Canadian commercial real estate isn't bouncing back to 2019. It's finding a new baseline. After years of rapid repricing, the market is shifting into what analysts call "deliberate recalibration." Pricing has firmed. Capital is re-engaging, though selectively. And fundamentals, not forecasts, are driving investment decisions.

This isn't a return to the low-rate environment of the past decade. Early signals point to 2026 as the year the market starts operating within a more rational framework, particularly in Canada.

‍

A Subdued 2025 Set the Stage

Transaction volumes in Canada contracted 12% overall by Q3 2025, with significant variation by asset class and region. That followed a 14% year-over-year decline in 2024, putting volumes 25% below the record year of 2022.

But calling that weakness misses the context. Traditional lenders remained highly selective across both Canadian and US markets. Private and non-bank lenders played an increasingly important role in refinancing and recapitalization activity.

Capital totaling $24.2 billion transacted in the first half of 2025, a 22% decline year-over-year. But that wasn't a lack of interest. It was a pause. Substantial institutional capital accumulated on the sidelines as investors waited for clearer economic and rate signals.

By Q3 2025, investment volumes posted the strongest sales quarter since 2022, according to Avison Young. Third-quarter sales volume was up more than 40% year-over-year in the US, signaling that capital is moving again.

The narrative is shifting from "when will things improve?" to "how do we operate effectively in this environment?"

‍

Housing Pressures Continue to Shape Fundamentals

Housing remains one of the most influential forces underpinning CRE performance heading into 2026. Structural undersupply persists in both Canada and the US, even as elevated borrowing costs and sluggish demand temper near-term price appreciation.

In Canada, resale prices are expected to stabilize through 2026 following modest declines in 2025. Affordability remains constrained in major metropolitan regions. Slower condominium pre-sales have restricted new development pipelines, reinforcing demand for purpose-built rental.

The national rental vacancy rate climbed from 2.2% to 3.1% according to CMHC, as historically high rental supply completions combined with weaker demand from slower population and economic growth. But that's still tight by historical standards.

In the US, the multi-family sector is moving through the peak of its supply cycle. New deliveries are expected to reach 400,000 units by 2026, but vacancy rates are stabilizing and rent growth is normalizing. Some markets are seeing potential compression of capitalization rates.

Across both markets, these dynamics continue to support residential-adjacent defensive segments. Asset classes like multi-family and grocery-anchored retail attracted stronger debt and investor interest. At the same time, lenders remain more conservative in underwriting, applying higher minimum hurdles and tighter assumptions around rent growth and vacancies.

Sector Performance Remains Uneven

‍

Industrial continues to demonstrate resilience in Canada, supported by long-term demand for logistics and distribution space. CBRE data points to moderating new supply pipelines and low vacancy across major logistics hubs, helping sustain cash flows even as rent growth eases.

In the US, industrial vacancy reached 7.3% in Q2 2025 as new supply outpaced demand for the third consecutive year. But construction has dropped 63% since 2022, and vacancy is peaking. Net absorption is set to jump to 220 million square feet as reshoring, manufacturing, and data centers fuel demand.

Retail has re-emerged as one of the steadier property types in both countries. Limited new construction, healthier retailer balance sheets, and durable performance from grocery-anchored formats are supporting the sector. US retail vacancy is now the lowest among major property types, a notable shift from pre-pandemic perceptions.

In Canada, CBRE observes that food and grocery tenants continue to play a central role in retail investment decisions. Their ability to drive consistent foot traffic and align with consumers' emphasis on convenience and accessibility makes them attractive anchors.

Multi-family rental performance continues to diverge across North America. While Canada remains a tighter market overall, the wave of new deliveries has moderated rental rate growth and pushed vacancy rates up. In the US, several high-growth metros are working through new deliveries, leading to more competitive leasing conditions and increased use of tenant incentives as new projects lease up.

Larger, supply-constrained urban markets have largely stabilized, with construction pipelines remaining more limited. Across both countries, rising operating costs from insurance to utilities continue to pressure margins, underscoring the need for operational efficiency.

Office remains the most fragmented segment. National office vacancy sat at 18% at the end of 2025, down from 18.7% a year earlier. That marks the first decline in years and reflects return-to-office mandates taking effect.

But the quality divide is stark. CBRE research continues to highlight high vacancy rates in older, commodity buildings in many downtown cores. At the same time, demand for well-located, amenity-rich space has proven more durable. Class A vacancy in Toronto dropped to 15.4%, while trophy buildings hit just 3%.

Vacancy in Class B and C offices downtown remains elevated at 25.4% in Q4 2025, virtually unchanged from a year earlier.

‍

The Refinancing Wave

Loan maturities continue to shape market activity heading into 2026. A meaningful share of mortgages originated in the low-rate era of the late 2010s are now rolling over at higher costs of capital.

Trepp estimates US banks alone have roughly $598 billion of CRE loans maturing by the end of 2026, indicating a substantial refinancing horizon for 2025 and 2026. Canadian borrowers face similar renewal pressures within a more conservative lending framework.

