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Canada’s office investment scene is poised for action

From 2020 to early 2025, investor and lender appetite for office assets deteriorated sharply with office sales accounting for just 17% of total dollar investment volume, reflecting a profound dislocation triggered by the pandemic and prolonged uncertainty surrounding office utilization. By comparison, two thirds of investment transactions in Canada’s commercial real estate market during that same period were allocated to the industrial (38%) and multifamily (27%) sectors.

Elevated vacancy, opaque pricing, and the lack of clarity around the future of office demand pushed many institutional participants to the sidelines.

But that dynamic is now beginning to shift.

In Q1 2026, office transactions represented 19% of total sales volume, which is an improvement from the 2020 to 2025 period, but remains well-below the 26% level of the 2014-2019 cycle. This small increase conceals a major shift in transactions focused on quality, which began last year. This flight-to-quality is a key differentiator from past market cycles.

“Since 2025, Trophy office sales accounted for 25% of the total square footage and 39% of the total dollar volume of office sales in Canada. This is up considerably from the period 2014 to 2019 and of course a major increase when compared to 2020 to 2024. This supports the narrative of institutional office investors narrowing their focus to core assets with a sustainable competitive advantage to enhance their offering to occupiers. This is not the only major trend in office sales in Canada. All markets have experienced an uptick in office trades, with many investors focused on value-add and conversion opportunities.”

Mark Fieder
Principal, President, Canada

Total sales volume in Canada’s six major markets

Source: Costar, Avison Young Market Intelligence
Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montréal

Investment trends resulting from the exceptionally difficult 2020-2025 cycle

The pandemic triggered a structural shock to office demand as remote work scaled rapidly. Early productivity gains led many organizations to formalize hybrid models through 2021 to 2022, resulting in smaller footprints, increased sublet space, and historically high vacancy across major markets. Rising interest rates from 2022 to 2024 compounded these challenges. Transaction activity slowed sharply, pricing became unclear, and underwriting grew increasingly speculative. Opportunistic buyers dominated, acquiring assets well below replacement cost, rendering metrics like cap rates temporarily less meaningful.

By 2025, key leasing indicators began to stabilize.

Absorption flattened for the first time since 2020, while flight-to-quality trends strengthened. Trophy assets in major downtown cores are now seeing vacancy near 6%, supported by improving leasing momentum and limited competitive supply. Alongside moderating financing conditions, investor confidence has returned.

Total net absorption and new supply in Canada’s six major marketS

Source: Avison Young Market Intelligence
Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montréal

Net absorption was generally positive across the major markets, led by Toronto with over two million square feet. Calgary is also back in positive territory despite the mergers in the oil and gas sector acting as a headwind. Ottawa stood out as the only market with negative net absorption, due in large part to the Federal government’s exit from 226,000 square feet at 1550 Carling Avenue and 59 Camelot Drive. These recent absorption trends, led by demand for Trophy and upgraded class A office space, are clear signals of the momentum behind the return to office. Investors have taken note and are responding with renewed activity on the investment front.

Q1 2026 net absorption by markeT

Source: Avison Young Market Intelligence

What’s different this time

While the current recovery shares certain characteristics with past office cycles, several structural shifts have this one looking different:

1. Bifurcation in asset quality

The current office recovery is being defined by a pronounced and persistent bifurcation in asset quality. After several years of hybrid work, the link between workplace quality, employee engagement, and productivity is now widely acknowledged by occupiers. Office space is no longer treated as a commodity, but as a strategic tool to attract and retain talent. As a result, demand has become increasingly concentrated in best-in-class buildings offering modern design, strong amenity packages, and compelling locations, while unrenovated or poorly positioned assets continue to underperform.

This divergence is expected to persist, reinforcing a widening gap in leasing velocity, rental growth, and investor interest across quality tiers. Contributing to this divergence is elevated construction costs which pose a headwind for owners of older office inventory looking at an expensive bill to renovate their building to compete for tenants with Trophy and upgraded class A offices.

National downtown direct vacancy rate by class

Source: Avison Young Market Intelligence
Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montréal

Here, we have broken out the direct vacancy rates for Trophy downtown offices by market. With the bifurcation in office demand, the total vacancy rate metric masks how tight leasing conditions are for best-in-class space.

We note that while Vancouver has historically been a lower-vacancy market, the influx of new supply between 2021 and 2025 elevated the vacancy rate. Still, like the other major markets, the Trophy direct vacancy rate is well below the 12.2% average across all classes in downtown Vancouver and is trending down as absorption catches up to supply.

