Canada’s troubled office market has almost reached bottom as it shows signs of recovery, says Altus Group.

The hard-hit sector appears to have “turned an important corner” while being fuelled by such key factors as limited new construction, positive leasing momentum and tenants’ emerging in-office mandates for employees, Toronto-based Altus reported.

Canadian office leasing totalled 15 million square feet (msf) in 2024, surpassing the 12.9 msf feet recorded in 2023.

Class A buildings led the way, accounting for 11.6 msf of the total. Vancouver maintained the lowest overall office vacancy rate at 13.2%, with class A vacancies even lower at 12.7%. Calgary and Montreal also saw positive momentum, benefitting from interprovincial migration driven by affordability.

The Canadian office market has faced significant challenges due to remote work trends, corporate downsizing, and shifting space requirements, said the market-intelligence firm. However, vacancy rates in major markets appear to be stabilizing, with best-in-class A space becoming increasingly difficult to secure.

“We’re calling the bottom, but expect the vacancy rate will be relatively flat for the next while,” said Ray Wong, vice-president of data solutions at Altus, in the report.

While interest rates and potential U.S. trade tariffs create uncertainty, new office construction remains limited. Some new space is expected to come online in Vancouver and Toronto later in 2025 year, slightly increasing vacancy rates in the short term.

“It’s likely that we won’t see a new office tower for at least another few years in any of the major markets,” said Wong.

This limited new supply is expected to contribute to steady positive absorption and lower vacancies over time.

Leasing Momentum Gaining Strength

Leasing activity in 2024 was bolstered by a decline in sublet activity and an increase in inquiries.

“What we’re hearing from leasing representatives is that inquiries and activity have increased,” said Wong.

Companies are taking varied approaches to space requirements, with some downsizing, others maintaining their footprint, and some expanding due to the return-to-office mandates.

A growing number of financial and technology firms, among others, are requiring employees to return to the office for two to four days a week. According to new Flex Index research, 84% of Canadian firms offer work-location flexibility, Altus noted.

Flight to Best-in-Class Space

Flight to quality remains a clear trend, with companies prioritizing best-in-class AA buildings to attract employees back to the workplace.

This situation has created a bifurcated market. In 2024, class A buildings dominated leasing activity with the 11.6 msf leased far outpacing the class B showing (2.4 msf) and modest class C result (540,000 sf.)

Within the A category, demand is highest for newer AA properties that offer attractive amenities as commuting workers increasingly seek convenience and work-life balance.

Despite higher vacancies, many class B and C buildings remain viable, appealing to tenants in search of cost-effective options.

“Some of these properties will be redeveloped, which is what we’ve seen in Calgary with office conversion activity to residential,” said Wong.

However, challenges such as zoning regulations and structural limitations complicate conversion efforts.

“Eventually some of the B and C buildings that may be functionally obsolete will be converted to other types of uses, but it’s not an easy solution and it will take time,” said Wong.

Investment Activity and Market Outlook

Office transaction volumes remain below pre-pandemic levels, with 2024 transactions totalling $4 billion, compared to $10.5 billion in 2019. Owners of quality A buildings are largely holding onto their assets, while private investors are actively seeking properties with potential for repositioning.

“From the private-investor side, we’ve seen some activity and demand for assets that have potential for repositioning to higher and best use in the future,” said Wong.

While the market remains challenging, investors are exploring opportunities through redevelopment, repositioning, and conversions. Calgary, in particular, has seen strong investment activity in buildings that are nearing functional obsolescence.

“The bottom line is that even though there are still some challenges with vacancy rates, office is still viable, and investors are looking at office for potential opportunities,” said Wong.

Pace of Recovery Remains Uncertain

Leasing momentum is expected to continue in 2025, supported by easing inflation and the Bank of Canada’s rate-cutting cycle. However, the decision-making process is being hampered by factors such as long-term bond rates, three U.S. tariffs on imports from Canada, and economic uncertainty.

“There is a bit of hesitation around making decisions in the near term,” said Wong.

Pictured: Toronto office towers.

Photo: Shutterstock