Downtown Toronto’s office market continued to strengthen in the third quarter of 2025, with vacancy declining and absorption reaching its highest level in three years, according to a new report from Newmark.

Downtown office vacancy fell to 13.4% in the third quarter, down from 14.0% in the previous quarter and 14.6% a year earlier, after peaking at 14.8% in the third quarter of 2024.

“We have seen a very large resumption in demand, and as a result vacancy is steadily tightening,” said Andrew Petrozzi, Newmark’s head of Canadian research, in an interview with Connect. “We are continuing to see the downtown Toronto office market really swing to the positive.”

The sector displaying its strongest activity levels in years as more investors, landlords and tenants come off the sidelines.

The improvement was supported by stronger tenant demand in central submarkets, particularly the Financial Core, and a broad-based tightening in available space. Canada’s Big Five banks have been the largest demand drivers in the Financial Core, where their national headquarters are located, requiring most employees to work in the office.

“They did announce return-to-office mandates this past summer; and as a result, you’ve seen significant leases being done by financial institutions, as they have their workers come back into the office starting this fall and into early 2026,” said Petrozzi, who authored the report. “That’s been a really big shift downtown, and most of the activity has been in the Financial Core.”

Despite ongoing economic uncertainty, net absorption totalled approximately 1.45 million square feet in the first nine months of 2025, the strongest level recorded downtown since the same period in 2022

That preference has accelerated the divergence between building classes. Class A vacancy continued to decline sharply through 2025, while vacancy in class B and C properties remained elevated, particularly in fringe submarkets. The report notes that competition for high-quality space is increasingly forcing tenants to weigh location against building quality, with some occupiers already expanding their search beyond the traditional core to secure class A space.

“The tenants have largely remained drawn to the well-connected central submarkets of the Financial Core and Downtown South,” said Petrozzi.

Leasing activity has been driven largely by tenants gravitating toward well-connected, high-quality buildings, with Newmark pointing to an intensifying flight to quality as occupiers prioritize class A and trophy assets.

The sublease market also showed meaningful improvement. Overall sublease vacancy declined again in the third quarter and is now at its lowest level since 2020, reflecting reduced excess space and increased backfilling of previously available floors. Tightening sublease conditions have been most pronounced in class B and C buildings, one of the few areas outside class A assets where leasing activity has been occurring.

“And so again, we are running into this issue where there has been no new supply,” said Petrozzi, adding that construction remains limited.

With phase two of CIBC Square largely preleased and representing the last major office tower currently under construction downtown, Newmark says the lack of new development is contributing to mounting pressure on trophy and class A space.

“It’s primarily leased up,” said Petrozzi. “As tenants are increasingly looking, that flight to quality is turning into a fight for quality as tenants continue to look for amenity-rich buildings with large floor plates. The vacancy for those in downtown Toronto is falling fairly quickly. So, that again [creates] this question about who’s going to pull the trigger to announce a new development because it takes three, four, depending on the scale of the building, even five years for this to deliver.”

Construction velocity could accelerate as early as 2026, however, as sustained tenant demand and tightening conditions raise the likelihood of a new downtown office development announcement, says the Newmark report

Pictured: The Financial Core submarket in downtown Toronto.

Photo: Toronto Financial District Business Improvement Association

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