Canadian office market update – Q2 2025

In the second quarter of 2025, the national office availability rate continued its downward trend, settling at 16.6%

In the second quarter of 2025, the national office availability rate experienced a notable decline, settling at 16.6%, a 40 basis point reduction from the 17.0% recorded in the preceding quarter (see Figure 1). This decrease was primarily attributable to a combination of strategic adjustments by businesses, the increasing enforcement of return-to-work policies, and a significant reduction in new office construction.

Figure 1: Office availability rate (Q2 2024 vs. Q1 2025 vs. Q2 2025)

A closer look at major Canadian office markets revealed a varied performance. Halifax posted the tightest availability rate in the country at 8.3%, a level it had not recorded since 2013. Following closely were Vancouver and Ottawa, which both reported availability rates of 12.4%. Conversely, Calgary recorded the highest availability rate at 20.0%. However, a more nuanced perspective on this figure is essential. Despite having the highest overall rate, Calgary experienced a remarkable year-over-year decrease of 250 basis points in its availability rate, marking the most significant improvement among all major markets. This substantial reduction indicated a strong recovery trajectory for the city's market. This positive momentum in key markets like Calgary underscored a broader trend of gradual recovery that was taking hold across the national office sector.

Key contributing factors to declining availability

The decline in the national availability rate was primarily driven by a significant contraction in the office construction pipeline. This trend has been observable since 2020, with a marked slowdown in new project starts. Notably, no new office projects were added to the construction pipeline since the third quarter of 2023, and the total square footage of office space under construction decreased by 82% from its peak in the first quarter of 2020. This limited influx of new supply played a crucial role in reducing the overall available office space in the market.

Furthermore, a substantial contributing factor was the sustained decline in available sublet space. This continued its downward trajectory, reaching a low of 14.1% in the second quarter of 2025. This figure represented a significant year-over-year decrease of 310 basis points, providing strong evidence that a greater number of businesses were actively reoccupying previously subleased portions of their office space. This re-occupancy directly contributed to the overall reduction in the national availability rate, as space that was once available on the secondary market was pulled back into active use by original tenants.

In addition to these supply-side dynamics, the market also experienced a shift in net absorption. After several major markets reported positive net absorption during the latter half of 2024 and the first quarter of 2025, this trend reversed course in the second quarter of 2025. With the notable exceptions of Southwestern Ontario and Halifax, all other markets reported negative net absorption. This indicated that across most of Canada, more office space was being vacated than was being leased, which, while seemingly counterintuitive to a declining availability rate, emphasized the impact of the contracting supply pipeline and the reabsorption of sublet space. The overall effect of reduced new construction and the recapture of sublet space outweighed the general negative absorption trend in the overall national availability rate.

Market bifurcation and Class A preference

The first half of 2025 revealed a clear bifurcation within the office market, characterized by a pronounced preference for newer, premium Class A spaces. 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.

Employment trends and economic headwinds

While specific sectors directly linked to office space utilization demonstrated employment growth, the anticipated slowdown in immigration and persistent economic uncertainties were projected to mitigate the expansion of office-related employment throughout 2025. This cautious outlook stemmed from the broader economic environment, where a cooling labour market and reduced consumer confidence could temper the need for corporate expansion and, consequently, new office footprint requirements.

According to Statistics Canada’s Labour Force Survey (LFS) from May 2025, employment across Canada remained largely steady. The labour market experienced a modest net growth of 8,800 (+0.0%), and the unemployment rate rose by 0.1 percentage points to 7.0% compared to the previous month. This marked the highest unemployment rate recorded since 2016, a clear indicator of a tightening labour market and potentially reduced business confidence. The implications of this softening labour market typically translate into less aggressive hiring by businesses, which in turn diminishes the organic demand for additional office space.

A granular analysis of the LFS data revealed a mixed landscape across different economic sectors. The primary areas that registered employment growth included: (1) wholesale and retail trade, (2) information, culture and recreation, (3) finance, insurance, real estate, rental and leasing, and (4) utilities. Conversely, employment losses were concentrated in sectors that, in some instances, have direct or indirect ties to office space utilization: (1) public administration, (2) accommodation and food services, (3) transportation and warehousing, and (4) business, building and other support services.

