When CoStar surveyed real estate professionals at its annual outlook webinar to uncover their expectations for Canadian real estate in 2026, opinions varied considerably, probably reflecting the current elevated level of uncertainty.
The largest share of survey respondents, 44%, said they expect 2026 to be somewhat better for Canadian real estate performance than the past two years, while 35% believe it will be no different. Meanwhile, 20% of participants felt performance would be worse. Only a negligible few said it would be significantly better.
Given this backdrop of heightened uncertainty in the industry, here are three significant trends for the industry to watch for that are likely to shape Canada's real estate market outlook in 2026.
An economy in structural transition
Canada’s economy proved to be more robust than expected in 2025. A recession was averted, mainly due to resilient domestic spending. That was partly driven by the lagged impact of previously strong population growth. And despite the flare in tensions caused by the trade war, the impact of U.S. tariffs proved to be more bark than bite on Canada’s important external side of the economy. A big reason for this is that the USMCA trade agreement remains in effect, which continues to protect most Canadian exports from U.S. tariffs.
But prospects for the overall economy in 2026 may be less sanguine. Population growth is poised to decline due to new federal government rules restricting immigration for non-permanent residents. With households still reeling from significant affordability concerns and an elevated cost of living, Canada’s domestic economy is likely to struggle to replicate its 2025 standout performance, resulting in a demand-side drag for some household-driven property types.
Meanwhile, with very little progress made with the United States in trade negotiations, there is a possibility that the existing 2020 USMCA trade deal could unravel in 2026, leaving many Canadian industries vulnerable to higher American tariffs. Given such uncertainty, the federal government has committed to structurally realigning the economy by diversifying trade with other countries. It has also committed to encouraging more business investment to boost Canada’s lagging productivity and support more infrastructure and housing development.
These initiatives are very worthy, but the process of transforming Canada’s economy and reaping its benefits will not happen overnight. The transformation could even result in demand constraints for commercial properties in the near term.
A cyclical housing supply overhang
Though much has been made about Canada’s housing supply crisis, the reality is there's currently an oversupply of housing that nobody wants. Namely, a growing inventory of for-sale condos. It is estimated that it will take six to nine years to clear this excess inventory, given the relatively weak housing demand in Canada.
Developers have consequently shifted their focus to build purpose-built rental apartments in recent years, resulting in the highest number of rental apartment units currently under construction than at any time over the past 50 years. Because the average rents required to build these units are considerable, given high development costs, many of the recently completed units are struggling to lease due to affordability constraints.
This cyclical housing supply overhang suggests that both average home prices and apartment rents are likely to continue declining in the upcoming year, with the market unlikely to return to equilibrium until after 2027.
Capital market reset
With inflation remaining elevated and government debt continuing to rise, long-term interest and mortgage rates have not meaningfully fallen in response to central bank policy rate cuts over the past two years.
Now that the Bank of Canada has signaled it is done cutting rates, markets are pricing in the possibility that the Bank's next move could be to increase rates. As a result, the materially lower costs of capital that the real estate industry had hoped to see by 2026 are unlikely to materialize.
With capital market conditions unlikely to be the tailwind for the property sector that they had been over the past two decades, distress-driven transactions, particularly those involving land and development assets, are likely to continue increasing and prevent a meaningful improvement in overall deal activity in 2026.
In the meantime, the real estate capital stack is likely to continue evolving in 2026 as new sources of capital, including private real estate investment trusts, family offices, infrastructure funds, and private debt, help to narrow the existing gap between buyer and seller expectations over the longer term.
All told, these factors, which are also incorporated into CoStar’s house view forecasts released in late November, suggest that commercial real estate performance will not be significantly different from the past two years, with a meaningful recovery unlikely until after 2026.