Office vacancy rates decline amid uneven recovery

The Canadian office market is experiencing a notable transformation as vacancy rates decline, yet this recovery showcases significant disparities across different segments. While newer, high-quality buildings are witnessing increased demand, older office spaces remain challenged, reflecting a broader trend in the real estate landscape. Understanding the nuances of this market is essential for stakeholders looking to navigate these changes effectively.

Current trends in office vacancy rates

The vacancy rate for office spaces across Canada continues to show a downward trend, indicating a potential recovery in the real estate sector. However, this recovery is not uniform; instead, it highlights a stark contrast between newer, premium office spaces and older buildings. As of the fourth quarter of 2025, the overall national vacancy rate has decreased, but the gains are concentrated primarily in high-quality properties.

Data from commercial real estate firm CBRE reveals that annual net absorption reached 2.2 million square feet nationwide. This figure is particularly influenced by a surge in leasing activity in metropolitan hubs like Toronto, where significant downtown leases have driven much of the demand.

The role of economic factors in office leasing

Amidst high economic uncertainty, particularly concerning tariffs and inflation, the growth in office leasing activity is a hopeful signal for the market. Marc Meehan, research managing director at CBRE Canada, emphasized that while the overall growth is encouraging, it remains uneven across different urban centers. For instance, while Toronto thrives, cities like Ottawa are lagging behind in terms of occupancy rates.

• Economic uncertainties can influence leasing decisions.
• High demand in major cities like Toronto contrasts with stagnation in smaller markets.
• Leasing activity is seen as a positive sign for economic recovery.

Return-to-office mandates and their impact

The push for employees to return to the office is gaining momentum, with major companies like Toronto-Dominion Bank and Rogers Communications mandating their staff to work in the office four to five days a week. This trend reflects a broader desire among employers to enhance workplace collaboration and productivity, which has a direct impact on office demand.

As organizations adapt to hybrid work models, the types of office spaces they seek are evolving. There is a heightened interest in Class A buildings, characterized by superior locations and amenities, which are seen as more conducive to attracting talent.

Class A buildings vs. older office spaces

The distinction between Class A and older office buildings has become increasingly pronounced. In the fourth quarter of 2025, vacancy rates for Class A offices decreased in seven out of ten major downtown markets, with Toronto and Montreal leading the charge. Currently, the national vacancy rate for Class A space stands at 15.4%, marking its lowest level in three years.

Conversely, older Class B and C office buildings are facing significant challenges, with vacancy rates hovering around 25.4%. This slight increase from 25.3% the previous year underscores the widening gap in demand between high-quality spaces and the rest of the market.

• Class A buildings are in high demand due to their amenities and appeal.
• Older buildings struggle to attract tenants, leading to higher vacancy rates.
• Quality of office space is increasingly prioritized by companies.

Changing dynamics in office conversions

As a response to the shifting demand, many developers and landlords are exploring office-to-residential conversions, particularly in cities like Calgary, which have seen significant activity in this area. Since 2021, Calgary has accounted for nearly half of all office space conversions across Canada, adapting to the evolving needs of urban populations.

In the fourth quarter of 2025 alone, more than one million square feet of office space was removed from the market due to conversion projects. This strategic shift not only alleviates some vacancy pressures but also reflects a broader trend of reimagining urban spaces to meet contemporary housing demands.

The implications of sublet space reduction

A notable indicator of stabilization in the office market is the reduction in sublet space, which often signifies tenant distress. In 2025, companies removed 3.2 million square feet of sublet space from the market, the highest figure since 2005. The current availability of sublet office space stands at 11.4 million square feet, aligning with levels seen in 2017 when demand for office space was robust.

• Reduction in sublet space suggests improving tenant stability.
• Current sublet levels indicate a return to pre-pandemic demand.
• Companies are increasingly prioritizing long-term leases over short-term solutions.

Construction trends and future supply

Another factor contributing to the evolving landscape of office vacancy rates is the limited new construction happening across the country. Currently, only 2.8 million square feet of office space are under construction, with a significant portion already pre-leased. This scarcity of new supply is expected to further tighten vacancy rates, particularly for high-quality spaces.

As the market continues to evolve, it’s likely that the demand for premium office spaces will persist, with fewer new buildings entering the market. This dynamic could lead to further increases in occupancy rates for Class A buildings, as companies look to invest in spaces that align with their workforce needs.

Conclusion: A bifurcated recovery in the office market

The current state of the Canadian office market illustrates a clear bifurcation between high-quality assets and older buildings. As companies prioritize employee satisfaction and productivity, the demand for modern, well-located office spaces is likely to continue to outpace that of older properties. Stakeholders must remain vigilant in adapting to these changes and exploring innovative solutions, such as office conversions, to leverage emerging opportunities in this evolving landscape.