Canada’s office market is showing its clearest signs of recovery since the pandemic upended downtown towers, with national vacancy rates declining and Toronto’s financial core rebounding sharply on the back of bank return-to-office mandates, 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% in the second quarter of 2026, CoStar Group said. The firm’s updated forecast projects vacancy will keep declining to 9.3% by the end of 2027 and 8.7% by the end of 2028 — both improvements over its previous outlook of 10% and 9.4%, respectively. CoStar attributed the upgrade to stronger-than-expected absorption of office space.
A Two-Tier Recovery
Mario Lefebvre, chief economist for Canada at CoStar Group, described the market as “a tale of two markets.” Higher-end office 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 the same period — though it has also turned positive since late 2025. Rent growth is expected to track that same divide, with higher-end buildings forecast to see roughly 4% growth compared with about 2% for the rest of the market.
CoStar said the projected vacancy decline is being driven less by a surge in tenant demand than by a shrinking 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, while new deliveries — after peaking in 2026 partly due to the second phase of CIBC Square in Toronto — are expected to fall to roughly 200,000 square feet by the end of 2027.
Lefebvre cautioned that risks remain tilted to the downside, citing trade and tariff uncertainty, higher fuel costs and a declining population as factors that could weigh on the broader economy and slow absorption. Over the longer term, he said, “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.”
Toronto’s Financial District Tightens Fast
Nowhere is the shift more visible than downtown Toronto. Across 47 large downtown towers tracked by CoStar for The Globe and Mail, the availability rate peaked at 14.2% in the first quarter of 2025, up from 13.7% a year earlier. By last month, that rate had been cut in half, with the vacancy rate — a narrower measure counting only vacant space — falling 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 landlords no longer need to offer free-rent incentives to attract tenants. “There was an element of smoke and mirrors to the inducements, but it paid off,” he said, adding that the market has shifted from tenants having the upper hand to landlords regaining leverage.
Much of the turnaround traces to Royal Bank of Canada’s May 2025 announcement requiring four-day office attendance that fall, which Avison Young principal Stan Krawitz called a “watershed moment” for the downtown core. All of Canada’s big banks had adopted similar four-day mandates by fall 2025. Krawitz said rents have risen “significantly” in some buildings over the past year. CIBC absorbed most of the sublease space Shopify had vacated at The Well, while Scotiabank added roughly 410,000 square feet across three separate leases. Tech firms have also added to demand: ride-share company Lyft is moving into 90,000 square feet at First Canadian Place, aiming to grow its Toronto workforce past 500 employees after Canadian ride volumes grew 50% year-over-year.
Recovery Remains Uneven Across the Country
The rebound is far from universal. Calgary has returned to pre-pandemic vacancy levels, though those levels remain historically elevated, while Vancouver and Montreal are still adjusting to tenants needing less space than before 2019. Across the wider Greater Toronto Area, vacancy sits near 8%, still roughly double 2019 levels. Within Toronto itself, newer premium buildings near Union Station are filling faster than older stock north of King Street, where vacancy rates run about one percentage point higher, Haythornthwaite said, pointing to commuting convenience as a growing factor in tenant decisions.
Workers Still Split on Full-Time Return
Employee sentiment has not shifted as decisively as vacancy numbers. A 2026 study commissioned by Source Office Furniture, drawing on more than seven million employee responses through the AskPolly sentiment-analysis 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 reported being in the office five days a week, down from roughly 83% before the pandemic. In Toronto and Vancouver, commute time and cost were found to weigh heavily on resistance to full-time return, in contrast to cities such as Calgary, Halifax and Winnipeg, where resistance 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, with Source Office Furniture president Matt Stewart summarizing the takeaway as employees wanting “a reason to come in.”
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