Urban commercial real estate in Canada is at an inflection point. Not a crisis, not a boom. A reset.
Let’s look at what’s actually happening in our major cities, what’s driving the changes, and what it means for property owners, investors, and lenders.
The Urban Context
Canadian cities are where the bulk of commercial real estate value sits. Toronto, Vancouver, Montreal, Calgary, and to a lesser extent Edmonton, Ottawa, and Winnipeg are the major markets.
These cities have been dealing with several significant forces over the past few years: hybrid work changing office demand, e-commerce continuing to pressure retail, strong population growth driving housing demand, and an evolving economy that favors some sectors over others.
The result is differentiation. Some property types and locations are thriving. Others are struggling. The uniform upward trajectory of urban property values that characterized the 2010s has given way to much more selective performance.
Downtown Office: The Challenge
Let’s start with the property type getting the most attention: downtown office space.
Office vacancy in downtown Toronto is running around 16% to 17%. That’s nearly double the long-term average of 8% to 10%. Vancouver is similar, around 14% to 16%. Calgary’s downtown office vacancy is higher, around 25% to 30%, though that includes legacy issues from the energy sector downturn.
Why is this happening? Hybrid work is the main factor. Many companies have reduced their office footprints as employees work from home two to three days per week. Some companies have moved to fully remote models. Others have shifted to hub-and-spoke models with smaller downtown offices and suburban locations.
The result is that downtown office buildings have excess space. Landlords are competing aggressively for tenants. Concessions like free rent periods and tenant improvement allowances are common. Effective rents (what landlords actually collect after concessions) are down from peak levels.
But here’s the nuance: not all downtown office space is suffering equally.
Trophy buildings with modern amenities, good transit access, sustainability features, and quality ownership are maintaining decent occupancy. Tenants who want downtown presence are willing to pay for the best space.
Class B and C buildings are struggling. Older towers without recent capital investment are seeing the highest vacancy. Some are trading at prices 30% to 40% below 2019 values. A few buildings are being taken off the office market entirely and considered for conversion to residential or other uses.
For investors and borrowers, downtown office requires careful analysis. If you own quality space with long-term tenants, you can get financing, though terms are tighter than five years ago. If you’re looking at value-add or repositioning plays, expect lenders to be very conservative.
Suburban Office: The Relative Winner
Suburban office markets are performing significantly better than downtown in most Canadian cities.
Vacancy rates in suburban office parks are running 8% to 12%, which is close to normal. Rents are stable or growing modestly. Companies are finding that suburban locations offer several advantages: easier parking, shorter commutes for employees in the suburbs, lower rent than downtown, and often newer buildings with better layouts.
The tech sector, which is a major office tenant, has been particularly active in suburban markets. Companies that don’t need the prestige of a downtown address are choosing suburban locations for the economics and employee convenience.
Financing for suburban office is more straightforward than downtown. Lenders see better fundamentals and are more comfortable with loan terms. You’re still not getting the aggressive financing you could have gotten in 2019, but it’s workable.
Retail: The Splitting Market
Urban retail real estate has split into clear winners and losers.
Street-level retail in high-traffic neighborhoods continues to perform well. Queen Street in Toronto, Robson Street in Vancouver, Crescent Street in Montreal, these locations have maintained tenant demand and rental rates. The combination of residential density, foot traffic, and lifestyle appeal supports retail.
Necessity-based retail like grocery stores, pharmacies, medical offices, and services are consistently strong. These tenants serve essential needs and maintain occupancy through economic cycles.
Shopping malls in urban areas are more challenged. Foot traffic hasn’t fully recovered to pre-pandemic levels. Anchor tenants are struggling, and smaller retailers are consolidating locations. Malls that have successfully pivoted to entertainment, dining, and experiential elements are doing better than those that remain traditional retail.
Restaurants and hospitality have recovered significantly from pandemic lows, but the sector remains more volatile than other retail. Urban restaurants that attract both local residents and office workers are back to normal operations. Those that depended heavily on office tower workers are still adjusting to lower weekday lunch traffic.
Industrial in Urban Settings
Industrial property in urban markets is one of the success stories.
Last-mile distribution facilities near major cities are in extremely high demand. E-commerce requires warehouses close to consumers for fast delivery. Vacancy rates for modern urban industrial space are below 4% in most major markets.
Older industrial buildings in urban areas are increasingly being eyed for conversion to other uses. The land is often more valuable for residential or mixed-use development than for continued industrial use. This is particularly true in Toronto and Vancouver where development sites are scarce.
From a financing perspective, urban industrial properties are getting excellent terms. Lenders like the fundamentals, and these properties are easy to finance with high loan-to-value ratios and competitive rates.
Multi-Family: The Demand Story
Multi-family residential properties in urban markets are benefiting from strong fundamentals.
Rental demand in Canadian cities is at historic highs. Immigration, population growth, housing affordability challenges, and lifestyle preferences are all driving demand for rental housing.
Vacancy rates for purpose-built rental apartments in Toronto, Vancouver, and Montreal are below 2%, which is extremely tight. Rent growth has been strong, running 5% to 8% annually in many markets over the past few years.
The challenge for multi-family is on the valuation side. As interest rates rose in 2022-2023, cap rates for apartment buildings expanded, which caused property values to decline from peak levels even though operating performance remained strong.
