May 2025 Commercial Real Estate Market Insights
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Q1 GDP beats forecasts, pushing rate cut expectations to July
Canada’s economy grew at an annualized pace of 2.2% in the first quarter of 2025, outpacing expectations and matching the growth rate from Q4 2024. On a quarterly basis, real GDP rose 0.5%, while per capita GDP climbed 0.4%, building on a modest 0.1% gain in the previous quarter. The quarterly gain was largely driven by growth in total exports (+1.6%) and the buildup of business non-farm inventories, according to the agency. On an annual basis, business investment rose a solid 4.0%, despite ongoing tariff-related uncertainty facing Canadian firms. The upside was partially offset by a 2.8% drop in residential investment, driven by an 18.6% decline in ownership transfer costs—an indicator of resale market activity. It marked the steepest drop since Q1 2022. Final domestic demand—which captures total consumption and investment in fixed capital—was flat in Q1, posting no quarterly growth for the first time since late 2023. Advance data from StatCan suggests that real GDP rose another 0.1% in April, supported by gains in mining and finance, though partly offset by continued weakness in manufacturing. “The Canadian economy looks to have held up reasonably well in the opening months of the trade war, and even the most recent (estimate) for April suggests growth is weathering the trade storm,” wrote BMO’s Douglas Porter. Economists Warren Lovely and Noah Black with National Bank highlight an unsung driver of GDP strength: social security. While the federal government posted a $62-billion deficit over the past four quarters—equivalent to 2% of GDP—Canada’s public pension programs (CPP/QPP) “delivered a seasonally adjusted surplus (national accounts basis) for a 103rd straight quarter,” Lovely and Black wrote. They describe this surplus as a “fiscal lynchpin” for Canada, helping to offset gross debt and bolster financial reserves across government sectors. By their estimate, Canada now holds general government financial assets equivalent to 100% of GDP—thanks in no small part to consistent contributions from social security.
Mortgage Forecast: Economic Uncertainty Could Keep Rates Close to 7% This Summer
There's a growing consensus among housing market experts that average mortgage rates will stay above 6.5% this year. Uncertainty over the impact of President Trump's economic policies continues to cause daily volatility in the mortgage market. On Tuesday, the average rate for a 30-year fixed mortgage was 7.02%, according to Bankrate, compared to around 6.75% at the start of May. The increase followed a surge in Treasury yields in the bond market. Since the 30-year mortgage rate closely tracks the 10-year Treasury yield, we generally see higher rates for home loans when yields go up. Lisa Sturtevant, chief economist at Bright MLS, said the uptick in Treasury yields can be attributed to rising federal government debt levels and Moody's recent downgrading of the US credit rating. Bond yields had been on the rise even before last week, fueled by a combination of risk factors, including the inflationary impact of tariffs. "Growing uncertainty is going to make this a slower-than-typical spring housing market," said Sturtevant. Expensive mortgage rates and record-low affordability have plagued the housing market since 2022. Even those who can afford to buy in today's market are waiting. The psychological impact of economic instability holds prospective buyers back. "When people are anxious, they are less likely to make big decisions, like buying and selling a home," Sturtevant said.
How A Weakened Canadian Dollar Impacts Commercial Real Estate
One of the many subplots of the ongoing trade war with the United States is that it has raised the value of the Canadian dollar, somewhat covering up the fact that the CAD has been on years-long slide. In March 2024, the CAD to USD exchange rate was at about $0.74 and then stayed above $0.70 — with fluctuations — before dipping to a 22-year low of $0.68 on January 31, the day before 25% tariffs levied by US President Donald Trump on nearly all goods from Canada and Mexico were set to come into effect. "I think everybody knows that the CAD has been coming off quite a bit in the last year, but that's within the context of a longer run, said CoStar Group Chief Economist & Head of Market Analytics Carl Gomez in an interview with STOREYS this week. "The depreciation has been happening since the pandemic. Even going back before that, since the ['08-'09] financial crisis and the oil implosion in 2015, the CAD has really come off." In a vacuum, however, a weakend Canadian dollar may not be a bad thing, at least for commercial real estate. "We are one of those weird industries where up is down, black is white, and sometimes bad news is good news for us," says Colliers National Head of Research Adam Jacobs. "It's a negative in the sense that it could cause more inflation if you're sourcing materials outside Canada, but it could also be a positive because it does put Canada somewhat 'on sale,' you could say, for an investor who's coming from Japan, who's coming from Germany, who's coming from England."