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Southwestern Ontario Real Estate Outlook 2025
January 27, 2025 4 Minute Read
Southwestern Ontario promises to hum with commercial real estate activity in 2025.
The anticipated St. Thomas Volkswagen and PowerCo battery cell gigafactory is creating buzz across Southwestern Ontario’s industrial market. Waterloo Region’s industrial market is facing increasing vacancy and declining lease rates, creating a tenant-favoured environment, while the medical office sector is set for significant growth, fueled by healthcare innovations and the upcoming super hospital.
We spoke to CBRE Southwestern Ontario Managing Director Phil Coley about what commercial real estate trends he’ll be tracking this year.
Industrial
We’ve seen a massive correction in industrial rents; 2024 was the year of rent correction in the large bay market. Rents escalated throughout COVID then slowed and then by late 2023 started to drop more in line with 2019 numbers. So the two to three years of COVID were anomalies. Rents are more reasonable now for tenants and it’s a much healthier market as a result. With demand loosening up, we have more available space, and tenants have more options, which has fed into the rental rate correction.
Industrial landlords are offering more incentives in tenant inducements and free rent for tenants and bonus commissions for brokers to attract good tenants. There is a feeling that we are at the bottom of the economic slump, the curve, and we will rebound by the second quarter of 2025, with deal volume increasing, especially for big bay spaces.
Small and mid-bay continues to be relatively stable compared to large bay, with rents holding as there is limited supply. No one is building 1,500 to 3,000 sq. ft. mom and pop industrial spaces.
Sale prices have corrected down and will stay flat for the first two quarters. There’s a bit of a discrepancy between buyers and sellers. Sellers are still trying to hold on and get as much as they can for their properties while buyers are pushing for less.
With GTA rents declining, we are seeing fewer tenants coming this way to do deals, which is in contrast to 2021-2023 where there were a lot of GTA tenant requirements in this market.
Office
There are three office-to-residential conversions happening in Kitchener-Waterloo at the moment. One is at Conestoga College, which is converting a tower to student residence. The other two are private investors converting office towers to rental apartments. For a market this size to have three live examples of conversions is notable. Otherwise the office market here is soft.
In 2025 the focus of the Waterloo region office market will be on medical and education uses, as these continue to be drivers of activity for vacant space. We’re seeing the C-suites of these companies making a big push to get people back to the office. The dominant trend seems to be three days in, two days at home. There has been a slow resurgence of tech workers returning to the office, with most companies demanding at least three days in the office.
Vacancy has flattened out in recent quarters. Class B and C office vacancy will likely increase due to Class A landlords offering higher incentive programs and packages to tenants.
In addition to the office to residential conversion mentioned above, there has been some office to industrial conversion as well. Primarily in old Blackberry space that went from industrial to office for BlackBerry’s use and is now being converted back to industrial.
With the super hospital due for completion in 2031 in Waterloo Region, we expect to see an increase in ancillary uses supporting medical activities. And the new 90,000 sq. ft. Velocity life science incubator space will set the tone for a new debate about venture capital investment and growth in that sector.
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