Will 2025 Be a Breakthrough Year for Commercial Real Estate?

The commercial real estate market in Ontario is on the brink of significant shift heading into 2025, and savvy investors should be paying close attention. With a wave of lease and mortgage renewels set to shake up the market in a big way, many small-scale owners and operators may find themselves unable to service their debt. This shift could lead to a surge in off-market opportunities as owners are forced to liquidiate, making 2025 a unique opportunity for well capitalized investors looking for a deal.

The Renewal Wave and Economic Pressures

A substantial portion of commercial leases, particularly in Ontario, operates on 5-to-10-year renewal cycles. According to CBRE data, approximately 20% of existing commercial leases in Ontario are due for renewal between late 2024 and early 2026.

This comes at a time when interest rates are significantly higher than they were during the last renewal period. Many small landlords and business operators who locked in rates under favorable conditions are now faced with higher financing costs, climbing insurance premiums, and escalating property taxes.

To compound matters, a challenging economic climate, including ongoing inflationary pressures, has made it harder for tenants to absorb rent increases. Many small business owners leasing retail or industrial spaces may struggle to keep up, leading to vacancies and distressed assets coming onto the market.

The Impact of Higher Mortgage Rates

According to the Bank of Canada, the average commercial mortgage rate has nearly doubled from approximately 3% in 2019 to 5.5%-6% in 2023. For property owners approaching renewal in 2025, this could mean a dramatic increase in monthly payments.

For example:

• A $1 million commercial mortgage at a 3% interest rate over a 25-year amortization would have a monthly payment of approximately $4,740.

• At a 5.5% interest rate, that same mortgage jumps to $6,135 per month—an increase of nearly 30%.

This level of financial strain is particularly challenging for smaller owners who have limited cash flow or reserves. Those who purchased properties at inflated prices during the low-interest era of 2020-2021 could be even more vulnerable, as their refinancing terms may not align with current property valuations.

Refinancing Challenges

Many commercial property owners rely on refinancing to manage balloon payments or improve liquidity. However, in 2025, several key challenges are expected:

• Stricter Lending Standards: Banks and lenders have tightened their underwriting criteria, requiring higher debt-service coverage ratios and lower loan-to-value (LTV) ratios. This could leave owners unable to refinance for the full amount of their existing debt.

• Negative Equity Risks: Properties in struggling asset classes, like certain retail or office spaces, may have seen their values stagnate or decline, making refinancing more difficult or impossible without significant cash infusions.

Opportunity for Investors

Off-market opportunities have long been a goldmine for strategic real estate investors, and 2025 is shaping up to be a bumper year for these deals in Ontario. Small-scale owners—those who own a handful of properties or manage them as part of a side business—are particularly vulnerable to these pressures.

These owners may look to offload their properties quickly, often preferring private sales to avoid public scrutiny or lengthy listing processes. The potential for investors lies in acquiring these properties at below-market prices, enhancing their value through strategic repositioning, and capitalizing on the long-term growth potential of Ontario’s commercial markets.

Why 2025 is Perfect for Commercial Investment in Ontario

1. Favorable Market Dynamics: The convergence of lease renewals, economic pressures, and rising costs will likely create a buyer’s market. Investors with access to capital or creative financing solutions will be well-positioned to take advantage of distressed sales.

2. Strong Long-Term Fundamentals: Ontario remains Canada’s economic engine, and demand for commercial space is likely to rebound as businesses adapt to new realities. Investing now allows for capturing long-term appreciation and cash flow.

3. Government and Economic Support: Programs aimed at revitalizing urban centers and addressing housing shortages could spill over into mixed-use developments, combining commercial and residential spaces, making these properties even more attractive to investors.

   
   

How Anchor Property Group Is Prepairing For This Opportunity

1. Expanding Our Pipeline: We continue to build our network of brokers, owners, property managers, attorneys, and lenders who may have insight into owners looking to exit under pressure. Ensuring we're the first call they make when an opportunity becomes available.

2. Raising Capital: Meeting with investors and partners well in advance of the coming opportunity is critical to secure capital commitments in advance. When deals come up, they seldom last long, sometimes we have just a day or two to make a decision. That's why it's important for us right now to be meeting with as many pottential investors and partners as possible, sharing our vission, outlining the opportunities, and prepiaring everyone to move as quickly as possible when the time is right.

3. Offering Creative Solutions For Sellers: Many owners may be open to creative financing options, such as vendor take-back (VTB) mortgages, joint ventures, or leaseback agreements, to ease their financial burdens while selling the asset. Making our network of brokers and professionals aware of these options, helps get word around that we are willing to work with sellers to get deals done.

4. Focusing on Value-Add Assets: We are looking primiarly at under utilized, poorly managed properties, in high growth secondary markets. This is where we can add massive value, force appreication, and generate the best returns for our investors. These are also the properties that are most difficult to finance and therefore there is typically less competition and better delas to be had.

   
   

Final Thoughts

The coming year presents an exceptional moment for forward-thinking investors to gain a foothold in Ontario's commercial real estate market.

By focusing on distressed opportunities, leveraging off-market deals, and positioning for long-term growth, 2025 is set to be a benchmark year for Anchor Property Group as we look to acquire high-yield commerial properties across Ontario.

If you're interested in learning more about upcoming oportunities or would like to participate in some way, please email darren@anchorpropertygroup.ca or contact us now.

Kindest Regards,

Darren Cabral

President & CEO | Anchor Property Group

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