An increase in leased office space has been driven by return-to-office mandates from large employers, particularly financial institutions.Tijana Martin/The Canadian Press
Canada’s office real estate market is starting to recover after years of employers shedding space in favour of remote work. But while some major cities are seeing increased leasing activity, many investors remain cautious about the sector, taking a wait-and-see approach, particularly in publicly traded real estate investment trusts (REITs).
Although the sector is still recovering from the COVID-19 pandemic, it’s now facing the new threat of artificial intelligence.
“AI threatens to hollow out white-collar demand just as the sector was finding its post-COVID footing,” says a research note from BMO Capital Markets released last week, while noting the bear case may be overstated.
According to commercial real estate firm CBRE Group Inc., office vacancy in Canada remained elevated, at roughly 18 per cent in the fourth quarter of 2025, compared with about 10.9 per cent in 2019.
But the market appears to be stabilizing, with more office space leased than vacated in 2025 for the second consecutive year.
Much of that improvement was driven by return-to-office mandates from large employers, particularly financial institutions and government.
“In downtown Toronto, we’ve had the four best quarters for leasing in over five years,” says Marc Meehan, managing director of research at CBRE Canada.
Toronto remains the strongest office market in the country. Vancouver is also showing increasing leasing activity, although vacancy remains relatively high as tenants continue to give up older office space, Mr. Meehan says, while Calgary and Montreal are improving more slowly.
At the same time, the pipeline of new office construction has shrunk significantly. Many developers paused new projects during the pandemic, meaning fewer buildings are being completed today than in the years leading up to 2020.
But the recovery has been uneven, says Dean Orrico, president and chief executive officer of Middlefield Group in Toronto, with older buildings struggling.
“I would say that many [older] buildings are obsolete and at some point they’re going to have to be repurposed, because you’re going to have a hard time getting any tenant to take up space there, especially if they have options,” he says.
Indeed, companies bringing employees back to the workplace are prioritizing modern, well-located towers with features such as upgraded ventilation systems, transit access and nearby restaurants and retail.
“What we’ve really seen is a bifurcation,” says Lee Goldman, portfolio manager at CI Global Asset Management in Toronto. “The trophy buildings are doing quite well, while everything else is still having a harder time.”
In Toronto, downtown vacancy is 15 per cent, according to CBRE’s Q4 2025 report, but vacancy in top-tier “trophy” buildings is dramatically lower, at 3 per cent.
But while developers across the country have floated the idea of converting obsolete office space into mixed-use or residential buildings, the economics don’t always make sense.
“The cost of converting an office building to residential can be close to building new housing,” Mr. Meehan says. “For the math to work, the property often has to be purchased at a very low price.”
Institutional owners
For investors looking at public markets, the office sector also presents a structural challenge in Canada.
Unlike retail or industrial real estate, office properties have limited representation in publicly traded REITs. Mr. Goldman says many of the country’s premier office towers are owned by institutional investors such CPP Investments, OMERS and the Ontario Teachers’ Pension Plan.
“There really aren’t many investable office REITs in Canada,” he says.
Among the few publicly traded office landlords, Allied Properties REIT AP-UN-T and Dream Office REIT D-UN-T have faced considerable pressure in recent years as the sector adjusts to weaker demand and higher borrowing costs.
Allied Properties, which owns a large portfolio of urban office buildings, has been particularly challenged by development projects launched before the pandemic and rising debt levels. It’s now trading at around $9 a unit, down around 45 per cent from last year and about 80 per cent from its all-time high in 2020. The company recently cut its dividend and raised equity to strengthen its balance sheet.
“It’s really become a show-me story,” Mr. Orrico says, noting some investors are choosing to allocate their capital elsewhere. Middlefield’s REIT funds currently have little or no exposure to office real estate.
“Investors want to see them execute on asset sales and improve the balance sheet before confidence returns,” he adds.
While the expectation is for the office market to continue improving gradually as return-to-office policies pick up speed, there are still longer-term uncertainties around hybrid work arrangements and artificial intelligence potentially reshaping demand for the office worker.
“The worst of the disruption may be behind us,” Mr. Goldman says. “But investors are still trying to understand what the future of office demand will look like.”