Toronto’s office sector is expecting to see improvement this year as more office workers return to their desks, but new supply and a strong preference by tenants for space in trophy buildings remain obstacles to a stronger recovery.

The office vacancy rate in the city of Toronto is 13.1%, and 11% in the overall market. However, the vacancy rate for both is slated to increase in tandem with the recent addition of several new buildings, according to a CoStar Market Analytics report.

Among the notable new deliveries are 23 Spadina in downtown Toronto in September, and 2161 Yonge St., which was completed in October and added roughly 90,000 square feet of additional office space in midtown.

CIBC Square’s second tower, expected to reach completion very soon, will introduce 1.45 million square feet of premium office space to the market. The Canadian Pension Plan plans to relocate from 1 Queen Street to the new tower at CIBC Square, leaving its former space on the market.

The office market has benefited from more corporations calling employees back to the office, and the vacancy rate is expected to decrease as a result. Return-to-office mandates are strongest among financial services firms and government entities. RBC has mandated its employees to work in the office four days a week, while the city of Toronto has ordered city workers back full-time.

RBC renewed a lease for 565,700 square feet on Financial Drive in Mississauga’s Meadowvale neighbourhood, marking the largest office lease deal in Greater Toronto since the pandemic began. That was followed by JP Morgan Chase joining CPP in the final phase of CIBC Square, where it leased 66,000 square feet at the new tower in Toronto’s financial district.

According to CoStar analyst Ben Haythornthwaite, Toronto’s office market has transitioned from recession to early recovery, noting that the city is at the tail end of a development cycle launched before the pandemic.

“The gap between vacancy and availability, which widened from 2020 through late 2024, has tightened through 2025 and now sits near 2%, broadly in line with pre-pandemic norms,” Haythornthwaite said in an interview.

However, the office recovery is concentrated in downtown trophy assets, he said. “Suburban submarkets and lower‑quality buildings are not seeing the same traction, and visibility on their path forward remains limited. Given that Toronto’s downtown accounts for roughly 45% of the total GTA office value, it’s natural that core performance drives the headlines. Still, owners should be cautious about extrapolating the core story to every location. Market strength is highly asset- and submarket-specific.”

Asking office rents in Toronto have climbed in recent years to an average of $41 per square foot, $1 above the market’s five-year average, CoStar data shows. While office rents are projected to remain stable over the next 12 months, a modest decline is possible.

However, there have been substantial declines in net effective rents as landlords sought to counter soft tenant demand by offering lease incentives, CoStar said.

Annual rent growth has averaged 0.3%, but it’s expected to turn negative over the following year, according to CoStar. Landlords have shown willingness to sign leases well ahead of occupancy, often with tenants whose leases expire within a couple of years.

Suburban firms seeking to upgrade to downtown offices have demonstrated a particular predilection for this strategy in a bid to lock in today’s rates as they anticipate rents for downtown locations will likely increase in one or two years’ time when they’re ready to move.

As for office sales, transaction volume has declined precipitously throughout the Greater Toronto Area compared to the years before COVID-19. The $1.2 billion in office building sales transacted over the past 12 months is considerably below the 10-year office sales average of $2.9 billion, largely due to reduced office utilization, tighter capital markets, and concerns about Canada’s economy, according to CoStar.

Source CoStar Click here for the full story.