Key Takeaways
- • Toronto's trophy office market is tightening sharply: Class AAA downtown vacancy is about 3 percent versus roughly 25 percent for Class B and C buildings, according to the Financial Post, even as the headline downtown vacancy rate sits near 16 percent.
- • Office leasing in Toronto reached just under 2 million square feet in Q4 2025, the strongest quarter in five years, led by RBC, CIBC, TD, Wealthsimple, Scotiabank, Stripe and Mastercard Foundation.
- • Class AAA rents have risen from $50 to $55 per square foot since 2020, a 21 percent increase, and CBRE does not expect new trophy-level supply before 2030 or 2031.
- • Bloomberg reports roughly $30 billion of the approximately $80 billion held in Canadian private real estate funds is locked behind redemption gates, with Romspen, Nicola Wealth, Hazelview, Trez Capital, Centurion Apartment REIT and KingSett all having suspended or limited redemptions or payouts at various points.
- • Liquidity mismatch is the core risk: funds holding illiquid towers, warehouses and construction loans were marketed with frequent-redemption features, and rising rates after 10 hikes in 2022 and 2023 left returns unable to support outflows.
Summary
Toronto's office market has improved at the top end while the broader market remains weak, a split that matters for institutional investors weighing property risk, liquidity and future returns. According to the Financial Post, office leasing in the city reached just under 2 million square feet in the fourth quarter of 2025, the strongest level in five years. Demand was driven largely by major tenants including Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Wealthsimple, Bank of Nova Scotia, Stripe and Mastercard Foundation. CBRE research managing director Marc Meehan described the market as "on fire," while Colliers national head of research Adam Jacobs said "Demand is roaring again," linking the rebound to return-to-office mandates from banks, government, insurers and technology employers.
The headline downtown vacancy rate remains around 16 percent, near historic highs, but it obscures a sharp divide. Trophy-grade downtown space has a vacancy rate of about 3 percent, compared with roughly 25 percent for Class B and C buildings. Class AAA rents have climbed from $50 to $55 per square foot since 2020, a 21 percent rise. Meehan said there has been no meaningful new office construction in 2024 or 2025 and that CBRE does not expect new trophy-level supply before 2030 or 2031 at the earliest. CBRE forecasts office demand to peak in 2026 before moderating through 2027 and 2028, though Meehan expects the scarcity of trophy space to keep pushing rents higher. Older stock needing capital upgrades remains under pressure, and in some markets such as Calgary is increasingly a conversion candidate. Jacobs cautioned that "uncertainty is an enemy in real estate for getting deals done and building for the future," and the Financial Post notes that infrastructure issues, trade tensions with the US affecting Ontario's manufacturing sector and Toronto's relatively high unemployment could dampen demand.
The larger issue for institutional readers is liquidity in private real estate funds. Bloomberg reports that investors hold about $80 billion in Canadian private real estate funds, and roughly $30 billion is now locked up as managers gate redemptions and restrict distributions amid a housing downturn and slower development. Romspen Investment Corp. halted redemptions in 2022 and has kept them gated. Nicola Wealth has lengthened withdrawal timelines and cut distributions by more than one-third on about $2.7 billion of real estate assets. Hazelview Investments, Trez Capital, Centurion Apartment REIT and KingSett Capital's Canadian Real Estate Income Fund have also, at various points, suspended or limited redemptions or payouts.
Bloomberg points out that these funds hold illiquid assets but were marketed with frequent-redemption features. After 10 interest rate hikes in 2022 and 2023, condominium values fell by hundreds of dollars per square foot, and returns could no longer support outflows. Former Bank of England governor Mark Carney warned in 2019 that offering quick redemptions on illiquid assets was "built on a lie." York University real estate professor Jim Clayton told Bloomberg the structure is "a bit of a house of cards," arguing that borrowing to maintain distributions sustains an illusion of stability while deepening the eventual adjustment. The backdrop is weak: national home prices have fallen 18 percent from their peak, development pipelines in Toronto and Vancouver have dropped to levels last seen in the 2000s, commercial real estate investment fell 22 percent year-over-year in the first half of 2025, and population fell 0.2 percent quarterly in the third quarter of 2025 after immigration curbs.
The headline downtown vacancy rate remains around 16 percent, near historic highs, but it obscures a sharp divide. Trophy-grade downtown space has a vacancy rate of about 3 percent, compared with roughly 25 percent for Class B and C buildings. Class AAA rents have climbed from $50 to $55 per square foot since 2020, a 21 percent rise. Meehan said there has been no meaningful new office construction in 2024 or 2025 and that CBRE does not expect new trophy-level supply before 2030 or 2031 at the earliest. CBRE forecasts office demand to peak in 2026 before moderating through 2027 and 2028, though Meehan expects the scarcity of trophy space to keep pushing rents higher. Older stock needing capital upgrades remains under pressure, and in some markets such as Calgary is increasingly a conversion candidate. Jacobs cautioned that "uncertainty is an enemy in real estate for getting deals done and building for the future," and the Financial Post notes that infrastructure issues, trade tensions with the US affecting Ontario's manufacturing sector and Toronto's relatively high unemployment could dampen demand.
The larger issue for institutional readers is liquidity in private real estate funds. Bloomberg reports that investors hold about $80 billion in Canadian private real estate funds, and roughly $30 billion is now locked up as managers gate redemptions and restrict distributions amid a housing downturn and slower development. Romspen Investment Corp. halted redemptions in 2022 and has kept them gated. Nicola Wealth has lengthened withdrawal timelines and cut distributions by more than one-third on about $2.7 billion of real estate assets. Hazelview Investments, Trez Capital, Centurion Apartment REIT and KingSett Capital's Canadian Real Estate Income Fund have also, at various points, suspended or limited redemptions or payouts.
Bloomberg points out that these funds hold illiquid assets but were marketed with frequent-redemption features. After 10 interest rate hikes in 2022 and 2023, condominium values fell by hundreds of dollars per square foot, and returns could no longer support outflows. Former Bank of England governor Mark Carney warned in 2019 that offering quick redemptions on illiquid assets was "built on a lie." York University real estate professor Jim Clayton told Bloomberg the structure is "a bit of a house of cards," arguing that borrowing to maintain distributions sustains an illusion of stability while deepening the eventual adjustment. The backdrop is weak: national home prices have fallen 18 percent from their peak, development pipelines in Toronto and Vancouver have dropped to levels last seen in the 2000s, commercial real estate investment fell 22 percent year-over-year in the first half of 2025, and population fell 0.2 percent quarterly in the third quarter of 2025 after immigration curbs.
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