Intelligent Investment

2025 Poised to be a Year of Increased Activity

Canada Monthly Market Commentary

December 18, 2024 2 Minute Read

In its final monetary policy meeting of the year, the Bank of Canada cut the policy interest rate by another 50 bps to 3.25%. Cumulatively, this totals 175 bps of interest rate decreases this year and establishes the Bank of Canada as the most aggressive rate-cutter in the world in 2024. While this latest move also marks the second consecutive “jumbo” sized interest rate decrease from the central bank, its accompanying statements have curbed most expectations that this pace of policy easing would continue. Most notable was the removal of a line from its decision statements that had previously effectively guaranteed further interest rate decreases to come. Instead, the central bank has signaled a slower and more gradual pace going forward, opting to evaluate “the need for further reductions in the policy rate one decision at a time.”

With the policy interest rate at 3.25%, the Bank of Canada has now lowered borrowing costs to the upper bounds of its estimated “neutral” range of 2.25% - 3.25%. However, economist groups do not believe the central bank is finished with interest rate cuts just yet and that more will be needed next year in order to actually start stimulating economic growth. According to the median projections of the major Canadian banks, the policy interest rate is expected to gradually fall to 2.25% by the end of 2025. Meanwhile, the Canada 10-year bond yield, which continues to be influenced by developments in the U.S., is also projected to modestly contract and average 3.00% next year. Overall, the Bank of Canada has taken a more cautious tone heading into 2025, weighed by heightened uncertainty - the greatest of which being the threat of broad U.S. tariffs on Canadian goods.

Against this economic backdrop, Canada remains a growth play for commercial real estate with GDP, population and employment forecasts set to rank among the top G7 nations over the next five years. According to CBRE’s Canada Real Estate Market Outlook 2025, the cost of capital crisis will finally begin to ease in 2025 and investment as well as leasing activity will increase in the year ahead. Investment sentiment has been improving and stronger transaction volumes are expected in 2025 as more capital is drawn off the sidelines. Cap rates for some asset classes are likely to start modestly compressing, but subject to global bond market conditions. Real estate debt availability is also expected to improve and credit spread dynamics should begin to normalize. Overall, 2025 is poised to be a year of increased activity for the Canadian commercial real estate market.

Economic Highlights:

  • Employment rose by 50,500 jobs in November 2024 and the unemployment rate increased to 6.8%.
  • Real GDP growth for Q3 2024 was 1.0% annualized, falling slightly below the Bank of Canada’s October projection for 1.5% growth.
  • Headline inflation fell to 1.9% in November 2024, with core measures CPI-Trim and CPI-Median holding flat at 2.7% and 2.6%, respectively.

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