Canadian office market update - Q3 2025

In the third quarter of 2025, the national office availability rate continued its downward trend, settling at 16.4%

In the third quarter of 2025, the Canadian office market demonstrated robust recovery momentum despite ongoing challenges, including shifting workplace preferences, return-to-office mandates, and a softening labour market. The national office availability rate continued on a downward trajectory, settling at 16.4%, a 160 basis point reduction from the 18.0% recorded in the same period in the preceding year (Figure 1). This decrease was primarily attributable to increased demand for Class AAA office space and a contraction in new office construction.

Figure 1: Office availability rate (Q3 2024 vs. Q2 2025 vs. Q3 2025)

The sector witnessed a significant bifurcation between newer, premium Class A properties and older, less modernized stock. This “flight to quality” was a key driver of market activity, with new supply coming to a near standstill. The combination of a limited new development pipeline, declining sublet space, and institutional return-to-office mandates contributed to the tightening availability rates. This dynamic is expected to place a greater emphasis on the re-evaluation and repositioning of older, well-located office assets as tenants are compelled to broaden their search beyond the dwindling supply of new, top-tier inventory.

National and major market performance

A closer examination of major Canadian office markets revealed a varied performance. Halifax’s availability continued to contract, posting the country's tightest availability rate at 7.8%. Following closely were Vancouver and Ottawa, which reported availability rates of 12.7% and 13.3%, respectively.

Conversely, Calgary posted the highest availability rate at 20.5%. Yet this figure requires a nuanced view, as it also reflects a significant year-over-year decline of 280 basis points. This substantial reduction indicated that the strong recovery efforts in the city’s office sector, primarily through its Downtown Development Incentive Program, have proven successful. This program incentivized the conversion of underutilized office space into residential, mixed-use and other productive projects, effectively reducing available office inventory and contributing to the market’s rebalancing.

In a notable divergence from national trends, Quebec City’s office availability rate observed a significant uptick, reaching 14.6%, a 310 basis point increase year-over-year. The “flight-to-quality” trend was less pronounced in this market. Instead, there was a clear preference for Class B properties, which recorded a tighter availability rate of 11.7% compared to Class A’s 18.2%. This preference for Class B office space can be attributed to several factors. The market has a smaller corporate footprint and a higher proportion of smaller tenants who favour cost-effective office solutions. Additionally, these tenants may prefer less centrally located properties with ample parking, a feature often found in Class B buildings. This unique market dynamic underscores that local economic drivers and tenant profiles play a crucial role in shaping the city’s real estate performance, often deviating from broader national trends.

Key contributing factors to declining availability

The gradual decline in the national office availability rate was primarily driven by a drastic contraction in the construction pipeline, which occurred in response to waning demand. This marked slowdown began in 2021, leading to a gradual decline in the total area under construction in each subsequent quarter. As a result, the available office space decreased by 80% from its peak in the first quarter of 2020. This limited introduction of new supply played a crucial role in reducing overall available office space in the market and aiding in the absorption of existing inventory.

Another key driver was the sustained decline in available sublet space, which fell to 13.9% in the third quarter of 2025, a significant year-over-year drop of 320 basis points. This trend indicates that more businesses were re-occupying previously subleased office space, contributing to a lower national availability rate as original tenants reclaimed space from the secondary market. The return-to-office mandates of major Canadian institutions further substantiate this data. Most of the major banks in Canada, along with the Ontario provincial government, have mandated their employees to return to a four-day in-office work week, starting in the fall of 2025. The Ontario provincial government plans to implement this change in phases, wherein employees will begin with a four-day in-office work week in October 2025 and then transition to a five-day schedule by January 2026. While there is ongoing debate about the benefits of flexible work arrangements, the shift away from remote and hybrid models is contributing to a tighter job market in some areas, reflecting a move towards more in-office work.

Market bifurcation

The clear bifurcation within the office market, characterized by a pronounced preference for newer, premium Class A spaces by both investors and tenants, remained a prevalent trend. This trend not only underscored the widening disparity between high-quality Class A properties and older Class B and C stock but also highlighted a further segmentation within the Class A category itself. Specifically, a discernible distinction emerged between standard Class A and top-tier Class AAA buildings. The latter frequently commanded higher rental rates and experienced low vacancy rates, reflecting strong demand for prime office environments equipped with modern amenities, superior building systems, and desirable locations. This growing divide necessitated that property owners of older stock consider significant capital investments to reposition their assets and remain competitive in the evolving market.

Employment contraction and the office market

As of August 2025, the slowed population growth and persistent economic uncertainties have contributed to a cooling labour market. According to Statistics Canada’s Labour Force Survey (LFS) from August 2025, employment across Canada contracted for the second consecutive month, with a decrease of 66,000 employed persons, representing a 0.3% decline. The unemployment rate also rose by 0.2 percentage points to 7.1%, marking the highest rate recorded since 2016 (excluding the pandemic-impacted years of 2020 and 2021). These figures indicated a softening labour market and potentially reduced business confidence. The weaker employment conditions have generally led to a more cautious approach to hiring by businesses, which has, in turn, reduced the organic demand for additional office space.

