Five years later, the rent resets that saved tenants are now constraining landlords — and there is no fast way out
When the pandemic shut down retail Canada in the spring of 2020, commercial landlords faced a choice that felt simple at the time: renegotiate leases downward, absorb the pain, keep tenants in place, and wait for the world to return to normal. Most made that choice. It was the right one. Five years later, many of those landlords are living with consequences that were never part of the original calculus — and the financial damage is still compounding.
What Happened: The Government Programs and the Landlord’s Dilemma
The federal government’s response to the retail collapse of 2020 was the Canada Emergency Commercial Rent Assistance program — CECRA. Introduced in April 2020 and eventually extended through September of that year, CECRA provided forgivable loans to commercial property owners who agreed to reduce eligible small business tenants’ rent by at least 75 per cent. Under the program, the federal and provincial governments combined to cover 50 per cent of monthly rent obligations, the landlord absorbed 25 per cent, and the tenant covered the remaining 25 per cent of their pre-pandemic rate. By July 30, 2020, more than 63,000 small business tenants had been supported across Canada, representing over 616,000 employees, for a total of over $613 million in rent support.
CECRA was followed by the Canada Emergency Rent Subsidy (CERS), which ran from September 2020 through June 2021, directing subsidies to tenants directly rather than through landlords. Together, the two programs cost the federal government an estimated $3 billion and sustained thousands of retail tenancies that would otherwise have gone dark.
But the programs came with a structural consequence that neither government policy nor landlord agreements adequately addressed: they reset the rent base. When a tenant who was paying $40 per square foot before the pandemic was reduced to $10 per square foot for six months, then $25 per square foot through a renegotiated lease extension, the new number became the psychological and contractual anchor for every renewal conversation that followed.
The Rent Reset Problem: COVID Rates Become the New Base
Here is the arithmetic problem that is now playing out across Western Canadian retail malls and strip plazas, playing out quietly in thousands of lease renewal conversations.
Traditional retail leases in Canada assume periodic escalation. A tenant paying $30 per square foot entering a five-year lease in 2019 would typically expect, and a landlord would contractually require, a renewal in 2024 at rates reset to market — historically representing increases of 10 to 20 per cent over the preceding lease term. That escalation is not a windfall for landlords; it is the financial model that makes the initial purchase price and mortgage service of a retail property viable over time.
What happened instead: tenants who received rent relief in 2020 and subsequently signed renegotiated leases at rates 20 to 40 per cent below their pre-pandemic levels are now treating those reduced rates as the base from which any future increase must be calculated. When leases come up for renewal, the conversation is not “market rent is now $35 per square foot; your rate adjusts accordingly.” The conversation is “we were paying $18 during COVID, and we expect any increase to be applied to $18, not to the $30 we were paying before.”
The landlord’s pre-pandemic NOI (net operating income) is not coming back on the normal escalation schedule. In many cases, it is not coming back at all within a foreseeable lease cycle. Tenants who survived the pandemic by paying reduced rent have five years of business built on those cost structures. Their margins, staffing models, and business plans are calibrated to what they pay now, not to what they paid in 2019. The business that barely survived at $18 per square foot cannot absorb a jump to $30 without genuine risk of closure — and both landlord and tenant know it.
This creates a negotiating dynamic in which the landlord’s leverage is severely constrained. An empty bay generates no income and still costs money to maintain, insure, and carry on mortgage. A tenant paying below-market rent is better than no tenant at all. So the rent resets hold. The NOI stays suppressed. And the suppressed NOI flows directly into property valuation.
The Cap Rate Trap: How Lower NOI Destroys Property Values
Commercial real estate is valued almost exclusively on one formula: value equals NOI divided by cap rate. This is not a theory; it is how every appraisal, every acquisition analysis, and every mortgage underwriting is done.
If a retail plaza generates $500,000 in annual NOI and the market cap rate is 5.5 per cent, the property’s value is approximately $9.1 million. If the same property’s NOI falls to $380,000 — reflecting the suppressed rents of COVID-era leases — the value at the same 5.5 per cent cap rate drops to approximately $6.9 million. That is a $2.2 million decline in property value driven entirely by NOI compression, without a single dollar of physical damage to the building.
Now layer in the cap rate problem. Western Canadian retail properties that were acquired between 2015 and 2020 were frequently purchased at cap rates between 4.5 and 5.5 per cent — reflecting the low-interest-rate environment of that era and the premium investors placed on stabilized, well-leased retail. Those tight cap rates were the market’s expression of confidence: strong tenants, rising rents, compressed yields.
The interest rate environment that prevailed from 2022 through 2025 changed that calculus dramatically. As the Bank of Canada raised its overnight rate from near-zero to 5 per cent to fight inflation — and as 5-year commercial mortgage rates followed to levels not seen since the pre-2010 era — cap rates on Canadian retail assets expanded accordingly. The Bank of Canada’s rate-cutting cycle, which began in 2024, has started to restore deal economics, with the overnight rate sitting in the 2.75 to 3.25 per cent range as of early 2026. Colliers’ Q4 2025 Cap Rate Report forecasts some downward pressure on yields for in-demand assets such as grocery-anchored retail in major markets, where lack of supply and favorable lending should drive cap rate compression for the strongest assets.