Owners who bought at peak prices with high leverage are feeling pressure. Their properties are performing well operationally, but their equity has eroded as values adjusted. Some are in situations where current property values are below their mortgage balances.
Longer-term owners or those with conservative leverage are fine. The properties generate strong cash flow, and the long-term outlook for rental housing in Canadian cities is solid.
Lenders view urban multi-family as relatively low risk despite the valuation adjustments. Strong occupancy and consistent cash flow make these properties financeable, though loan-to-value ratios are more conservative than they were at peak values.
Mixed-Use Development
Mixed-use properties combining residential, retail, and sometimes office in urban settings are getting renewed attention.
The logic is compelling: create live-work-play environments where residents, workers, and visitors all occupy the same space at different times. This can support retail that pure office buildings can’t sustain, and create vibrant neighborhoods rather than single-use districts that empty out after hours.
Toronto and Vancouver have both seen significant mixed-use development. Montreal has a strong tradition of mixed-use neighborhoods. Calgary and Edmonton are seeing more of this type of development as downtowns evolve.
From a financing perspective, mixed-use is complex because lenders need to underwrite multiple property types with different risk profiles. But well-executed mixed-use projects in good locations can get financing, particularly if they have pre-leasing or pre-sales in place.
Transit-Oriented Development
Proximity to transit has become increasingly important in urban property values.
Properties within walking distance of subway, light rail, or commuter train stations command premiums for both residential and commercial space. The convenience of transit access is valued highly by tenants and buyers.
Cities like Toronto and Vancouver, where car ownership is expensive and traffic is challenging, see particularly strong premiums for transit-adjacent properties.
This trend is likely to continue as cities invest in transit infrastructure and environmental concerns make car-dependent development less attractive.
The Work-From-Home Effect
Hybrid work isn’t just affecting office buildings. It’s rippling through urban commercial real estate in several ways.
Neighborhood retail in residential areas is doing better because people are home more often. Local coffee shops, gyms, and service businesses are benefiting from residents who aren’t commuting downtown five days a week.
Downtown restaurants and retail that depended on office workers are struggling with lower weekday traffic. The Thursday and Friday office crowd is much smaller than pre-pandemic.
Suburban commercial areas are seeing increased activity as people spend more time in their home neighborhoods rather than downtown.
This rebalancing is creating both challenges and opportunities across urban markets.
Population Growth and Housing Pressure
Canadian cities are growing quickly, driven primarily by immigration. That growth is fundamental to urban real estate demand.
The challenge is that housing supply hasn’t kept pace with population growth. That’s supporting rental rates and creating demand for new development, but it’s also creating political pressure for policy changes.
Various levels of government are trying to encourage more housing supply through regulatory changes, tax incentives, and direct investment. How successful these efforts are will affect urban real estate markets over the next several years.
Regional Differences
Let’s talk about how these trends are playing out in specific cities.
Toronto is seeing the strongest multi-family fundamentals, continued challenges in downtown office, and robust industrial demand. The sheer size and diversity of Toronto’s economy creates opportunities in multiple property types.
Vancouver has similar dynamics to Toronto but with even tighter constraints on developable land. That’s supporting property values in established locations but making new development challenging.
Montreal offers more affordable urban real estate than Toronto or Vancouver, which is attracting investment. The office market is holding up better than other cities, and multi-family fundamentals are strong.
Calgary is adjusting from energy sector dependency. Downtown office remains challenged, but suburban markets are active. Population growth is picking up, supporting residential demand.
Ottawa is heavily influenced by government employment. Hybrid work policies for federal workers directly affect downtown office demand. Multi-family is steady.
Financing Urban Commercial Real Estate
Getting financing for urban commercial property depends heavily on property type, location, and quality.
Prime multi-family and industrial properties in good urban locations are getting favorable financing terms: 70% to 75% LTV, rates in the 5% to 6% range.
Quality retail and suburban office are financeable at 65% to 70% LTV with rates in the mid-5% to mid-6% range.
Downtown office requires strong property fundamentals and lower leverage, often 55% to 65% LTV, with rates in the high-5% to low-7% range.
All of these assume good borrower credit and strong property cash flow. Properties with challenges require more equity and higher rates.
Opportunities in the Current Market
For investors and operators, here’s where opportunities exist.
Value-add plays on multi-family properties can generate strong returns if you can improve operations, upgrade units, and raise rents to market levels.
Adaptive reuse of office buildings to residential or other uses is attracting attention, though the economics are complex and require creative financing.
Suburban office and retail properties with good fundamentals are trading at more reasonable valuations than during the peak, creating acquisition opportunities.
Industrial properties in urban settings continue to be in demand, though pricing is aggressive for quality assets.
Work With Urban Market Specialists
Urban commercial real estate requires deep local market knowledge and understanding of property-specific dynamics.
At Creek Road Financial Inc., we work with property owners and investors in urban markets across Canada. We understand which lenders are active in which property types, how to structure deals for optimal financing, and how to navigate complex situations.
Whether you’re acquiring urban commercial property, refinancing existing debt, or funding improvements, we can help you secure competitive financing that positions you for success.
Let’s discuss your urban commercial real estate financing needs and explore your options in the current market.