A granular analysis of the LFS data revealed a mixed landscape across different industries. The primary areas that registered employment growth included construction, accommodation and food services, and agriculture. However, despite the construction industry recording the highest monthly employment gains, Statistics Canada noted that the sector saw little net variation since the beginning of the year, and the increase recorded in August was the first since January.

Conversely, employment losses were concentrated in sectors that, in some instances, have direct or indirect ties to the impact of tariffs, including professional, scientific and technical services; transportation and warehousing; manufacturing; and educational services. Despite the employment losses observed in the professional, scientific and technical services industry in August, the sector had observed an employment increase of 36,000 employed persons on a year-over-year basis, indicating underlying resilience in a key office-dependent sector. This nuanced data suggested that while the overall labour market was contracting, the demand for office space was not uniformly impacted and remained supported by specific professional sectors that continued to grow.

National office completions and new supply dynamics

Canada saw the completion of the King George Hub – Phase D, located in Surrey, British Columbia, totalling 28,497 square feet. Delivered fully available, this new supply did little to alleviate the overall scarcity of high-quality, modern office space. This reduction in completions signalled a further tightening of the market, particularly for high-quality, modern office space. The lack of new supply, when combined with the ongoing return-to-office mandates by major employers, served to accelerate the trend of declining availability rates.

This dynamic had two primary implications. It reinforced the bifurcation in the office market, as tenant demand and investment capital continued to concentrate on a limited pool of newer, premium assets. This intensified competition for top-tier buildings and widened the performance gap between newer Class AAA and A properties and older stock. Simultaneously, it placed a greater emphasis on the value of existing office stock. Property owners of older, well-located properties were incentivized to invest in renovations and upgrades, a trend that could lead to the revitalization of older buildings and become a defining shift for the Canadian office market.

National office construction pipeline: Long-term implications and revaluation of assets

The national office construction pipeline saw the addition of three new office buildings, bringing the total number of buildings under construction nationwide to 24, comprising 4.2 million square feet. Despite these additions, this figure represented a multi-year low in construction activity, underscoring a pronounced slowdown in new supply coming to market. Of this limited space, 24% remained available for lease, indicating that even the new inventory was not being fully pre-leased prior to completion (Figure 2).

Figure 2: Office under construction and availability (Q3 2025)

Vancouver and Toronto remained the epicentres of office development activity, collectively accounting for the dominant share of the nation’s ongoing construction. Vancouver has added three new office buildings to its construction pipeline. The most prominent addition is The Onyx, a Class AAA office building with 270,000 square feet of dedicated office space located at 1296 Station Street, expected to be completed in the first quarter of 2026. Vancouver’s robust economy, diverse industries, and dwindling Class A office space provided a stronger foundation for new development compared to other Canadian markets, even as the overall national pipeline has contracted significantly.

The ongoing contraction of the new office development pipeline is expected to pose a considerable challenge for tenants seeking premium office spaces in the future. Vancouver has introduced three new office projects into its construction pipeline. The growing demand for top-tier Class AAA spaces will likely extend to older, lower-quality Class A and Class B buildings in smaller markets. As a result, we can anticipate increased occupancy rates and potentially higher lease rates for these existing properties, as tenants are forced to expand their search beyond the shrinking supply of new Class AAA inventory. This dynamic highlights a potential market shift where the value of existing office stock is redefined by market pressures, prompting property owners to reassess their asset management strategies in response to tenant demand for high-quality, well-located space, regardless of the building’s age.

The long-term implications of this contracting pipeline suggest a tightening market for tenants and a potential re-evaluation of older office stock. This re-evaluation is not merely financial but also functional, as property owners may find renewed opportunities to attract tenants through strategic capital investments. Such investments could include modernizing building systems, improving amenities, and redesigning common areas to meet contemporary tenant expectations. This market rebalancing could drive new investment into repositioning new assets, ultimately altering the competitive landscape for office space across Canada. The trend signals a strategic shift from a “build-new” to a “re-position-existing” market, where the focus on capital investment moves from ground-up development to the strategic enhancement of older properties.

Looking ahead

The Canadian office market experienced a complex yet pivotal phase of recovery in the third quarter of 2025. Despite a cooling labour market and broader economic uncertainties, the national availability rate continued its downward trend, driven by a significant contraction in the construction pipeline and a concurrent decline in available sublet space. This “flight to quality” trend, amplified by return-to-office mandates, created a clear market bifurcation where a limited supply of high-quality, modern office space was met with strong, concentrated demand.

Looking ahead, this dynamic is poised to reshape the Canadian office landscape. The persistent scarcity of new inventory will likely compel tenants to broaden their search, driving demand toward existing Class A and even some Class B properties in smaller markets. This anticipated spillover effect could be a key catalyst for the re-evaluation of older office stock. Property owners are expected to increasingly focus their capital investments on modernizing and repositioning these legacy assets to meet contemporary tenant expectations for superior amenities and infrastructure. This strategic pivot from “build-new” to “re-position-existing” will not only revitalize urban cores but also create new investment opportunities and alter the competitive dynamics of the market. The long-term outlook indicates a more competitive and tighter market for tenants. However, this shift will also drive the renewal and enhancement of Canada’s existing office building stock, ensuring it remains relevant in the evolving post-pandemic work environment.

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