Downtown Toronto’s office market is showing signs of a stronger recovery amid heightened leasing activity in the Financial Core, according to a new report from Newmark.

Vacancy stood at 14.0% at mid-2025, says the commercial real estate advisory services company. While slightly higher than the previous quarter’s 13.8%, vacancy is down from the 14.8% peak reached in the third quarter of 2024, Newmark reported.

“I think we’ve definitely turned a corner in regards to the downtown Toronto office market,” said Andrew Petrozzi, Newmark’s head of Canadian research in an interview with Connect.

“We are seeing it currently, more specifically in certain submarkets,” added Petrozzi, who authored the report.

Demand for space in the Financial Core is driving the leasing activity, he added. Leasing activity has also increased in Downtown West. Leasing activity in the Financial Core led all submarkets, with the gap between availability and vacancy narrowing to 380 basis points – the tightest spread since late 2020.

“The recovery of downtown West would also represent a more wholesome approach to the recovery of the entire downtown office market,” said Petrozzi.

Banks’ return-to-office movement is catalyzing the Financial District. Four of Canada’s Big Five banks – BMO, Scotiabank, RBC and TD – have announced new return-to-office policies requiring employees to be in the office at least four days per week starting later in 2025.

The banking employees’ return will have “some pretty serious impacts on the downtown office market,” Petrozzi told Connect.

Meanwhile, the Ontario government’s decision to require civil servants to return to the office in 2026 will “start to power the change and the recovery” in the sector, he added.

During the first half, downtown office absorption in the first totalled nearly 960,000 square feet, the strongest mid-year performance since 2017 despite economic volatility and tariff concerns.

“The key thing that everyone needs to remember is that during the past five years, these organizations have been continuing to hire, and so now, when they are bringing everybody back into the office four or five days a week, they’re starting to realize that the space that they had is no longer sufficient based on their new headcount,” said Petrozzi.

For five years, absorption was low due to the effects of the COVID-19 pandemic, he said. And in the three years before the pandemic, there was a lack of supply in downtown Toronto, causing record-low vacancy and tempered leasing activity.

“That’s why you’re seeing the Financial Core really driving absorption, and that’s why it’s at an eight-year high,” said Petrozzi.

Sublease vacancy continued to decline, particularly in class B and C properties, though much of the demand remained focused on class A space. But a shortage of class A space is not driving sublease vacancy downward, said Petrozzi.

He said tenants’ desire to be in the Financial Core is prevailing over their desire for higher-quality space in outlying areas.

That situation is narrowing the availability-vacancy delta in the Financial Core, which is the only area in which class A vacancy is “particularly tight.”

No major new tenant commitments were announced in the first half, leaving vacancy elevated due to obsolete backfill space.

“There will always be a delta between the two, and the existence of that delta highlights a healthy office leasing environment,” said Petrozzi. “But a lack of availability will preclude, say, tenants, particularly large ones, from planning for expansion or growth right in the coming years. It will also limit the ability of new market entrants to actually enter into that submarket and into the Financial Core.

“So it’s tightening because, basically there’s fewer options moving forward, because there is little new supply in the pipeline currently.”

Outdated inventory in Downtown North and East could see redevelopment or demolition after more than five years of rising vacancy. With phase two of CIBC Square the last large tower under construction, sustained demand for trophy space could eventually trigger Toronto’s first new downtown office development since before the pandemic, according to Newmark.

Looking towards 2026 and beyond, there will be even fewer options for large tenants to move into new spaces because of the lack of supply in the pipeline, said Petrozzi.

With vacancy and availability expected to continue to decline, there will, potentially, be a greater need for a new project, said Petrozzi. But if one were to be announced this fall, it could not open until around 2030 due to the amount of construction time required.

Pictured: The Financial Core submarket in downtown Toronto.

Photo: Toronto Financial District Business Improvement Association

.