Downtown Toronto’s office vacancy rate declined to 13.7% in the first quarter, says a new report from Newmark.

The reduction marked a second consecutive quarterly drop from a peak of 14.8% in Q3 2024.

The market saw approximately 784,000 square feet of positive absorption—the highest Q1 absorption downtown since 2000.

Leasing activity was strongest in the Financial Core, where vacancy fell for the first time since early 2023. While return-to-office trends remain sluggish compared to other Canadian cities, tenants continue to favour well-located, newly built class A spaces, especially in Downtown South and the Financial Core.

Landlords are increasingly covering fit-out costs to secure leases.

Despite improving fundamentals, overall vacancy remains elevated due to the absence of major new tenant announcements and a backlog of obsolete sublease space. Leasing momentum continues to centre around renewals and deals in newer class A buildings near Union Station.

Downtown West is beginning to recover after years of weak leasing and tenant departures, posting the second-highest absorption rate among downtown submarkets in Q1. Incentives like tenant improvements, free rent and delayed lease terms are still necessary to close deals, particularly outside of the most sought-after areas.

Class A rents continue to diverge from those of class B and C buildings, reinforcing the trend toward high-quality space among occupiers seeking modern amenities and transit connectivity.