, 5 million SF of new national industrial space was completed, with only 25% pre-leased, increasing national vacancy to 3.7%. Toronto saw 2.2 million SF delivered in Q2 2025, with 67% available upon completion.

Rental rates are stabilizing. National average asking net rent was $16.33/SF in Q1 2025 (2.5% decline from Q1 2024, but 166% increase over five years). Toronto rents declined 4.4% in Q1 2025.

Despite moderating trends, industrial assets led GTA CRE investment in Q1 2025 at $1.4 billion (45% of total investment). Total sales volume in seven major markets reached $2.5 billion. Construction activity has slowed significantly, helping prevent oversupply, with Toronto remaining most active (8.3 million SF under construction in Q2 2025, 87% speculative).

The industrial sector is sensitive to US tariffs, impacting industries like automotive and manufacturing. Trade disputes contributed to high unemployment in auto-dependent Southern Ontario regions.

"Speculative build absorption" is a challenge; a substantial portion of industrial construction remains unleased, risking continued vacancy increases if demand doesn't pick up. Low pre-leasing levels suggest vacancy pressure through 2025, muting rent growth and incentivizing concessions, shifting the market towards tenants.

Retail

Ontario's retail landscape is strategically reinventing itself. Essential-service retailers, grocery-anchored plazas, and smaller-format stores are outperforming, aligning with consumer habits.

GTA retail space has tightened, with vacancy at 1.7% in Q1 2025, largely due to population growth (9% since 2016) outpacing retail development (3.6% since 2016). Availability remains under 2%. Average rents were $37/SF in Q1 2025, with North Toronto reaching $66/SF.

Retail investment surged in the GTA in Q1 2025, up 60% YOY to $937 million (30% of total CRE investment). Necessity-based retail assets are highly sought after for their resilience. Nationally, retail investment saw the highest YOY growth (21%), reaching nearly $1.7 billion in Q1 2025.

Construction challenges persist due to high costs, placing upward pressure on rents in high-demand areas.

The strong performance of necessity-based retail highlights its "resilience and counter-cyclical appeal." This segment thrives even with wavering consumer confidence and tariff threats, making it a "safe haven" asset class for investors seeking stable cash flow and a hedge against economic volatility.

Land & Development

Land development in Ontario offers significant investment potential, driven by demand for residential, commercial, and mixed-use projects. Mixed-use projects are cornerstone, catering to "live-work-play" lifestyles.

In the GTA, Industrial, Commercial, and Institutional (ICI) land investment reached $437 million in Q1 2025 (40% YOY increase), concentrated on large deals. Well-located land remains in demand at competitive pricing despite elevated development costs and uncertain timelines.

Key development hotspots include Toronto (high demand, robust infrastructure, scarce vacant land), Brampton (fast-growing, high housing demand), Hamilton (transforming, mixed-use potential), Kitchener-Waterloo (tech hub, student housing demand), London (affordable land, high growth), and Niagara Region (emerging, affordable industrial/commercial land).

Housing affordability remains critical, prompting innovative solutions like modular construction and public-private partnerships. Despite efforts, Ontario's housing starts are down 29% YTD in 2025, and Toronto's pre-construction inventory climbed to 58 months of supply.

Emphasis is on sustainable and resilient development, with a surge in projects prioritizing energy efficiency and eco-friendly materials to meet net-zero emissions goals. Adaptive reuse is also prioritized.

Despite rising costs and tariff uncertainty, well-located land, especially for mixed-use or strategic industrial purposes, commands competitive pricing. This "quality land scarcity premium" reflects a fundamental belief in long-term growth and prime land's irreplaceable nature, even if immediate development is delayed or more costly.

Table 1: Ontario Commercial Real Estate Key Market Indicators (Q4 2024 - Q1 2025)

Asset Class	Vacancy Rate (Q4 2024)	Vacancy Rate (Q1 2025)	Average Asking Rent (Q4 2024)	Average Asking Rent (Q1 2025)	Sales Volume (Q4 2024)	Sales Volume (Q1 2025)	Key Trend/Note
Multi-Family	1.7% (Toronto)	N/A (Toronto advertised rents declined, but occupied units higher)	$3,200/month (2-bedroom Toronto)	Advertised rents declined 1.7% YOY (Toronto)	N/A	$208M (GTA) , $173.1M (GTA)	Demand outpaces supply; affordability pressures; owners holding properties
Office	15.5% (GTA)	16% (GTA projected) , National decreased 10 bps	Mid-$40s to $50s (Class A GTA)	N/A	N/A (GTA investment down 75% QOQ in Q1 2025)	$134M (GTA)	Flight-to-quality; older properties face higher vacancies; lowest investment in 15+ years
Industrial	N/A	3.6% (Toronto) , 4.9% (Toronto Q2 2025) , National 3.7% , National 5.9% YOY	N/A (National $15.47/SF in Q1 2025)	$16.33/SF (National) , $17.79/SF (GTA North)	N/A (GTA investment down 7% QOQ in Q1 2025)	$1.4B (GTA) , $2.5B (National)	Cooling but resilient; supply outpacing demand; tariff sensitive
Retail	1.4% (GTA)	1.7% (GTA)	$36.82/SF (GTA)	$37.00/SF (GTA)	N/A (GTA investment up 73% QOQ in Q1 2025)	$937M (GTA)	Strategic reinvention; strong investment in necessity-based retail; limited new development
Land	N/A	N/A	N/A	N/A	N/A (ICI land investment down 39% QOQ in Q1 2025)	$437M (ICI GTA)	Redevelopment focus; well-located land in demand despite high costs

