Principal & Managing Director
When bond yields are declining, fixed interest rates for commercial real estate mortgages typically move in tandem and decline as well. The variable, or floating, interest rates have also been compressed, due to the previous seven consecutive cuts to the overnight rate and prevailing Prime Rate (before the Bank of Canada (BoC) held its rate in April and June, given uncertainties around tariff developments).
Similarly, fixed interest rates are priced over the bond rates or lender’s cost of funds, so fixed rates have also experienced compression compared to 12 months ago.
Lenders price their interest rates based on a spread on bond yields, or on their internal cost of funds. They'll price over the five-year Government of Canada (GoC) bond rate (for example), and that is what your resulting fixed interest rate is. The GoC bond rates directly indicate where some lenders’ price their term fixed interest rates for commercial real estate. With variable loans or with construction loans, it's based on the prime rate of the major banks, which is currently 4.95%.
Government Canada Bond yield curve
Low interest rates are a strong indicator for commercial real estate investment activity, as financing and resulting cost of capital for investors are more favourable. On the other hand, the economic turmoil over the past 90 days has been holding back investment momentum. In spite of this, now is an opportune time for real estate owners who are refinancing or investors who want to acquire, considering the lower interest rate compared to Q1/Q2 2024. It's always a good time to invest in real estate when financing or debt is cost effective relative to capitalization rates. And now we are currently getting close to pre-pandemic interest rates. Let’s not forget that for the majority of 2023 and 2024, fixed five-year term interest rates for commercial mortgages were priced above 5.00%, and that does not compute for a lot of investors, but we're in a more favourable interest rate environment this year.
We haven't seen lenders fully tighten up their underwriting parameters over the last 90 days. There's a lot of capital allocations still available for retail, industrial, and multifamily asset classes. Industrial and multifamily have been heavily weighted over the past 24 months, so lenders have appetite for more retail properties, and even a select portion of office or professional buildings to diversify their portfolio - which we have not previously seen in the last two to three years. That said, expect lenders to be asking more questions, to better understand each borrower’s exposure to tariffs.
Bond yields, policy rate and inflation
The equity market is a leading factor for the initial spike in bond rates after some of the tariff news. The uncertainty has investors seeking more stable financial vehicles, like bonds or fixed income. However, real estate is also viewed as an alternative investment to equity or stocks. As investors diversified out of equity into bonds, that caused an escalation in bond rates, but the uncertainty in the equity markets also incited investors to look at commercial real estate as well.
The bond rates are slightly higher than they were three to four months ago, before U.S. President Trump was in office. The five-year GoC, as of June 10, 2025, is around 2.94, whereas it was 2.75 in early February. While yields are back to where they were three months ago, there was a bit of roller coaster during that period. That said, we're lower than we were at this time last year, when the five-year bond was 3.70. We are in a better place right now for investment sales than we were this time last year, even with all the uncertainty.
In fact, interest rates are lower than they were last year for all asset classes in all markets. So, if cap rates are holding stable, there's a lot more availability of capital for investors to transact.
Five-year fixed rates right now are below 4.00% for multi-residential and five-year commercial interest rates are in the 4.30% - 5.00% range. For example, in Alberta, with cap rates for multi-residential that are in the 4.00% - 5.00% range and commercial cap rates that in the mid-5.00% to 6.00% range, there is yield for investors, in certain markets.
Business credit funds and interest rates issued by chartered banks
Many lenders are still expecting two or three more BoC rate cuts before the end of the year. It would be beneficial if the BoC brought the rate down another 50 basis points (pending inflation metrics) over the next six months. This would compress the variable prime rate for the major banks to under 4.50%, which brings construction financing as well as acquisition loans that are on variable rate terms to a much lower cost of capital. For acquisition loans, if you're on one-year or two-year variable rate terms, when you're ready to refinance a longer-term fixed rate, it's open for prepayment.
As mentioned earlier, there is still significant appetite from lenders to provide capital for commercial real estate acquisitions, refinances, or developments in several asset classes in 2025.
CMHC significantly changed some of their parameters again in the fall of 2024. However, while CMHC-insured loans are still a main driver for multifamily investment in Canada, in 2025, lenders and investors are more interested in the prospect of conventional mortgages, in lieu of CMHC-insured loans. Non-CMHC lending for construction is also on the rise, since CMHC tightened parameters on their loan-to-cost ratio for their advances with their construction financing.
CMHC-insured loans can achieve 95% loan to value/cost, and you can still potentially have that approved, but now they may be holding back 10%-15% of your leverage. They would not advance the full 95% until your construction is complete and the project is stabilized. So, if you're only achieving 80% loan-to-cost during construction with CMHC-insured financing, then developers and investors should explore loans with banks, credit unions, or private lenders who will approve 75% loan-to-cost so they don't have to deal with CMHC’s application process, extended timelines, or pay CMHC premiums. Developers or investors who complete their construction financing with conventional loans can still apply to CMHC to insure the takeout or permanent term financing upon completion of the project.
Today, it is essential to find the right match between the lenders and the objectives of borrowers, whether this is an investor or developer.
Mortgage brokers can make a huge difference in this type of environment. They have a deep understanding of lenders’ credit underwriting parameters, interest rate pricing, and lenders’ appetites. In 2020 and 2021, bond rates were extremely low and five-year interest rates were below 2.00%, but the market is much different now as those loans are coming to maturity. Investors may believe they have the lowest possible interest rate available with their current lender, but when you can create a competitive situation and you have a mortgage broker there to help underwrite, it's always beneficial. Mortgage brokers will identify the best lender-borrower match for different mixes of asset classes and geographies to create that competitive situation.
Real estate investors should ensure they speak with a commercial mortgage broker to accurately underwrite their properties – including sensitivity analysis to interest rates, cap rates, and leasing parameters. The commercial real estate debt market is constantly evolving, and with some of the added uncertainty we are experiencing in 2025, it is important that investors stay informed and protected by an expert.
Cap rate survey debt market trends
Multi-residential
Maximum LTV
Conventional: ≤70%
CMHC MLI: 95%
Spread over 5-year GoC bond yield
Conventional: +175 bps
CMHC MLI: +65 bps
Preferred term
5 or 10 years
Longest amortization
Conventional: 30 years
CMHC MLI: 50 years
Debt cost outlook
Stable
Industrial
Maximum LTV
≤70-75%
Spread over 5-year GoC bond yield
+175 bps
Preferred term
5 years
Longest amortization
30 years
Debt cost outlook
Stable
Office
Maximum LTV
≤60-65%
Spread over 5-year GoC bond yield
+250 bps
Preferred term
5 years
Longest amortization
30 years
Debt cost outlook
Stable
Retail
Maximum LTV
≤70-75%
Spread over 5-year GoC bond yield
+170 bps
Preferred term
5 years
Longest amortization
30 years
Debt cost outlook
Stable
Reach out to Brennan Yadlowski to learn more
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