Q1 2026 Downtown Trophy direct vacancy rate by markeT

*No Trophy office inventory
Source: Avison Young Market Intelligence

2. Rising fit‑out costs and capital intensity

Elevated tenant expectations are translating into increasingly sophisticated and costly office fit outs, materially raising the capital intensity of ownership. Construction cost inflation and higher design standards have driven larger tenant improvement allowances, particularly among larger occupiers for whom high quality build outs are essential to support return to office initiatives. While these allowances allow owners to preserve face rental rates, not all owners have the financial capacity to fund substantial capital programs over extended leasing cycles. This challenge is also prevalent among office investment sales. Increasingly expensive capital expenditures have posed headwinds to demand for vintage or generally undercapitalized assets. The higher degree of risk for buyers to take on both expected and surprise upgrade costs in the early days of their ownership tenure has widened the bid-ask gap, especially if the seller’s pricing assumes a stabilized income.

This dynamic is reinforcing the quality bifurcation, as well-capitalized owners are better positioned to compete for demand, while undercapitalized assets face growing leasing and valuation pressure.

A major factor behind the new economics of fit-out costs was the accelerated rise in construction costs during the pandemic.

When looking at the Building Construction Price Index (BCPI) for office buildings in Canada, there was a very clear shock to the market from 2021 to 2023 when year-over-year inflation peaked at 12%. Though the inflation rate has since cooled to 3%, it continues rising, compounding the spike observed during the pandemic.

For further context on the current situation around costs, Avison Young’s Ontario Project Management team estimates that the base-building construction cost for office fit-outs can range from $115 per square foot for a good-quality space up to $275 per square foot for best-in-class. After adding professional fees, security, furnishings, IT, signage, and contingencies, this range increases to $190 to $450 per square foot.

More modern, and costly, fit-outS

Source: Avison Young Market Intelligence, Statistics Canada
Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montréal
TI allowance is normalized to 10-year direct lease transactions.

3. Leasing economics reset around flexibility

As market conditions normalize, leasing economics are beginning to stabilize following several years of volatility and tenant favourable terms. Occupiers are re-engaging to meet their increased space needs and compete for the narrowing availability of high-quality offices. As a result, owners are regaining significant pricing leverage for Trophy and well located, recently upgraded class A buildings, as evidenced by free rent periods reverting to pre-pandemic levels, and trending lower.

Meanwhile, average length of leases has gradually improved from cyclical lows of 60 months from 2020 to 2022 to 64 months today. However, this is still below the pre-pandemic level of 70 months. These shorter terms speak to a new paradigm for occupiers and owners to grapple with around the higher risk of structural economic shifts impacting future labour markets and workplace strategies. The pandemic was one instance of such a shift, and now the headline is AI and its widely unknown impacts. Overall, this has reinforced the pivot to shorter commitments from tenants. Tenants also consider flexibility in terms of their office fit-out, such as prioritizing turnkey or near-turnkey spaces requiring minimal upfront cost amid high construction prices, and modern, adaptable spaces to support dynamic workplace environments.

Average lease terms improvinG

Source: Avison Young Market Intelligence
Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montréal

4. Accelerated conversions and declining supply

A further structural difference in the upcoming office investment cycle is the permanent contraction of supply through office conversions and demolitions. This follows from accelerated obsolescence of lower quality assets in the context of heightened occupier expectations. These rising tenant expectations and higher capital requirements have rendered a growing portion of older Class B and C inventory economically uncompetitive. For many assets – particularly smaller, pre-1980 buildings with small floor plates – the cost of repositioning exceeds the feasibility of continued operation as office space, making conversion or demolition the more rational outcome. Unlike cyclical vacancy, these projects permanently remove office space from inventory at a time when new development remains highly constrained. The resulting net negative supply dynamic is expected to tighten conditions for remaining competitive assets and reinforce the divergence in performance across quality tiers. There are regional differences, however. Calgary has led the country in completed and under construction office conversions, followed by Ottawa and Montréal. Meanwhile, in Toronto, conversion plays remain speculative and focused on densification. Although about a dozen office buildings are earmarked for redevelopment to a different use, it remains to be seen when they will be able to execute on the plans.

A new way forward

While the past few years have certainly reshaped the office market, the sector now feels firmly on the other side, ready for new opportunities and a focus on assets meeting the moment most right now.

How are these trends impacting office investment across Canada? What is the current state of price discovery and transaction volumes? Discover in the next article in our Canadian office investment series, Capital returns to Canada’s office market, selectively.

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