Return-to-office mandates from banks, government offices and tech firms in Toronto, combined with limited new supply expected this year, are supporting the continued recovery of the city’s office market, according to a new report.
The 2026 Royal LePage Commercial Real Estate Report, published Thursday, says vacancy rates in most office asset classes declined in 2025 compared to the year prior, but the impact of return-to-office mandates hasn’t been uniform.
Companies returning to in-person work are increasing demand for and securing high-quality, “AAA and Class A buildings” in downtown Toronto, but soft market conditions are expected to continue for “Class B and C” offices, it says.
William Irons, senior vice president of commercial leasing and investments at Royal LePage Signature Realty, said a large number of new leases are for workers who were hired during the pandemic and had never worked in office, or for companies that worked remotely during the pandemic and are now renting bigger spaces.
There’s been a “shift” for companies that were historically in Class B and C buildings, which are older and may not have amenities, moving into state-of-the-art buildings near Union Station, he said.
“Some companies that had a small presence in the City of Toronto have now opened very substantial, multi-floor offices upwards of 100,000 or 200,000 square (feet),” Irons said. “Large tech companies that were in old buildings (are) moving into The Well, and into Portland Commons, and into First Canadian Place, and into office towers. It’s traditionally not been where they’ve been.”
The Royal LePage report notes Wealthsimple, Lyft and tech company Nvidia secured “significant square footage” in Toronto last year.
Additionally, it says many office developments were shelved during the pandemic, so new supply in the near-term is limited.
Peter Norman, vice-president and economic strategist at real estate data company Altus Group, emphasized that the market has experienced a “fundamental break” with the pandemic that isn’t just a regular fluctuation of supply and demand.
There is still a “tremendous amount of functionally obsolete space” across Canada’s and the GTA’s office stock, and the uptick in leasing is still having a “minor effect,” he said.
Compared to the first quarter of 2020, occupied lease space has decreased by five million square feet, he said.
And due to millions of square feet of space being constructed at the beginning of the pandemic, there is now 12.3 million square feet more of office space available to lease, he added.
The vacancy rate across the GTA went from 8.9 per cent pre-pandemic to 15.8 per cent now, he said.
“We have a lot of office investors who hold a lot of stock which is functionally obsolete, has very, very high vacancy rates, or are entirely vacant,” he said.
That being said, the downtown core is “doing better” than the GTA overall, he noted, with an increase in one million square feet of space being leased.
The vacancy rate there went from 4.6 per cent pre-COVID to 14.9 per cent now — a large difference, but an improvement from the 20 per cent vacancy rate a few years ago, he said.
“The way the momentum has been, has shifted towards higher-quality space downtown, well-located and stuff, is that it is maintaining, for the most part, valuations,” he said. “And I think that if you maintain valuations, then it buys you a lot of time to deal with what to do with that obsolete stock.”
Ben Haythornthwaite, director of market analytics at real estate firm CoStar agreed, saying “the world is different today,” and it’s not “realistic” that the market would ever return to its pre-pandemic state.
“We can call it a stabilization, I think,” he said about the uptick in office leasing. “The market is no longer getting worse.”
Meanwhile, industrial space vacancy rates increased and rent prices dipped in 2025 compared to 2024, thanks to tariff pressures and low consumer confidence, the report says, but the market is expected to remain “resilient.”
The industrial space had experienced “significant rent growth” since 2019, amid low interest rates and pandemic-era e-commerce driving industrial warehousing demand, but those rates have been moderating, Irons said.
Many industrial buildings were built over the pandemic without lease commitments, which has increased vacancies, he said.
“People had land in Mississauga and Oakville and Vaughan and Markham, where they decided to build brand new, large distribution centers without a lease commitment in place, so they would build a 500,000 square-foot building on the basis that there’s so much demand that that building will be leased by the time it’s built,” he explained.
“But what’s happened is the likes of Amazon and some of these other companies that were leasing a lot of space have slowed down and pulled back on their leasing,” he said.
At the same time, smaller, regional manufacturing companies have faced economic challenges due to tariffs, causing owners to reevaluate whether they should renew their leases or downsize to save on costs, he said.
Overall, the changes have led to a “healthier, balanced market” where tenants have more room to negotiate, Irons said.
