TORONTO -- BMO Economics says the commercial real estate market -- which has been characterized by cautious growth since a severe market downturn in the 1990s -- will become a draw for investors into next year, thanks to a strong real estate market and low interest rates.

Earl Sweet, senior economist and managing director at BMO Capital Markets, said vacancy rates in the commercial real estate sector are lower than historical norms in many Canadian cities.

"The commercial real estate industry benefits from the healthy condition of Canada's financial institutions, the participation of large, well-funded operators and institutional investors, whose long-term objectives reduce volatility during downturns," Sweet said in a report.

"Higher occupancy -- spurred by steady growth in employment, manufacturing, wholesaling, and retailing -- is reducing office, industrial, and retail vacancies, while lease rates are edging upward."

But the market is likely to grow at a more tempered pace this year and next, noted Sweet, as Canada's economic growth slows to two per cent.

The eurozone crisis and slowing momentum in the U.S. are also expected to dampen investors' appetites in the short term, he said.

In Toronto, a healthy financial services sector, stable consumer and business confidence and an increase in manufacturing helped the commercial real estate sector recover last year.

In Montreal, softer employment in the business and professional services industry helped push vacancies up to 9.2 per cent during the first quarter of 2012, from 8.2 per cent at the end of 2011.

But BMO predicts that recovery in the professional services industry, continued growth in financial services and limited space should stabilize the market.

In Vancouver, the lack of supply has kept commercial property prices high. That, along with low bond yields and volatile stock markets, is driving more investors toward commercial real estate.

Toronto-based real estate owner Brookfield Canada Office Properties (TSX:BOX.UN) says it has seen stability across all of the markets it operates in, especially Toronto, Calgary, Ottawa and Vancouver.

The company, which reported second-quarter earnings on Monday that nearly tripled compared to the same year-earlier period, says it expects that rental rates in downtown Toronto will continue to steadily increase.

"The outlook for future demand of office space remains positive," said Jan Sucharda, president and CEO, during a conference call on Tuesday.

"While uncertainties resulting from the European debt crisis and slowing global economies could impact the future direction of the Toronto market, today we haven't seen any fallout."

The company says its Calgary portfolio is 100 per cent occupied, thanks to a strong oil sector that has created demand for office space there.

The real estate owner is boosting its annual dividend by eight per cent as it reports earnings of $134.4 million, or $1.44 per unit, nearly tripling the $47.5 million, or 51 cents per unit it earned in the same quarter a year-earlier.

The latest quarterly results included a $100-million fair value gain, reflecting a change in the value of its buildings, compared to a gain of $15 million in the same period of 2011.