The interplay of these sectoral shifts, combined with the broader economic headwinds, suggested that while certain segments of the office market would likely remain robust due to specific industry growth, overall demand for office space could face limitations throughout the remainder of 2025, largely due to a less expansive employment base and ongoing economic uncertainties.

National office completions and new supply dynamics

In the second quarter of 2025, six new office buildings were completed across Canada, adding 875,477 square feet to the national inventory (Figure 2). Notably, nearly half of this newly constructed space remained available for lease upon completion, signalling a cautious absorption trend in the market.

Toronto was the primary driver of this new supply, with two office buildings contributing 527,657 square feet. A substantial portion of this, 466,590 square feet, came from the new EQ Bank Tower located in the city’s Financial District. Vancouver also added to the national supply with the completion of three new office buildings, totalling 308,642 square feet. Similar to Toronto, Vancouver’s 308,643 square feet of new office space saw a significant portion of the space available for lease. Finally, Montreal made a smaller contribution to the new supply pipeline with the introduction of a 39,177 square foot office building. Notably, this entire building was completely available for lease at the time of its completion. 

Figure 2: Office completions & availability (Q2 2025)

The relatively high availability within newly completed projects across both Toronto and Vancouver reinforced the importance of pre-leasing activities in a market where tenants were exercising caution. Developers faced the challenge of bringing new supply online in a market where demand was selective and heavily focused on high-quality, amenity-rich spaces - a trend previously underscored by the strong preference for Class A and Class AAA assets. These market dynamics collectively contributed to the overall national availability rate, as the addition of unleased new construction augmented the existing inventory.

National office construction pipeline: contraction and future implications

The national office construction pipeline experienced a continued contraction as of the second quarter of 2025. During this period, only 21 office buildings were under construction nationwide, totalling just under 3.9 million square feet. This represented a multi-year low in construction activity, underscoring a pronounced slowdown in new supply coming to market. Of this limited upcoming space, 35% remained available for lease, indicating that even the dwindling new inventory was not being fully re-leased prior to completion (Figure 3).

Figure 3: Office under construction and availability (Q2 2025)

Vancouver and Toronto continued to be the epicentres of office development activity, jointly accounting for the dominant share of the nation’s ongoing construction. This concentration highlights the sustained demand for new, modern office space in these key economic hubs. Their robust economies, continued population growth, and diverse industry bases provided a stronger foundation for new development compared to other Canadian markets, even as the overall national pipeline dwindled significantly. The reduced activity outside these major centres further exacerbated the contraction of the national pipeline.

The persistent shrinking of the new office development pipeline is anticipated to present a substantial challenge for tenants seeking premium office spaces, particularly those in newly developed properties, in the foreseeable future. Should the prevailing trend of limited new project commencements persist, it is highly probable that demand for modern, high-quality spaces will eventually spill over into the older, lower-quality Class A and B office buildings. This shift would likely lead to increased occupancy and potentially higher lease rates for these existing assets, as tenants are forced to broaden their search beyond the dwindling new supply of Class AAA.

The long-term implications of this contracting pipeline suggest a tightening market for tenants and a potential revaluation of older office stock. This dynamic was expected to prompt a revaluation of older Class A and B office stock, as landlords of these buildings might find renewed opportunity to attract tenants through strategic capital investments, such as modernizing building systems, amenities, and common areas. This market rebalancing could drive new investment into repositioning existing assets, ultimately altering the competitive landscape for office space across Canada.

Looking ahead

As the national office market moved into the second half of 2025, the trends from the second quarter set a clear stage for the future. The critically low construction pipeline, which dropped by 82% from its peak in 2020, signals an impending supply crunch for new, premium office space. This future constraint is expected to intensify the already fierce competition for top-tier Class A and AAA properties. Given the limited new supply, it is anticipated that demand will eventually spill over into the older, well-located Class A and B assets. This shift will likely drive a revaluation of existing office stock, as landlords of these buildings may find renewed opportunities to attract tenants and command higher lease rates through strategic capital investments and renovations. The market is transitioning from one defined by abundant options to one characterized by strategic scarcity, fundamentally altering the competitive landscape for both tenants and landlords in the coming quarters.

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