But “the strongest assets” is the critical qualifier. Strip malls and smaller community retail plazas with suppressed rents, below-market NOIs, and mixed tenant credit quality are not grocery-anchored Class A centres. A 1970s strip mall in a secondary market where buyers want a much higher return to compensate for uncertainty — that describes precisely the assets that were purchased in volume across Western Canada during the low-rate years, often at cap rates between 4.5 and 5.5 per cent, by investors who assumed escalating rents would compound their returns over time.
Those same assets now trade, if they trade at all, at cap rates between 6 and 7.5 per cent — reflecting higher risk premiums, lower investor confidence, and the market’s rational pricing of suppressed income streams. The math on that spread is brutal. A property purchased at a 5 per cent cap rate with an NOI of $500,000 cost $10 million. If the NOI has compressed to $380,000 and the market now prices that asset at a 6.5 per cent cap rate, the current market value is approximately $5.8 million. The landlord who has held, managed, and maintained that property through five years of pandemic disruption is sitting on a paper loss of more than $4 million — and cannot sell without crystallizing it.
The Road Back: Why This Takes Longer Than Most Owners Expect
The path to recovery from this position has three components, all of which are slow and none of which are within a landlord’s direct control.
Rent normalization requires lease cycles to turn over. A tenant who signed a five-year renegotiated lease in 2021 at reduced rates does not come back to the table until 2026. A tenant who signed a new five-year lease in 2023 after successfully anchoring to their COVID rate doesn’t renew until 2028. Full normalization across a typical retail plaza — assuming landlords succeed in pushing rents toward market at each renewal — could realistically take 8 to 12 years from the original pandemic lease resets. The consensus view from Colliers and CBRE is cautiously optimistic that Canadian commercial real estate will find a new equilibrium, with rents recovering back to roughly 2019 levels in real terms by 2026 to 2027 — but that recovery is concentrated in major urban markets with strong demand, not in secondary markets or mixed-quality strip plazas.
Cap rate compression requires a sustained low-interest-rate environment and returning investor appetite for retail. The Canadian commercial real estate market transitioned into 2026 through a phase of strategic recalibration, with elevated long-term bond yields continuing to squeeze the risk premiums typically expected from property investments, and investor preference shifting toward safe-haven assets with reliable, inflation-protected cash flows. Smaller retail malls, with their COVID-era rent structures, do not fit the “reliable, inflation-protected cash flow” description that institutional capital is seeking right now. Retail reported the highest value gains among Canadian CRE asset classes in Q3 2025 — driven primarily by demand for grocery-anchored centres. The benefits of that demand are accruing to the strongest assets, not to the segment facing the most structural distress.
Interest rate risk is the variable that could stop the recovery entirely. The Bank of Canada has signalled that its rate-cutting cycle may be near completion. If inflation resurges — driven by the energy shock from the Middle East, persistent tariff pass-through, or renewed fiscal expansion — and if the Bank is forced to reverse course and raise rates again, cap rates on retail properties will not compress. They will expand further. For landlords already trapped between suppressed NOIs and elevated cap rates, a rate reversal would be devastating: the property value formula moves in the wrong direction on both variables simultaneously.
The Strategic Reality for Western Canadian Retail Mall Owners
The honest assessment for Canadian retail property owners who bought at pre-pandemic cap rates and renegotiated leases during COVID is this: you are not selling at a profit in the near term. The market has not corrected to your purchase price. Your NOI has not returned to the level that supports your acquisition cap rate. And the timeline for both to normalize is measured in years, not quarters.
That does not mean there are no paths forward. Landlords who can attract anchor tenants — grocery, pharmacy, essential services — are seeing the most meaningful rent recovery and the most active buyer interest. CBRE’s H2 2025 Canada Retail Rent Survey notes that demand remains strong from quick service restaurants, specialty grocers, pharmacists with general practitioners, and nail salons — service-oriented tenants whose businesses survived the pandemic, grew through it, and whose models are less vulnerable to e-commerce displacement.
The landlords who will recover soonest are those who use each lease renewal as a genuine reset opportunity rather than a continuation of pandemic-era rate negotiations, who invest in improving the quality and positioning of their centres to attract stronger tenants, and who build their portfolios for a long hold horizon rather than a near-term exit.
The hardest truth is also the most important one. The COVID lease resets were necessary. They kept businesses alive, kept people employed, and kept retail plazas from becoming rows of empty storefronts during a national emergency. The cost of that goodwill was real, it was correctly incurred, and it will take years to earn back. Understanding that timeline — rather than waiting for a market recovery that restores pre-pandemic valuations quickly — is the starting point for managing these assets intelligently in the years ahead.
Sources: Canada Mortgage and Housing Corporation (CMHC); Canada Department of Finance (CECRA and CERS program data); Altus Group Canadian CRE Investment Trends Q4 2025; Colliers Canada Cap Rate Report Q4 2025; CBRE Canada Retail Rent Survey H2 2025; LendCity Canadian Cap Rates 2026; Real Estate News Exchange (RENX), November 2025; PwC/ULI Emerging Trends in Real Estate Canada 2026; Norton Rose Fulbright Commercial Lease COVID Analysis; CBC News CECRA program reporting.