Canada’s Office Market: The Mismatch Behind the Empty Towers
By: Roc Lidder & Aaryan Sethi
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Canada’s office market isn’t experiencing a normal downturn; it’s undergoing a structural mismatch between what companies need and what actually exists.
The Problem: A Structural Divide, Not a Cyclical Soft Patch
While Class A towers continue to exhibit stable occupancy and sustained leasing momentum, older Class B and C buildings are facing prolonged vacancy, weakening rental economics, and rising obsolescence. The difference is not simply cosmetic. Class A assets are characterized as the most prestigious buildings relative to a local market, featuring prime location, rich amenity packages, and high quality construction with modern mechanical systems, high efficiency HVAC, and digital systems. Class B and C buildings, by contrast, suffer from subprime locations, outdated systems, inefficient layouts, higher operating expenses, and substantial capital requirements to meet modern standards.
This divide predates the pandemic but widened sharply thereafter. Publicly released CBRE data shows that Canada’s national office vacancy reached 18.7% in Q4 2024, and CBRE explicitly attributes this elevated rate to underperforming class B / C buildings rather than newer (Class A) assets. In Toronto’s downtown core, CBRE’s Q3 2025 figures show approximately 1.3 million sq. ft. of positive absorption concentrated in Class A buildings, while vacancy in A towers sits as low as 3.7%, far below the broader market. Although public reports do not provide a long-term numerical A/B/C spread, CBRE consistently notes that the “delta between Trophy/Class A and B/C buildings remains at an all-time high downtown.” This long-term pattern demonstrates structural, not cyclical forces at play. Even as return-to-office initiatives accelerated and utilization increased, older towers failed to absorb tenants, underscoring a fundamental misalignment rather than temporary softness in demand.
Why It Happened: The Mechanics Behind the Split
Hybrid work did not eliminate the office asset; it changed its purpose. Across Canada, employers have struggled to convince workers to return on a full-time basis, and the hybrid model has become deeply entrenched. This is why trophy office assets have been thriving as of late, because of the purpose-built amenities that attract employees into the office that many Class B and below offices do not have, such as close proximity to food courts, lounges, modern collaborative spaces, and service-rich surroundings. Although companies also require less square footage per employee than before, falling from roughly 165 square feet to approximately 132 according to JLL’s occupancy report, expectations for quality have increased dramatically. As companies reduced their space needs and moved into smaller offices, demand for traditional trophy spaces declined. This shift has increased interest in top-tier Class A offices, exemplified by downtown Toronto’s CIBC Square, which was fully leased before opening.
However, hybrid work is not the sole driver. Pre-pandemic, firms were already consolidating into higher-quality buildings due to rising employee expectations, mechanical upgrades, and ESG-related requirements. Even in strong leasing years like 2018, when Canada saw one of its highest absorption totals of the decade, Altus Group reported a flight to best in class space, with leasing activity concentrated in newer, high-quality assets, while older buildings underperformed. This demonstrates that structural quality preferences existed before hybrid adoption.
Employers now prioritize environments that help employees justify the commute: seamless transit access, collaborative space that supports teamwork, wellness-oriented amenities, nearby food halls and retail, and buildings integrated into urban infrastructure networks. Class A towers are uniquely positioned to deliver these features.
Toronto exemplifies this dynamic; many of the city’s top-tier office buildings are directly connected to the PATH system, providing weather-protected access to the subway, GO Transit, restaurants, retail, and essential services. This connectivity has become a decisive differentiator for employers who need to make in-office days both convenient and appealing. Older Class B and C towers, often lacking transit adjacency, amenities, or modern design, cannot provide a comparable experience.
Nuance matters: Some well-located Class B buildings with strong features and modernized infrastructure can compete after upgrades, while some Class A buildings struggle when transit access is weak. Certain government-heavy submarkets behave differently, and tenants in cost-sensitive industries often move to lower-priced space rather than higher-priced options. Even within Class A, distinctions can be drawn between lower-tier and AAA counterparts, with the latter posting stellar occupancy. These nuances strengthen, rather than weaken, the structural argument: exceptions exist, but the overall misalignment is economy-wide.
These workplace considerations intersect with rising ESG and mechanical requirements. Modern ventilation, high-performance envelopes, upgraded electrical capacity, and compliance with benchmarking requirements have become baseline expectations. Many older towers require extensive and often unviable capital expenditures simply to meet minimum regulatory standards. Meanwhile, newer assets already satisfy or exceed these requirements. As a result, capital naturally gravitates toward buildings that require fewer upgrades and carry lower operating risk.
Tenant preferences and capital constraints reinforce each other. As tenants gravitate toward higher-quality buildings, cash flows weaken in older properties. This deterioration makes refinancing more difficult, especially as OSFI-regulated lenders tighten underwriting. Capital continues to flow into Class A assets, improving their competitiveness, while disinvestment accelerates the decline of older buildings. This self-reinforcing cycle explains why the divide persists across markets, regardless of macroeconomic fluctuations.
Too Much of the Wrong Kind of Space
Canada does not face an oversupply problem; it faces a supply misalignment. In 2025, Canada had 800 million square feet of office inventory, with nearly 100 million of it sitting vacant, and new construction is at a two-decade low. Importantly, vacancy is concentrated almost entirely within aging Class B to D towers.
According to Altus Group, in 2024 Class A buildings captured 11.6 million sq. ft. of leasing in 2024 vs. 2.4 million in Class B and ~0.54 million in Class C. Similarly, the Globe and Mail reports the downtown office supply glut in Canadian cities being driven by companies actively shifting from Class B to Class A leases, leaving deteriorating towers vacant.
