Canadian Real Estate Sector

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From Sector Resilience to Affordability Challenges

The real estate industry has weathered significant change in recent years. First, a historic pandemic reshaped how people and organizations work. Then, an inflationary environment not seen in decades led to a surge in interest rates. As a result, the real estate industry has been forced to adapt to a rapidly changing landscape. At the onset of the last quarter of 2025, we think it’s time to pause and reflect on the challenges and opportunities facing this sought-after asset class.

Return-to-office mandates force a flight to quality

In the early stages of the pandemic, many companies switched to remote work. Projects were successfully delivered, employees enjoyed increased flexibility with no daily commute, and many organizations reduced costs by cutting back on office space. Today, that pendulum appears to be swinging back toward equilibrium. Recent evidence indicates that remote work presents an array of challenges that include its impact on new employees’ learning curves, team and firm collaboration, career development, organizational culture, and overall performance.

KPMG 2024 CEO Outlook, a survey of 1,325 CEOs from 11 countries, shows that many firms have caught on. An overwhelming 83% of respondents expect a full return to the office within the next three years. Although this trend bodes well for office real estate, not all properties are positioned to benefit equally.

With employee retention top of mind, many organizations are strategically crafting work environments with in-demand amenities as they begin their return-to-office mandates. Tenants’ recent flight to quality has increased the spreads between different property classes, pushing up the vacancy rates of lower-quality builds.

The America First agenda puts a damper on Canadian transactions

The real estate market isn’t immune to the general uncertainty fostered by the disruption of U.S. trade policy. Although tariffs didn’t have a direct and severe impact in the first half of 2025, the mere threat of tariffs and the frequent changes of posture by the Trump administration have had a dampening effect on Canadian real estate transaction volumes. 

In the first half, all but two asset categories were lower relative to the previous six-month period. Investors are taking a more cautious approach to industrial properties in particular. It’s reasonable to assume that a deterioration in trade relations would have a corresponding impact on the demand for manufacturing and warehousing space. Although a worst-case scenario is unlikely, considering the high stakes for the U.S. and Canadian economies alike, it’s clear that many investors are taking a wait-and-see approach.

Not surprisingly, investor appetite is shifting to retail assets, with necessity and essential retail leading the way–sectors that have both demonstrated resilience during economic downturns. For example, properties anchored by grocery stores and pharmacies proved to be highly resilient during the COVID-19 pandemic.

With trade and economic uncertainty at elevated levels, these properties are once again a favourite of buyers and lenders alike. The typical neighbourhood shopping mall–a one-story building with ample surface parking and surrounded by a mature residential area–has become costly to replicate and thus somewhat insulated from a supply wave, adding to its relative stability.

Canada urgently needs to close its housing gap

Another major theme making headlines in recent years is the urgent need for housing. Although rent increases came down in 2024 from the record highs of 2023, the Canadian rental market remains particularly tight. The CMHC 2024 Fall Market Report pins the purpose-built rental apartment vacancy rate at 2.2%, with the condominium market even lower at 0.9%. Despite a recent improvement, housing affordability remains a challenge for the average Canadian, with monthly rent or mortgage payments absorbing the lion’s share of household income nationwide.

To restore affordability, CMHC estimates that Canada requires 430,000 to 480,000 new housing units a year between now and 2035. With a projected construction rate of only 250,000 units and the Canadian population expected to reach 44.5 million by 2035, the affordability problem is set to become much more acute if supply isn’t increased materially during that time.

Policymakers at all levels of government can influence outcomes through various strategies. For instance, policies that support the training of additional construction workers may address labour shortages; technological advancements in material science can potentially lower construction costs and enhance productivity; and more efficient municipal planning may accelerate approval timelines. Achieving these goals will involve collaboration across different levels of government and a focus on practical solutions. 

Macroeconomic trends are creating tailwinds 

As for the second half of 2025 and beyond, one factor that investors are keeping an eye on is the interest rate curve, which has an impact on asset profitability and pricing. As long-term interest rates seem to be staying higher for longer and narrowing the capitalization-rate spread along the way, we don’t expect widespread cap-rate compression in the foreseeable future. 

Against this economic backdrop, investors will be drawn to properties generating stable and/or growing cash flows in asset classes benefitting from long-term macroeconomic and demographic tailwinds. Such opportunities are seen in purpose-built rental properties, for example. As noted, demand for new housing units is high. This trend is further reinforced by the rising average age of first-time homebuyers and the growth of oneperson households.

The industrial market is another asset class supported by long-term trends. Even though it has slowed after significant growth during the pandemic and faces uncertainty owing to trade policies, it remains positioned to benefit over the long term from developments such as increased adoption of e-commerce, investments in technology for logistics efficiency, and changes in global supply chains that cause companies to localize their procurement processes.

Navigating an evolving market: our strategic approach 

In summary, the Canadian real estate market continues to be driven by macroeconomic factors, such as trade policy uncertainty, shifting investor preferences, and a crying need for housing. The market has demonstrated resilience, especially necessity-based retail and purposebuilt rentals, but industrial properties must navigate volatility stemming from trade relations. 

Meanwhile, the persistent challenge of housing affordability underscores the need for strategic public policy and innovation within the construction sector as Canada’s population soars and the gap between demand and supply widens. Long-term demographic shifts, such as an aging population and the rise of single-person households, further reinforce demand for new rental units and innovative approaches to residential development. 

Against this dynamic backdrop, iAGAM employs a team of active managers with deep expertise in the Canadian real estate landscape. Their hands-on approach allows them to identify opportunities across market cycles and asset classes, leveraging both cyclical and secular trends. By staying attuned to the latest developments and maintaining a disciplined investment strategy, iAGAM is poised to capitalize on emerging trends for the benefit of its clients.