Strategic Outlook & Recommendations for 2025-2026

Synthesis of Key Trends and Their Interplay

Ontario's CRE market in 2025-2026 is in a "reset mode" with complex forces at play. Anticipated interest rate cuts are expected to stimulate investment, yet US tariffs drive up construction costs and dampen confidence. Consumer confidence remains cautious, affecting retail and residential demand.

A consistent "flight-to-quality" drives demand for premium, well-located properties, while older assets face pressure. Government policies and infrastructure spending are shaping development, especially for housing and transit-oriented projects, creating strategic opportunities.

The industrial sector, though cooling, remains fundamentally strong but susceptible to trade tensions and speculative supply absorption. Multi-family benefits from robust demand driven by population growth but grapples with affordability and rent control dynamics.

Identification of Opportunities for Investors and Developers

Given these dynamics, strategic opportunities include:

• Niche and Value-Add Opportunities: Acquire and upgrade older multi-family properties for modern standards, leveraging government grants for sustainability. Adaptive reuse of underutilized Class B/C office space into residential or mixed-use formats in high-demand areas is significant. Specialized industrial spaces like cold storage and data centers continue to attract attention.

• Suburban and Secondary Market Growth: Explore growing suburban and mid-sized cities like Mississauga, Vaughan, Kitchener-Waterloo, London, Hamilton, and the Niagara Region. As a commercial realtor in Hamilton, you'll find this area transforming with mixed-use potential, offering higher cap rates and more affordable land than the GTA core.

• Long-Term Rental Investments: Multi-unit properties, duplexes, and townhomes offer stable income potential due to rising rental demand and affordability pressures. Investments in Accessory Dwelling Units (ADUs) also present added income.

• Strategic Partnerships: Pursue joint ventures with municipalities for mixed-income projects, leveraging public-private partnerships. Aligning development with government infrastructure spending, especially around transit hubs, can de-risk projects and accelerate approvals.

• Distressed Assets and Refinancing Opportunities: Opportunities may arise for alternative lenders and investors to acquire assets at favorable terms as some properties face loan shortfalls during refinancing due to higher mortgage rates.

Recommendations for Navigating Market Complexities

To navigate Ontario's CRE market:

• Cultivate Localized Expertise: Deep understanding of neighborhood dynamics, local/provincial policies, and financing options is crucial for informed decision-making. For your work as a commercial realtor in Hamilton, staying current on local zoning and development plans is key.

• Implement Flexible Business Models and Scenario Planning: Prepare for various scenarios, including interest rate fluctuations, material cost increases, or shifts in foreign investment. Flexible leasing terms and adaptable property designs enhance resilience.

• Diversify Suppliers: To mitigate supply chain disruptions and tariff costs, diversify material suppliers and explore domestic alternatives.

• Adopt a Long-Term Perspective: The Ontario CRE market is in transition. A long-term view is essential, as patient, strategic plays will yield significant benefits.

• Continuously Monitor Policy and Economic Indicators: Stay updated on interest rates, tariff negotiations, and evolving government policies for timely adjustments to strategies.

Conclusion

Ontario's commercial real estate market in 2025-2026 is dynamic and in "reset mode." While presenting challenges, it rewards patience, innovation, and strategic thinking.

Despite headwinds from US tariffs, economic uncertainty, and affordability challenges, underlying fundamentals like population growth and sustained demand suggest long-term resilience. The market's ability to absorb new supply, adapt to changing tenant preferences, and creatively repurpose existing assets will be key to its evolution.

Success in this intricate and transitional environment depends on the ability of investors, developers, and tenants to adapt swiftly and strategically. This includes repositioning properties, embracing flexible leasing models, identifying niche investment opportunities, and leveraging deep localized expertise in Ontario's diverse submarkets. The period ahead demands a nuanced approach, balancing cautious optimism with proactive, informed decision-making.

As a commercial realtor dealing in multi-family and mixed-use buildings in Hamilton, Ontario, and with your property management company, Red Maple Property Management, understanding these currents will be crucial for guiding your clients effectively through the opportunities and complexities of the market in the coming years.