ARLINGTON, Va. — Canada’s office market is expected to continue recovering through 2028, with higher-end buildings leading improvements in vacancy and rent growth, according to a new forecast from CoStar Group.
The national office vacancy rate is projected to decline steadily over the next two years as positive net absorption combines with a sharply reduced construction pipeline. However, the recovery is expected to remain uneven, with higher-quality office properties significantly outperforming other assets.
Canada’s overall office vacancy rate peaked at 10.4% in the second quarter of 2025 before falling to 9.8% in the second quarter of 2026, according to CoStar. The decline came as net absorption turned positive while new office deliveries largely stopped.
CoStar’s latest forecast calls for the national vacancy rate to reach 9.3% by the end of 2027 and 8.7% by the end of 2028.
Both projections represent improvements over the firm’s previous forecast, which had called for vacancy rates of 10% in 2027 and 9.4% in 2028. CoStar attributed the revised outlook to somewhat stronger-than-expected absorption.
Higher-end buildings lead recovery
The improving conditions are being driven largely by a widening divide between higher-end office properties and the rest of the market.
“Higher-end assets have posted positive net absorption averaging 1 million square feet per quarter since the second half of 2021, while absorption in all other office assets combined was deeply negative over that same stretch – though it, too, has turned positive since the second half of 2025,” said Mario Lefebvre, chief economist for Canada at CoStar Group.
The performance has led to what CoStar describes as a continued “flight to quality” across the Canadian office sector, as demand has increasingly favored higher-end buildings.
Rent growth is also expected to reflect the difference between the two segments. CoStar forecasts rent growth of approximately 4% for higher-end assets, compared with an average of about 2% for all other office properties combined.
Limited construction supports vacancy decline
The expected decline in vacancy is not primarily the result of a dramatic increase in office demand. Instead, CoStar said, the improvement will be driven largely by the limited amount of new office space entering the market.
Net absorption is expected to remain modest by historical standards, averaging approximately 1 million square feet per quarter in 2027 and 1.75 million square feet per quarter in 2028.
At the same time, new deliveries are expected to fall quickly following a peak in 2026. The 2026 delivery total is being driven in part by the second phase of CIBC Square in Toronto.
By the end of 2027, CoStar expects net office deliveries to fall to approximately 200,000 square feet.
The combination of modest positive absorption and a limited construction pipeline is expected to put continued downward pressure on the national vacancy rate.
Economic risks remain
Despite the improved forecast, CoStar cautioned that risks to the outlook remain.
“The balance of risks in this forecast remains tilted to the downside,” Lefebvre said, pointing to trade and tariff uncertainty, higher fuel costs and a declining population as factors that could weigh on the Canadian economy and affect expected office absorption.
Those factors could alter the pace of recovery if economic conditions weaken and businesses reduce their requirements for office space.
Over the longer term, however, CoStar expects the Canadian office market to move toward equilibrium as demand for office space grows alongside the broader economy.
“Over the longer term, however, we expect equilibrium to be restored in the Canadian office sector as demand for office space grows in tandem with the broader economy and the development pipeline remains modest,” Lefebvre said.
For now, the forecast points to a continued recovery in Canada’s office market, but one that remains heavily concentrated in higher-end properties. As new construction declines and demand gradually improves, CoStar expects overall vacancy to continue falling through 2028, with the strongest rent and occupancy performance concentrated among the market’s higher-quality assets.
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