Selective Investments Prime Real Estate Dealmaking Recovery

Improving capital availability and an increasingly active deals environment are sparking a recovery in the Canadian real estate market. Current deals activity is being driven by the privatization of public real estate investment trusts (REITs), institutional investors pivoting their portfolios, and the disposition of distressed assets.

The next real estate cycle will be won by organizations that can defend after-tax returns, solve refinancing pressure, and create net operating income (NOI) growth without relying on capitalization-rate compression. Those that get this right will attract capital, talent, and partnerships others won’t.

After a 20-year bull run, 2022 marked the start of several years of significant deals volatility, sparked by the Bank of Canada raising interest rates 10 times over an 18-month period. But over the last 12 months, investor confidence has started to pick up again. Total commercial real estate investment volume reached $16.2 billion in the second quarter of 2026—the highest level since early 2022, according to CBRE. There’s a growing belief that the fundamentals underpinning the deal environment are strengthening, making Canada a more attractive place to invest.

Heading into 2027, three forces will shape a selective recovery: improving but selective capital availability, continued caution from equity investors, and tax policies that shape how foreign and domestic capital flows into Canada. 

Improving transaction activity doesn’t mean values have fully recovered. Bid-ask spreads are narrowing for high-conviction assets as debt markets become more functional. Pricing remains uneven for development land, transitional assets, and properties needing capital. Recovery will be practical: refinancing low-rate loans, adjusting pro formas, and managing covenant pressure.

Debt capital remains plentiful in Canada. That’s a shift from recent years: survey respondents are far less likely now to say debt capital availability is falling short for acquisitions, refinancing, and development. Banks are well positioned to lend, and a growing number of alternative lenders are active. In June 2026, the Office of the Superintendent of Financial Institutions (OSFI) adjusted its rules to give Canada’s largest banks greater flexibility to deploy capital.

Several interviewees highlighted the role CMHC continues to play in real estate financing. While some noted program constraints and shifting rules have affected development planning and project feasibility, others emphasized CMHC-backed financing remains the preferred execution path for purpose-built rental development.

For many real estate companies, the challenge isn’t capital availability. It’s selectivity. One interviewee highlighted the “continued flight to quality,” a sentiment echoed by others. The flight to quality is increasingly a flight to liquidity, operating, and capital expenditure certainty. Even a physically high-quality building can be difficult to finance or sell if future costs are opaque. Another interviewee noted that while capital is available, deploying it is difficult due to underwriting constraints, stressing that “projects need to be highly bankable to secure financing.”

Selectivity is evident across the deal continuum. Banks prefer to finance income-producing assets over construction. Lenders are prioritizing large companies with income-producing assets and other ventures able to service their debt, as well as smaller companies with well-proven histories and strong fundamentals. They’re also concentrating on premium assets.

This selectivity has consequences. Small real estate companies and funds with less diversified portfolios continue to struggle with attracting capital, while alternative lenders with significant land exposure in their portfolios are challenged by fluctuating land valuations. While this has contributed to stalled projects and receiverships, it’s also led to creative solutions aimed at unlocking projects. These include renegotiated agreements between borrowers and lenders, as well as partnerships with more sophisticated builders and market players.

As conventional equity remains cautious, structured capital is filling the space between senior debt and common equity through preferred equity, mezzanine debt, rescue capital, co-general partner investments, recapitalizations, continuation vehicles, and joint ventures. Much next-cycle dealmaking may involve recapitalizations, partial sales, preferred-equity investments, portfolio restructurings, and acquisitions of debt rather than property. 

Many equity investors remain hesitant to deploy capital in the Canadian real estate market, with survey respondents continuing to say there’s an undersupply of equity capital for both acquisitions and development. Deals that are happening largely stem from funds pivoting portfolios or selling distressed assets. Most public REITs are also still trading below their net asset value (NAV), so they aren’t active buyers. Several have been taken private over the last 18 months, while others are buying back their own stock. While this is a sign of confidence in intrinsic value, it’s a short-term strategy that doesn’t address the underlying NAV discount.

Some pension funds are rethinking their real estate investments. One interviewee mentioned they’re reducing allocations because “there’s a risk trade-off between public markets and real estate, and real estate isn’t performing.” The pressure on real estate is being compounded by strong Toronto Stock Exchange performance, which has made equities more compelling for some institutional investors. Many investors are asking when capital will return to real assets.