Municipal energy benchmarking programs, zero-emission building policies, and the federal government’s initiative to reduce its office footprint by 50 percent all disproportionately impact older assets that lag in mechanical performance, energy efficiency, and workplace flexibility.
Cities that have moved aggressively to repurpose obsolete space, such as Calgary, highlight the underlying issue. Calgary’s Downtown Development Incentive Program deliberately removes obsolete supply from the office market and replaces it with demand-aligned uses such as residential. These conversions are not signs of weak demand; they acknowledge that certain buildings no longer function economically as offices. By removing obsolete supply and replacing it with high-demand uses like housing, these cities demonstrate a practical strategy for confronting structural vacancy.
What Recovery Actually Looks Like
Recovery in Canada’s office market is bifurcated.Vancouver market data for 2024 shows effective Class A rents increasing by roughly 3–5 percent, reflecting ongoing tenant migration to amenity-rich, energy-efficient assets. Institutional investment reinforces this trend: Oxford Properties’ acquisition of CPP’s stakes in several premier towers, KingSett Capital’s continued activity in Vancouver and QuadReal Property Group’s $1billion sale in the heart of Vancouver demonstrate confidence in the long-term durability of high-quality office stock.
On the other hand, Class B and C properties show no meaningful signs of recovery. National Class B/C absorption has remained weak since 2021, with CBRE confirming that Canada’s elevated 18.7 percent vacancy rate is concentrated in aging, underperforming stock. Furthermore, CBRE’s Q1 2025 reporting notes that the slight national improvement in vacancy was partly driven by the removal of obsolete office supply through conversion and demolition, not because leasing demand recovered in those buildings. Re-tenanting periods in older assets remain long, operating costs continue to rise, and capital requirements frequently exceed viable thresholds.
The divergence in fundamentals demonstrates that the market is not undergoing a uniform downturn but a structural reallocation toward buildings that align with contemporary workplace and sustainability standards.
Defend the Core
Class A and AA buildings represent the productive core of Canada’s office ecosystem. They attract tenants, sustain rent growth, and continue to draw institutional capital even amid broader market softness. Strengthening this segment through targeted ESG retrofits, workplace modernization, and amenity improvements reinforces its role as the foundation of any sustainable office-market recovery. These assets already exhibit the characteristics tenants value most, location, connectivity, flexibility, and experiential quality, and should remain the focal point of investment.
Convert or Clear the Rest
For many Class B through D buildings, conversion offers a more economically rational strategy than attempting to preserve outdated office use. Conversion is not meant to “upgrade” poorly located Class B/C towers into Class A offices, it recognizes that these buildings are no longer viable as office assets. Residential, student housing, and hospitality uses tolerate locations where office demand has structurally collapsed.
According to a 2023 Avison Young adaptive reuse study, about 34 percent of office buildings across major North American markets meet the basic physical criteria for potential conversion. Similarly, Gensler, an architectural firm, pegs the percentage of viable office conversions at 30 percent of the offices they surveyed in North America. These buildings are typically older properties built before 1990 with smaller and more adaptable floorplates. However, only a portion of this group is likely to be financially or structurally viable for full conversion after detailed feasibility analysis. Calgary’s Downtown Development Incentive Program illustrates how public policy can accelerate this process: by offering up to $75 per square foot in grants, the city meaningfully improves the economics of conversion.
One example is the former Petro Fina Building on 8th Avenue SW Calgary. Before conversion, the building’s office revenues were approximately $1.3 to $1.4 million, consistent with lower-tier performance in a market facing high vacancy. After approval for residential conversion, projected annual revenues rose to approximately $2.4 million, supported by Calgary’s extremely low rental vacancy rate. Municipal incentives and the federal GST/HST rebate materially further improve feasibility.
In Calgary, the gap between underperforming office economics and multifamily demand helps explain why conversion is gaining traction. Cushman & Wakefield’s Q3 2025 Calgary Office Marketbeat reports that the average direct net asking rent across the city’s office market is about 16.22 dollars per square foot per year, with lower-tier central assets experiencing softening rents and sustained vacancy. By contrast, rental housing demand remains comparatively resilient. CMHC and Statistics Canada data show that by late 2024 and early 2025 the average rent for a two-bedroom apartment in Calgary was roughly 1,880-1,920 dollars per month, while the overall purpose-built rental vacancy rate in the city remained about 4.6 percent despite significant new supply. Taken together, this indicates that in buildings where office tenants are paying relatively low net rents and vacancy remains elevated, repositioning space into apartments that command strong monthly rents in a tight rental market can plausibly support a higher and more stable income stream after conversion, provided that capital costs and operating expenses are managed effectively on a building-by-building basis.
Conversions are possible without explicit government support as well. In Toronto, changes to city planning policy in favour of conversions are still in deliberation stages. Despite the backup, Axemon is converting a Class B office tower with strong occupancy at 80% into a luxury condo complete with a saltwater pool and communal herb garden. Multiple other developers in the city are chasing similar plays, giving older towers with strong urban access a modern finish to capitalize on pent-up residential housing demand. A city-commissioned study pushed the municipal government to further enable conversion activity, signalling future profitability for a growing number of interested developers.
The Path Forward
Canada’s office market is not suffering from insufficient demand but from demand that is fundamentally misaligned with existing supply. Class A assets remain competitive, liquid, and actively sought by tenants and investors, while Class B and C buildings face rising obsolescence and deteriorating financial viability. A durable recovery requires a bifurcated strategy: defend and enhance high-performing buildings while proactively converting or removing those that no longer meet market standards. Aligning supply with workplace expectations, sustainability imperatives, regulatory pressures, and capital discipline is essential for restoring balance to Canada’s downtown cores.
Editor(s): Affan Bhimani
Researcher(s): George Xie
