Canada’s office market is showing its clearest signs of recovery since the pandemic, with a shrinking construction pipeline and renewed demand for downtown space pushing vacancy rates lower across the country — though the rebound is far from evenly distributed.
According to a new forecast from CoStar Group, 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 now projects the rate will continue declining to 9.3% by the end of 2027 and 8.7% by the end of 2028, both improvements on its earlier forecast of 10% and 9.4% for those same years. The firm attributed the upgrade to stronger-than-expected net 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 roughly 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 period — only turning positive since the second half of 2025.
That divide is also showing up in rents. CoStar forecasts rent growth of approximately 4% for higher-end buildings, compared with about 2% for the rest of the market, a pattern the firm describes as a continued “flight to quality.”
Crucially, CoStar said the projected decline in vacancy is being driven mainly by a thin construction pipeline rather than a surge in demand. 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. Meanwhile, new deliveries are expected to fall sharply after peaking in 2026, a year boosted by the second phase of CIBC Square in Toronto, dropping to roughly 200,000 square feet in net new supply by the end of 2027.
Toronto’s Towers Fill Back Up
Nowhere is the shift more visible than in downtown Toronto. An analysis of 47 large downtown towers by CoStar, cited by the Globe and Mail, found the availability rate had climbed to a peak of 14.2% in early 2025, up from 13.7% a year earlier. By last month, that availability rate had been cut in half, while the narrower vacancy measure — which counts only empty space, excluding sublets and space coming to market — 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 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 food courts and coffee spots near office towers have come back to life after years of empty streets.
Much of the turnaround traces back to Royal Bank of Canada’s announcement in May 2025 that staff would be required to work in-office four days a week starting 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. Krawitz said rents have risen “significantly” over the past year in some buildings, with CIBC absorbing much of the sublease space Shopify had vacated at The Well, and Scotiabank adding roughly 410,000 square feet across three separate leases.
The demand isn’t limited to financial firms. Ridesharing company Lyft is moving hundreds of employees into 90,000 square feet at First Canadian Place, expanding from a smaller office that had housed about 50 staff toward a Toronto workforce of more than 500, according to Jerry Golden, the company’s chief policy officer. “People want to be downtown and rideshare is most prominent in the densest population areas, so there’s a positive nexus for us,” Golden said.
Recovery Remains Uneven Across the Country
Outside Toronto, the picture is mixed. Calgary has returned to pre-pandemic vacancy levels, though those levels remain historically elevated, while Vancouver and Montreal have yet to see a sustained recovery as tenants continue to need less space than before 2019. Across the broader Greater Toronto Area, vacancy sits near 8%, still roughly double 2019 levels. Even within Toronto, buildings north of King Street run about one percentage point higher in vacancy than those to the south, which Haythornthwaite linked to proximity to transit and highway access in a city he described as “gridlock-ridden.”
Employee sentiment data suggests the shift toward office attendance is not without friction. A 2026 study commissioned by Source Office Furniture, based 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 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 specifically, the study found commute time and cost were driving much of the resistance, compared with cities like Calgary, Halifax and Winnipeg, where pushback was tied more to office-culture expectations.
CoStar’s Lefebvre cautioned that risks to the national forecast remain tilted to the downside, citing trade and tariff uncertainty, higher fuel costs and a declining population as factors that could weigh on the economy and alter absorption trends. 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.”
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