Family offices are acting more cautiously as well, with some shifting their focus to conversion projects and others shying away from funds. This wariness extends beyond family offices. Allocator scrutiny of fund structures is intensifying. Some pension funds are exiting open-ended funds entirely in favour of direct assets, while redemption gating has compounded liquidity stress. Capital is starting to rotate toward closed-ended development funds with defined timelines, suggesting a potential shift in how institutional investors access real estate. 

While many equity investors aren’t focused on net-new investments, one interviewee highlighted that institutional and infrastructure capital is entering real estate through adjacent categories that offer diversification and perceived resilience. 

While Canada is seen as a stable market with high-quality assets, the deeper US market remains a major focus for many equity investors, including Canadian players. Interviewees noted Canadian pension funds and developers have, historically, deployed disproportionately to the US. To keep domestic equity capital in Canada, related policies need to be competitive with opportunities in the US and elsewhere. 

Trade tensions and a reassessment of North American supply chains have created an opportunity for Canada to strengthen its investment framework for housing, infrastructure, industrial capacity, energy, and digital infrastructure. That renewed interest is already translating into higher capital inflows: foreign direct investment in Canadian real estate hit a record $44.9 billion in 2025, up 7.1 percent from the year before, according to Statistics Canada. Interviewees argued the focus should be on durable, predictable rules that support long-term capital rather than short-term responses to market volatility. For real estate, that means policy that improves the ability to finance, build, own, operate, and ultimately recycle capital into Canadian assets.

Tax is a significant capital-markets variable. While the cost of capital and spreads have improved for foreign investors, they remain tight within North America. One interviewee suggested early in the summer that there was a competitiveness gap of approximately 150 to 200 basis points for investment in Canada versus the US.

Interviewees raised a range of tax and policy opportunities that could make it easier to attract foreign capital—and capital more broadly. These include allowing companies to defer capital gains taxes through reinvestment in similar properties, as allowed in the US using a 1031 exchange. They also discussed reciprocal tax treatment for qualifying foreign pension plans, so long-term pension capital from treaty-partner countries isn’t materially disadvantaged relative to Canadian pension investors investing domestically.

Interviewees also suggested more practical excessive interest and financing expenses limitation (EIFEL) rules, including simpler compliance, consideration of targeted relief for priority capital-intensive assets, and a review or extension of the temporary purpose-built-rental exception. Another idea was strengthening the alignment of tax and incentive programs across federal, provincial, and municipal governments.

Others suggested reassessing foreign-buyer restrictions and non-resident speculation taxes—not to open the door to speculative purchasing, but to help create a clear pathway for long-term institutional capital that builds rental, affordable, and senior housing. Some also pointed to a modernized version of the former multi-unit residential building (MURB) regime to mobilize individual and private capital into new purpose-built rental supply. 

There was acknowledgement of recent effective tax and policy changes. Examples include the Goods and Services Tax/Harmonized Sales Tax (GST/HST) new housing rebate, increases to capital cost allowance rates, development charges credits in Ontario, and improved allowances for purpose-built rental. These measures can improve project economics, but many interviewees continue to see a need for greater certainty and broader Canadian tax reform.

The Canada Investment Summit in September 2026 was widely seen as creating significant positive momentum for attracting foreign investment to Canada. The government measures announced at the summit, including a permanent productivity mega-deduction that allows for immediate expensing of a range of depreciable property, weren’t specifically aimed at the real estate sector. But these measures are encouraging, as they can indirectly benefit real estate projects through eligible capital expenditures such as building improvements, energy-efficiency investments, and technology infrastructure.

Investor confidence in the Canadian real estate market is growing, and the signs of recovery are emerging. However, trade uncertainty and Canada-United States-Mexico Agreement (CUSMA) renegotiations could affect investor confidence and cross-border capital flows. Government action will be a critical area to watch, particularly given the federal government’s commitment to building essential infrastructure and the policy initiatives that have been announced or put into place over the last year.

The 2027 refinancing wave—loans originated at lower rates now requiring fresh equity or workouts—will be a defining capital-markets event. Structure, operating capability, and tax efficiency will matter more than broad optimism. Organizations that solve for capital, execution, and policy friction will be better positioned than those simply waiting for the next cycle.