Q3 Real Insights | Toronto and Ottawa's economic and market trends amid turbulence

Canada’s real estate and economic landscape is navigating turbulent waters in 2025, shaped by U.S.-induced trade tensions, rising interest rates, and shifting market dynamics. The latest video in our Real Insights series highlights key trends aligned to the upcoming Toronto and Ottawa forums, from the challenges facing commercial real estate and the office sector to the pressing need for affordable housing solutions.

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Q3 Real Insights | Toronto and Ottawa's economic and market trends amid turbulence

Economics

Economic uncertainty resulting from the U.S.-induced tariff war has affected every sector of Canada’s economy. While Canadian exports – mainly motor vehicles and parts as well as industrial machinery, equipment and parts – grew 4.1% in Q1 2025 and our GDP reached 2.2%, the increase in exports was due to Americans stockpiling goods in anticipation of tariffs. Growth is forecast to slow throughout the rest of 2025 and may actually contract in 2026 if the new federal government is unable to gain concessions from the U.S.

Canadian exports shrank 7.5% in Q2, while business investment in machinery and equipment declined 0.6% and GDP was down 1.6%. The Bank of Canada (BoC) maintained its overnight lending rate at 2.75% throughout the summer, although economists now believe the likelihood of further rate cuts before year’s end is increasing as our economy teeters on the brink of a recession.

The overall unemployment rate held steady at 6.9% in July, but the youth unemployment rate continued to rise for the 15-24 age group, with 15–19-year-olds experiencing significant difficulty finding part-time and 20–24-year-olds full-time work. In July, youth unemployment reached its highest rate since September 2010 – 14.6% (excluding 2020 and 2021). Although unemployment rates in U.S. tariff- and trade-areas like Oshawa and Windsor have risen sharply this year, half the provincial increase has occurred in the Greater Toronto Area (GTA). In Ottawa, federal employees are waiting for the October budget’s announced cuts, although indications so far are that workforce reductions will be achieved through attrition rather than layoffs.

Goods measured by the consumer price inflation index increased 4% in Q2 with the exception of new and used vehicles. Car prices declined 1% for two reasons: greater inventory and lower demand. TD Economics forecasts non-residential CRE investment will expand by a total of 0.3% by Q4 2025.

Investment Activity

CRE investment volume continues to decline in 2025. GTA transactions totalled $17.5 billion in 2024, down 21% from 2023. Q1 2025 transactions were moderate at $3.6 billion, down 6% year over year, while Q2 volume was down 22% to $7.2 billion.

Higher interest rates have not only increased borrowing costs but have also reduced demand for properties and valuations. The Office of the Superintendent of Financial Institutions has flagged CRE as an elevated risk as a result, citing office, construction, and development sectors as particularly endangered as a result of high interest rates and weak credit conditions.

Industrial investments were up 26% year over year in Q1 2025, but with 5.1 million square feet of new supply entering the market, net leasing activity was down 1.4 million square feet, most of it in Toronto.

Retail has rebounded, despite the demise of the Hudson’s Bay chain, with food-anchored retail and mixed-use redevelopments providing the bright spots in a 59% year-over-year increase to $935 million.

The office sector remains troubled, with high vacancy rates and Q1 transaction volumes down 38% year over year. The flight to quality continues, with Class A office performing better than any other segment. The office market should begin to stabilize in major centres like Toronto and Ottawa as a result of recently announced return-to-office mandates. The Province of Ontario, the City of Ottawa, Rogers, TD, BMO, RBC, and Scotiabank have announced they want to see employees back in the office five days by the new year. This will benefit the Toronto office market, where the financial services sector is a major employer and is seeking 1.7 billion square feet of leased office space in Central Toronto. In Ottawa, demand is stronger in Kanata with its cluster of tech and defence sector clients. West Ottawa and parts of the downtown core have seen space returns. However, the Ottawa office vacancy rate declined for the third straight quarter in Q2, to 10.8% and asking rents remained stable.

Multifamily and land transactions both dropped around 25% in Q1 2025 in the GTA.

Key Trends

Ottawa is experiencing more distressed transactions, particularly among smaller developers. These can be minimized by lease optimization, building contingency buffers to cover cost overruns and financing gaps, revaluing assets, divesting non-core holdings, and adaptive reuse of underused downtown office buildings.

Despite rents dropping in most major CMAs – Toronto rents have declined between 6.0 and 8.5% between July 2024 and July 2025 – the need for affordable housing continues to grow. Ottawa two-bedroom rents increased 1.9% and one-bedroom rents dropped only 1.6%. Red tape, unfavourable development economics, and traditional construction methods are slowing new purpose-built rental (PBR) starts.

One-stop digital portals for both municipal and provincial approvals would help to streamline and reduce approval timelines, as would as-of-right zoning for mixed-use and high-density transit-oriented developments. Reducing or deferring development charges for purpose-built rentals and providing higher-density bonuses for developments that include affordable units would also encourage construction. Fast-tracked approvals for modular and prefab designs and increasing the use of mass timber could cut build times between 30 and 50%.

Public-private partnerships that can tap into surplus government land through acquisition or leasing and a program that subsidizes adaptive reuse of vacant office buildings and malls would also encourage more affordable housing supply. Expanding funding for non-profit and co-op housing and providing either land or tax breaks for mixed-income, social, or seniors’ housing should also increase the number of available affordable units.

The skilled labour shortage and training gaps need to be addressed at the federal level to increase labour mobility between provinces while linking immigration to skilled building trade workers. Increased funding for construction trades programs and apprenticeships would alleviate construction delays.

The federal government’s plan to reintroduce a form of Multi-Unit Residential Building tax provisions (MURBs) should help make affordable housing builds more viable. The 2024 budget increased the capital cost allowance rate on purpose-built rentals from 4% to 10%. Federal plans to cut development charges by 50% will also be a boon to the multi-residential market.