Office Momentum Builds
Overall office vacancy declined to 15.6% in Q3 2026, its lowest level of the year and a full percentage point below the rate recorded one year ago. The Class A segment was the primary driver, with vacancy in both the Central and Suburban markets falling quarter-over-quarter (QOQ) to 14.9% and 14.4%, respectively. Much of the improvement in Central Class A was driven by continued tightening within trophy, or Class AAA, assets. Vacancy in this premium segment fell to 10.0% in Q3 2026, a significant improvement from the recent peak of 14.6% recorded just over two years ago. Conditions within the Class B and C segments have been more volatile throughout 2026, with vacancy rates lacking a consistent QOQ trend. In Q3 2026, combined Central Class B/C vacancy declined to 20.5%. In contrast, Suburban Class B/C vacancy increased to 13.0%, its highest level since Q1 2024.
Absorption strengthened in Q3 2026, reaching approximately 1.5 million square feet (msf), the highest quarterly total since Q4 2018. This brought adjusted year-to-date absorption to 2.8 msf, surpassing the level recorded during the same period in 2025. While most major markets posted limited absorption this quarter, Toronto drove national performance with nearly 1.2 msf of positive absorption. At the national level, occupancy gains in the Class A segment continued to outpace new vacancy for the sixth consecutive quarter, resulting in approximately 1.7 msf of absorption in Q3 2026. Although absorption in lower tier Central assets rebounded from last quarter, negative absorption of approximately 380,000 square feet (sf) in non-Class A Suburban properties offset a portion of the gains achieved elsewhere.
Following a momentary increase last quarter, direct vacant space continued to trend downward. Despite fluctuations in direct available space throughout 2026, the direct vacancy rate remained largely unchanged, settling at 14.0% in Q3 2026 after moving only 20 bps QOQ since the beginning of the year. Class A properties led the improvement, with direct vacant space declining 7.7% YOY. Meanwhile, sublet vacancy continued to shrink, accounting for a record-low 10.4% of total vacant space this quarter. The distribution of sublet vacancy has remained largely unchanged over the course of 2026, with blocks of sublet vacancy spread fairly evenly between both original term expiry date and size segments. That said a few shifts have occurred. The primary one is a decrease in the blocks of sublet vacancy over 20,000 sf, declining by close to 24.0% QOQ, largely driven by the decline in large block sublet vacancy within the overall Class A market.
New leasing activity held firm in Q3 2026 at 5.9 msf, essentially in line with last quarter's result. Demand remained heavily concentrated in the Class A segment, which captured nearly two-thirds of all new leasing activity. Central Class A transactions continued to set the pace, recording the largest footprints and longest commitments, averaging approximately 12,200 sf and 6.5 years. Among disclosed tenants, Finance and Insurance remained the most active sector, leasing close to 2.1 msf across 138 transactions year-to-date. Government Services emerged as a growing source of demand, with leased space increasing by roughly 700,000 sf compared with the same period in 2025.
Canadian rental rates continued to strengthen in Q3 2026, with the average direct net rent climbing to $23.32 per square foot (psf). As additional rent remained largely unchanged at $19.98 psf, the average gross rent reached $43.30 psf. The Central Class A market led the increase, posting an average net rent of $32.13 psf, up 2.5% QOQ and 5.2% YOY. Much of this momentum came from the Class AAA segment, where average direct net rents rose to $39.86 psf.
With the arrival of the 1.4-msf tower in Toronto last quarter, new supply deliveries slowed dramatically to reach 138,000 sf in Q3 2026, courtesy of three buildings arriving in Vancouver’s Central market. Approximately 1.8 msf remains under construction, largely located within the Vancouver market, and marks a quarterly low not seen in fourteen years.