Lower short-term interest rates are providing relief to some borrowers. Moody's ratings indicate that CRE credit conditions will remain neutral, with refinancing opportunities improving despite persistent risks, especially in weaker property types like office and retail.

Capital access remains uneven, favoring assets with stable cash flows, strong sponsorship, and solid fundamentals. Securitization markets are showing clearer signs of stabilization, with issuance increasingly centered on single-asset, single-borrower deals.

Banks are easing back into commercial real estate lending after spending two years digesting the impact of the Fed hiking cycle on their loan books. Lending was up 35% year-over-year through October 2025, and institutional sales activity increased 17%.

‍

Clarity Before Acceleration

The defining feature of 2026 may not be a sharp uptick in deal flow, but a clearer operating framework. After several years of abrupt rate movements, central banks appear closer to the end of their easing cycles. The Bank of Canada sits at 2.25%. The Federal Reserve is at 3.64%.

While interest rates remain materially higher than pre-2022 levels, reduced policy volatility has improved visibility for both borrowers and lenders. That clarity is beginning to show up in pricing.

CBRE reports that bid-ask spreads narrowed through late 2025 in sectors with the strongest fundamentals, particularly industrial, multi-family, and grocery-anchored retail, as buyer and seller expectations began to converge.

Capitalization rates are ready to move lower next year, according to a forecast from CoStar. Data is already showing hints of this in the multifamily and industrial sectors, where vacancies have peaked and rent growth is picking up.

Preqin notes a significant pool of private real estate capital remains undeployed. Rather than waiting for further rate cuts, many investors are reassessing opportunities that can perform under today's borrowing costs.

The result is a shift away from timing the next inflection point and toward structuring investments to operate effectively in a more normalized environment.

‍

Optimism, But Grounded

Avison Young's 2026 Canadian Outlook found that 97% of professionals expect activity to be stable or higher next year, with 64% anticipating growth. That contrasts with the firm's mid-2025 survey, when almost half projected only steady conditions and far fewer expected an upswing.

"Optimism is in the air, with a focus on recovery and growth among all sectors across the Canadian commercial landscape heading into 2026," said Mark Fieder, principal and president of Avison Young Canada.

But that optimism comes with caveats. "We were closely monitoring tariff measures and resulting slowdowns largely driven by declining exports in sectors closely tied to U.S. supply chains, such as automotive and machinery."

Colliers forecasts a 15% to 20% increase in sales volume in 2026 as institutional and cross-border capital reenters the market. But that still leaves volumes well below the 2021-2022 peak.

Deloitte's 2026 CRE Outlook found 83% of respondents expect their revenues to improve by the end of 2026, compared with 88% last year. Fewer respondents plan to increase spending, while more expect to keep spending flat.

The outlook is positive, but more cautious than a year ago.

‍

What This Means for Regional Markets

National trends don't always translate directly to regional markets like Kelowna. The Okanagan has its own dynamics.

Kelowna's commercial market historically moves in cycles tied to population growth and economic activity. Retail vacancy in 2023 sat at 1.65%, down from 1.95% in 2022, indicating a tight market. Industrial vacancy was at a historical low of 2.91%.

But 2025 brought changes. Central Okanagan's industrial vacancy rate jumped 28% in the last year to 4.1%, thanks to several new developments and caution from investors and business owners.

That mirrors broader trends. New supply coming online, weaker demand from slower population growth, and investor caution. Industrial remains Kelowna's most active commercial segment, but conditions have loosened.

Office markets in Kelowna show similar patterns to larger centers. Office leasing activity is growing at an estimated 8% annually, driven by flexible and amenity-rich workspaces. But overall office absorption has slowed as businesses adjust to hybrid work models.

Retail remains strong in Kelowna, particularly grocery-anchored formats and convenience retail. The market benefits from limited new construction and steady consumer spending on essentials.

For investors and business owners in Kelowna, 2026 looks like a year of selective opportunity rather than broad recovery. Quality assets in strong locations will perform. Older buildings or properties in weaker submarkets will struggle.

‍

The New Baseline

Across the industry, capital is being allocated with far more scrutiny than in prior cycles. Rather than relying on broad market appreciation, investors are evaluating opportunities through a narrower lens: the strength of local fundamentals, clarity of policy, the reliability of income streams in a higher-cost environment, paired with project viability.

Momentum is emerging first in sectors and jurisdictions where these conditions are most predictable. Food-anchored retail, modern industrial in logistics hubs, trophy office buildings, and multifamily in supply-constrained markets.

If 2024 marked the beginning of repricing and 2025 represented the search for stability, 2026 is shaping up to be the year the sector establishes a more durable footing.

Not a return to the past. A recalibration to a new normal where interest rates stay higher, capital stays pickier, and fundamentals matter more than they have in a decade.

For commercial property owners, investors, and businesses making leasing decisions in markets like Kelowna, understanding that this baseline has shifted changes the calculus on everything from renewal timing to acquisition strategies, and working with the team at Coldwell Banker Horizon Realty means getting guidance that accounts for both national CRE trends and how they're actually playing out in the Okanagan market, where local dynamics around population growth, employment, and supply often diverge from what's happening in Toronto or Vancouver.