A widening split in Canada's office market carries fresh risks for commercial lenders
Canada's office market logged a fifth straight quarter of positive demand in the third quarter of 2026. The recovery, however, is concentrating in the country's best buildings and leaving older stock behind, according to new data from commercial real estate firm CBRE.
Net absorption, which measures the change in occupied office space from one quarter to the next, totalled 2.0 million square feet nationally.
CBRE's Canada Office Figures Q3 2026 report found nine of 11 tracked markets in positive territory.
National vacancy eased to 16.7%, and downtown and suburban rates each fell 50 basis points, to 17.3% and 15.8% respectively.
Marc Meehan, managing director of research at CBRE Canada in Toronto, said negotiating power has shifted toward owners as trophy space thins.
"We're seeing further trickle over effect as leasing velocity is increasing in the areas neighbouring downtown cores, especially in Toronto," Meehan said.
The shift tracks findings in Avison Young's survey showing Canada's commercial market picking up pace earlier this year.
Why are older office buildings being left behind?
Downtown Class A vacancy stood at 13.8% nationally, compared with 23.8% for Class B/C properties. Trophy towers, the top tier known as Class AAA, posted vacancy of 6.3%, including 2.7% in Toronto and 3.0% in Montreal.
That spread reflects "that tenant preferences for high-quality space have never been more prevalent than at any other point in time," the report said.
Lower-tier buildings have not shared in the gains. "Class B/C assets meanwhile have stalled, with vacancy instead largely improving due to removals of obsolete inventory," the report said.
Keith Reading, senior director of research at Morguard, described the same divide in CMP's outlook on whether the 2026 commercial mortgage market would rebound.
"Now, that eventually has to trickle down into the rest of the Class A buildings, which is a much bigger inventory of buildings. So far, it's really been the better buildings that have outperformed," Reading said in December 2025.
CBRE tied the downtown momentum to rising return-to-office expectations. That trend has been reinforced by Canada's banking giants ramping up their office return efforts. Toronto led downtown vacancy declines, falling 90 basis points.
A thinning construction pipeline tightens supply
Sublease space fell by 1.3 million square feet, the largest quarterly drop since 2005, and now sits 50.2% below its peak.
Only 1.4 million square feet is under construction, and just 23.2% of it is pre-leased, down from more than 60% a year earlier.
The report said "the thinning pipeline of new supply is expected to remain constrained with no significant deliveries on the horizon beyond 2027."
"The earliest that Canada will see any significant new office completions is 2032, but that timeline shifts with each day that new construction isn't kicked off," Meehan said.
For commercial mortgage brokers, the data points to diverging financing conditions. Well-leased premium assets gain pricing power. Owners of older buildings face weaker leasing prospects and growing pressure to convert or redevelop.
Since 2021, conversions have removed 9.6 million square feet and demolitions another 3.0 million, together cutting national inventory by 2.7%, CBRE said.
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