Canada’s commercial real estate sector is staying steady, even as it is buffeted by higher bond yields brought on by economic and political volatility outside the country, Avison Young said in its Q3 analysis of cap rates and investment trends.

Long-term bond yields are being pushed up by factors outside the Bank of Canada’s control, such as trade disruptions, changes to energy markets and geopolitics, the commercial real estate advisory firm identified. Rising fiscal deficits and bond issuances to invest in data centres are adding additional competition for capital, further driving up yields.

Generally, cap rates face upward pressure when bond yields rise, which exerts downward pressure on property values, Tim Loch, the principal, senior director and practice leader of valuation at Avison Young, explained in an interview with RENX.

As bond rates move up and down, lending also moves in tandem, he said, influencing the cost of borrowing for investors.

In a time of instability, property fundamentals will be key, Avison Young said, with the industry keeping a close watch on the trajectory of long-term yields going into 2027.

Fundamentals remain key

Those fundamentals are durable income streams, high-quality tenancy and tenant credit quality, to name a few. Cost certainty has also become a priority, satisfied with efficient building systems and strong operational management.

Assets that are “well-located, well-maintained, newer-built with good quality covenant” will be sought after, Loch said, as those can remain on the lower end of the cap rate range. Older, legacy properties are likely to be burdened down by higher leasing risk or cap-ex requirements, he added.

Facing unpredictable bond rates and cost of capital, investors are likely to “selectively underwrite” assets perceived as having less risk, Loch said. Those assets carry higher growth rates and less demand for capital in the future. This also presents an opportunity for investors to take a gander at properties that were unattainable to them before, Loch said.

But this also probably means transactions will take longer to conclude than the typical three-to-six months because of the heightened scrutiny on underwriting, Marie-France Benoit, the principal and director of market intelligence at Avison Young, said in the joint interview alongside Loch.

The steady pace of economic shocks that hit the market every two months is weighing on the confidence of commercial real estate and its ability to plan ahead, Benoit said. “But a good piece of real estate is always a good piece of real estate,” she said.

Sales activity in Q3 around $7B

For Q3, Avison Young found approximately $7 billion of sales activity in six major real estate markets — Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montréal. The figure stood below the almost $10 billion of activity in Q2 and over $8 billion in Q1, but Avison Young noted it was underreported due to region-specific delays.

Sales activity in the first half of 2026 stood out because of the balance in asset classes, Loch said. Benoit noted how sales activity in H1 2026 exceeded the first half of 2025, and picked up in the end of 2025 from high investor confidence. But with the uncertainty in the second half of 2026 from factors such as a trade war with the U.S., the trajectory of that growth is an open-ended question, Benoit said.

Loch did not forecast major shifts in strategy for the commercial real estate sector for this year and 2027.

Deals will get done “whether the bond rates are at six per cent or 3.5 per cent,” he said, and investor expectations are adjusted on the new fundamentals.

“It’s not that an elevated bond rate is necessarily going to kill the commercial real estate market,” Loch said, with pricing and valuation realigned in light of the situation.

But uncertainty is a problem, he continued, with investors "stuck in the middle of rising bond rates as opposed to just having a bond rate that was at 3.5 or four per cent.”

Transactions likely get slowed to a crawl in this rapidly shifting environment. 

Trends for CRE subsectors

In the report, Avison Young identified the trends expected to impact four major categories of commercial real estate.

For multifamily, rental markets are anticipated to move toward balanced conditions after years of tightness; an insufficient housing supply may be a greater risk than oversupply; and tailwinds are emerging from an aging population.

The industrial category is seeing occupiers become more selective due to economic uncertainty, as Canada seeks to draw in billions of dollars in capital to grow its industrial capacity and the artificial intelligence boom could hit a ceiling from limited electricity.

A growing tech sector, changes to conversion projects and massive spending in infrastructure are forecast to affect the office sector.

In retail, Avison Young noted investors are acquiring properties at scale, with confidence in anchored retail and Canadian consumers continuing to spend despite concerns over inflation and job security.