A Glimmer of Hope: downtown Office Vacancy Rates Edge Downward

After a prolonged period of escalating vacancy, Canada’s downtown office market is showing tentative signs of recovery. A recent report indicates a marginal improvement in vacancy rates within city centers, marking the first such decrease as the onset of the pandemic. This offers a potential, albeit cautious, optimism for the commercial real estate sector.

Key Findings: Q1 2025 Vacancy Trends

The report reveals that downtown office vacancy rates dipped to 19.9% in the first quarter of the year, a slight decrease from the record high of 20% recorded in the previous quarter. While seemingly small, this shift represents a notable change in trajectory after consistent increases. This data comes at a time when remote work policies are being re-evaluated across many industries, potentially influencing long-term office space needs.

Regional Variations: Toronto and Vancouver Lead the Way

Despite looming concerns about potential trade tensions and customs tariffs, both Toronto and Vancouver experienced a reduction in office vacancy rates. This suggests a degree of resilience in these major urban centers. Though, analysts caution that the overall market remains volatile, and the full impact of trade-related uncertainties may not be fully realized until subsequent quarters.

Factors Influencing Vacancy: Supply and Demand Dynamics

The surge in available office space in recent years has been largely attributed to new developments entering the market. However, the first quarter of 2025 saw a unique situation where no new office spaces were added in the city center. Furthermore, approximately 400,000 square feet of existing office space was removed from the market due to conversion or demolition, contributing to the slight decrease in vacancy. This reduction in supply, coupled with potentially stabilizing demand, has played a crucial role in the observed improvement.

Suburban Stability: A Consistent Market presence

In contrast to the fluctuations in downtown areas, the combined vacancy rate for downtown and suburban offices remained relatively stable, holding steady at 18.7%. This suggests that suburban office markets have maintained a consistent level of occupancy, potentially due to factors such as lower rental costs or a preference for decentralized work locations.

Industrial Real Estate: Awaiting the Impact of Trade Policies

While the office market is showing early signs of stabilization, the industrial real estate sector is anticipated to be more considerably affected by evolving trade policies and customs duties. Despite these concerns, the first quarter demonstrated relatively strong net absorption in the industrial sector, indicating continued demand for warehousing and distribution spaces. The long-term effects of these policies, though, remain to be seen.

“The industrial real estate market will probably be more affected by customs duties, but that in the first quarter, it still displayed a relatively solid clear absorption.”
CBRE Report, March 2025

Looking Ahead: Uncertainty and Cautious Optimism

While the slight decrease in downtown office vacancy rates offers a glimmer of hope, the Canadian commercial real estate market remains subject to various economic and geopolitical uncertainties. The impact of trade tensions, evolving work patterns, and potential interest rate hikes could all influence future vacancy trends. as such, a cautious approach is warranted, and continued monitoring of market dynamics will be crucial for stakeholders in the industry.