Canada’s office market is emerging from its pandemic-era slump, but the recovery looks nothing like a uniform rebound. New data from CoStar Group shows the national office vacancy rate has fallen from a peak of 10.4% in the second quarter of 2025 to 9.8% in the second quarter of 2026, with further declines forecast through 2028. Yet the improvement is concentrated almost entirely in high-end towers and a handful of cities, leaving older buildings and some regional markets still struggling to attract tenants.
CoStar’s latest forecast projects the national vacancy rate will fall to 9.3% by the end of 2027 and 8.7% by the end of 2028 — both improvements on the firm’s earlier projections of 10% and 9.4%, respectively. Mario Lefebvre, CoStar’s chief economist for Canada, attributed the upgrade to “somewhat stronger-than-expected absorption” of office space nationally.
A Tale of Two Office Markets
According to Lefebvre, the recovery is really “a tale of two markets.” Higher-end assets have posted positive net absorption averaging 1 million square feet per quarter since the second half of 2021, while absorption across all other office assets combined was deeply negative over that same stretch — only turning positive since the second half of 2025. That divide is also showing up in rents: CoStar forecasts rent growth of roughly 4% for higher-end buildings, compared with about 2% for the rest of the market.
Critically, CoStar says the falling vacancy rate isn’t primarily a story of surging demand. Net absorption is expected to remain modest by historical standards — averaging about 1 million square feet per quarter in 2027 and 1.75 million square feet per quarter in 2028. Instead, the bigger driver is a construction pipeline that has all but dried up. New deliveries are expected to peak in 2026, boosted by the second phase of CIBC Square in Toronto, before falling 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 for the Globe and Mail, the availability rate — which includes vacant space, sublets and space coming to market within 30 days — peaked at 14.2% in early 2025, up from 13.7% a year earlier. By last month, that rate had been cut in half, while the narrower vacancy measure fell to 5.6% from 11.9%. Across the wider financial district, availability dropped to 10.1% from a 2024 peak of 17.9%.
Much of that turnaround traces back to Royal Bank of Canada’s May 2025 announcement requiring staff to return to the office four days a week that fall — a move Avison Young principal Stan Krawitz called a “watershed moment” for the downtown core. Other major banks followed with similar mandates by fall 2025. CIBC absorbed most of Shopify’s abandoned sublease at The Well, and Scotiabank added roughly 410,000 square feet across three separate leases. Krawitz said rents in some buildings have risen “significantly” over the past 12 months.
CoStar’s Ben Haythornthwaite said the shift has flipped downtown Toronto from a tenants’ market to a landlords’ market. “There was an element of smoke and mirrors to the inducements, but it paid off,” he said, referring to the free-rent packages landlords once used to fill space without formally cutting rents — incentives that are no longer necessary in the recovering core.
Recovery Remains Patchy Across the Country
The rebound is far from national in scope. Calgary has returned to pre-pandemic vacancy levels, though CoStar notes that baseline was itself historically elevated. Vancouver and Montreal, by contrast, are still adjusting to tenants requiring less space than they did before 2019. Across the broader Greater Toronto Area, vacancy sits near 8% — still double 2019 levels — even as the downtown core tightens. Within Toronto itself, newer buildings closer to Union Station are filling faster than those north of King Street, which run roughly one percentage point higher in vacancy, according to Haythornthwaite, who links the gap to commuter accessibility in a congested city.
Employee sentiment data adds another layer to the picture. A 2026 study commissioned by Source Office Furniture, drawing on more than seven million employee responses through the AskPolly platform, found more than 83% of Canadian workers expressed some support for return-to-office policies, but that support fell sharply when a five-day requirement was proposed, with 69% opposed to a full-time return. Only 24.4% of respondents reported being in the office five days a week, down from roughly 83% before the pandemic. In Toronto and Vancouver specifically, the research linked employee resistance largely to commute time and cost rather than to office culture, a pattern the study tied to transit reliability and housing-affordability pressures pushing workers further from downtown cores.
Risks to the Outlook
CoStar cautioned that its forecast still carries downside risk. 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 office absorption. Over the longer term, however, he said CoStar expects “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.”
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