Canada’s office market is emerging from its pandemic-era slump, with national vacancy rates forecast to keep declining through 2028 even as the recovery remains lopsided between premium towers and everything else, according to new data from CoStar Group and reporting from The Globe and Mail.
The national office vacancy rate peaked at 10.4% in the second quarter of 2025 before falling to 9.8% a year later, in the second quarter of 2026, CoStar found. The firm’s updated forecast now calls for vacancy to reach 9.3% by the end of 2027 and 8.7% by the end of 2028 — both improvements on its earlier projections of 10% and 9.4%, respectively. CoStar attributed the upgraded outlook to stronger-than-expected absorption of office space.
A Tale of Two Markets
Mario Lefebvre, chief economist for Canada at CoStar Group, described the recovery as “a tale of two markets.” Higher-end office buildings have posted positive net absorption averaging roughly 1 million square feet per quarter since the second half of 2021, he said, while absorption across all other office assets combined was deeply negative over that same period — only turning positive since the second half of 2025.
That divide is expected to show up in rents as well. CoStar’s forecast calls for rent growth of about 4% for higher-end assets, compared with roughly 2% for the rest of the market. The pattern reflects what CoStar describes as a continued “flight to quality,” with tenants gravitating toward newer, better-located buildings.
Much of the projected improvement in vacancy is not being driven by a surge in demand but by a thin construction pipeline. Net absorption is expected to average about 1 million square feet per quarter in 2027 and 1.75 million square feet per quarter in 2028 — modest by historical standards, according to CoStar. Meanwhile, new deliveries are expected to fall quickly after peaking in 2026, a year driven partly by the second phase of CIBC Square in Toronto, dropping to roughly 200,000 square feet by the end of 2027.
Toronto Leads the Turnaround
Nowhere is the shift more visible than in downtown Toronto. Across 47 large downtown towers tracked by CoStar, the availability rate peaked at 14.2% in the first quarter of 2025, up from 13.7% a year earlier, before being cut in half by last month, according to the Globe and Mail. Over the same period, the vacancy rate for those buildings fell to 5.6% from 11.9%. Across the wider financial district, availability dropped to 10.1% from a 2024 peak of 17.9%.
Ben Haythornthwaite, CoStar’s director of market analytics, said the shift has turned downtown Toronto from a tenants’ market into a landlords’ market, with incentives such as free rent no longer necessary to fill space. “There was an element of smoke and mirrors to the inducements, but it paid off,” he said.
The recovery is uneven even within the city: vacancy rates in buildings north of King Street run about one percentage point higher on average than those south of the corridor, closer to Union Station, reflecting what Haythornthwaite called growing tenant sensitivity to commute accessibility. Across the broader Greater Toronto Area, office availability remains near 8% — still roughly double pre-2019 levels.
Bank Mandates and a Divided Country
Much of Toronto’s turnaround traces to a single decision: Royal Bank of Canada’s announcement in May 2025 that staff would need to return to the office four days a week that fall, described by Avison Young principal Stan Krawitz as a “watershed moment” for the downtown core. Other major banks followed with similar mandates by fall 2025. CIBC absorbed much of the sublease space Shopify had vacated at The Well, and Scotiabank added roughly 410,000 square feet across three leases. Krawitz said rents have risen “significantly” in some buildings over the past year.
The rebound extends beyond banking. Lyft is relocating hundreds of Toronto employees into 90,000 square feet at First Canadian Place this month, with plans to grow its local workforce past 500, according to the company’s chief policy officer, Jerry Golden, who cited a “positive nexus” between downtown revitalization and rideshare demand.
Nationally, the picture is far less uniform. Calgary has returned to pre-pandemic vacancy levels, though CoStar noted that baseline remains historically elevated, while Vancouver and Montreal have yet to see a sustained recovery as tenants there continue adjusting to needing less space than before 2019.
A 2026 study commissioned by Source Office Furniture, drawing on more than seven million employee responses via the AskPolly platform, found more than 83% of Canadian workers expressed some support for return-to-office policies, but 69% disagreed with a full five-day requirement. Only 24.4% of respondents said they were now in the office five days a week, down from roughly 83% before the pandemic. Commuting time and cost emerged as the most-cited barrier to fuller returns, particularly in Toronto and Vancouver, while resistance in cities such as Calgary, Halifax and Winnipeg was linked more to office-culture expectations. Nationally, 97.5% of respondents said improved workspace design would make them more comfortable with return-to-office policies.
CoStar cautioned that risks to its forecast remain tilted to the downside. Lefebvre pointed to trade and tariff uncertainty, higher fuel costs and a declining population as factors that could weigh on the broader economy and slow expected absorption. “Over the longer term, however, we expect equilibrium to be restored in the Canadian office sector as demand for office space grows in tandem with the broader economy and the development pipeline remains modest,” he said.
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