Paul Morassutti's 2025 Real Estate Outlook

“Don’t believe the hype.” That was CBRE Canada Chairman Paul Morassutti’s message to his Toronto Real Estate Forum audience on December 4.

“There are challenges, and I will address them,” he said during his opening keynote, “but there is also more optimism in the market today than there has been in the past couple years.”

“The main reason for that optimism is that the cost of capital crisis –- which has played havoc with liquidity and decision-making — is finally abating.”

As interest rates come down, Morassutti said, “yield-seeking capital is now returning to real estate, which is one reason REITs had a near record rebound in the third quarter of 2024, posting the strongest quarter since Q2 2009.

“Falling rates will provide more stability to the market and will undoubtedly nudge buyers and sellers closer together. Deal flow is already picking up. Capital formation is improving. Lending sentiment is better.

“We expect 2025 to be considerably more active than 2024.”

Office is Under-Demolished, Not Over-Supplied

Confidence is returning to the office market, and there are numerous signs that a recovery is taking shape, with CBRE forecasting that office vacancy will peak in 2025.

Canadian markets are almost through the wave of new office supply and in 2025 new supply will be at a 20-year low. “This will have a profound positive effect on vacancy and rents, as it has in every cycle in memory,” Morassutti said. “In fact, if we hadn’t built any new buildings in Toronto over the past five years, and everything else stayed the same, our overall vacancy rate would be under 7%.”

Office vacancy is “heavily bifurcated by building quality and location and we all know what occupiers are looking for in this market,” he said. “The result is that the highest quality, best located buildings are actually under-supplied, while their commoditized counterparts are over-supplied. Put another way, we are not over-supplied, we are under-demolished.”

This is especially true when sustainability is factored in. Morassutti noted that the global head of one of the world’s biggest banks recently said that the lack of sustainable office assets is one of the biggest challenges the company faces. “They would like their real estate portfolio to be net zero by 2035 but 90% of their portfolio is not there.”

Reasons for Office Optimism

CBRE’s recent Occupier Survey indicates that more companies are looking to grow this year versus last year and fewer companies are looking to downsize compared with last year. Sublet availability is going down, which is usually a precursor to a more stabilized market as fewer tenants look to shed space. And trophy office property vacancy is the lowest that it has been in four years, with rent increases not uncommon.

When it comes to remote work, “it appears that the Return-to-Office pendulum is clearly swinging in favour of more time in office,” Morassutti said, noting that McKinsey, a management consulting giant that advises companies on how to optimize performance, is asking their employees to come into the office more. “That’s very telling.”  

The office sector will evolve beyond the “somewhat simplistic notion of bifurcation,” he said. “There is going to be further segmentation.”

At the top of the tree will be brand new, state of the art, net zero assets for which there will be enduring demand. A category below, will be older product but still well amenitized and well located and with strong sustainability credentials. Those assets are also likely to perform well. Another step down will be a swath of inventory where performance will likely be uneven.

“And below this,” Morassutti said, “is a category of assets which may never recover.”

Retail Renaissance Continues

Retail vacancies in Canada are below 4%, and the pace of retail leasing is at a multi-year high. It’s getting tough for tenants to find space and there has been rent appreciation across the country in almost all retail formats. Necessity-based retail and discount retail has been exceptionally strong.

Drawing parallels with the office sector, Morassutti pointed to the “positive effect of not adding much new supply.”

“It has been decades since an enclosed mall has been built. New developments like Royalmount in Montreal are few and far between and many commodity malls have been re-developed. The result is strong fundamentals and investor interest. Observers of the office market should take note.”

The biggest challenge to the retail sector is the obvious, Morassutti said: a slowing economy. Households face a cooling labour market, slowing wage growth and a wall of mortgage renewals onto higher interest rates in 2025.

“Cutting the GST on Christmas goodies might provide a bit of a sugar rush to consumers but nothing more.”

Multifamily Market Moderation

In 2024 a record amount of unsold condo inventory combined with already high rent affordability, Morassutti noted, “and the result is that rental growth for the multifamily sector is beginning to flatten, especially in higher-priced regions. And the reduced immigration targets will only further weaken growth.”

“We view this as more of short term, cyclical issue rather than a long-term headwind,” he added. “Canada’s population growth, even accounting for reduced immigration targets, is expected to lead the G7.”  

Morassutti said the past year has been “nothing short of disastrous” for the Toronto condo market, with September sales being roughly 90% lower than the 10-year average.

There have been very few new projects launching in 2024 and very few sales. “And what the numbers tell us is that is that if nothing is selling today, then 3 to 5 years from now, once the market and the economy normalize, there will be a severe shortage of units to buy and that could very well set off another condo boom.”

“That seems logical but it ignores an important point,” Morassutti said. “There is no condo market in Toronto without investors. You cannot pre-sell a project without them and the market will not fully recover until they come back.”

How does this impact apartment owners? “Well, less future condo supply – most of which ends up as rental – means that there will be less competition once the current unsold inventory clears up. The long-term prospects for multifamily remain very compelling notwithstanding the shorter-term challenges.”

Industrial Normalization to Come

The industrial story in 2025, like it was in 2024, will be one of supply and demand, normalization, as well as context, Morassutti said.

In response to historically low vacancy and surging rents, industrial construction ramped up considerably in 2023 just as demand was waning.

“Third party logistics providers were one of the main reasons for this pullback in demand,” Morassutti said. “They took too much space in the previous years and as the Canadian consumer has become stretched, we have seen retail users contracting inventory as well which has led to a spike in sublet availability, now at an eight-year high.”

The performance of the economy will play a large part in industrial performance in 2025, he added, “but overall we remain bullish on the industrial and logistics sector over the long term.”

Canada Adrift?

Morassutti said he couldn’t recall a year “where so many people have referred to Canada, and Toronto, as broken. I confess to doing it myself. Political dysfunction, sclerotic bureaucracy, falling productivity, an affordability crisis, and the worst congestion that Toronto has ever experienced – all of this makes it feel that perhaps Canada has lost its mojo. It is a legitimate concern.”

Does Canada have very real issues? “Of course it does,” he said. “And I suspect you will hear a lot more about these issues. But name a country that doesn’t.

“Context is important,” he pointed out. “As the world becomes less stable, Canada – little, safe, secure Canada – will look even better in comparison.

“I think we should consider that many countries and cities around the world would love to have our problems, and it is worth reminding ourselves that we are truly blessed to work and live in this country. The strengths and the potential of this country far outweigh its weaknesses and I believe the future is much brighter than what the doomscrollers would have you believe.

“Don’t believe the hype.”