Is Return-to-Office (RTO) the Silver Bullet to End the Office Slump?
August 8, 2025
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
|
As pandemic restrictions recede, many corporate leaders have framed return-to-office (RTO) mandates as a key driver behind the nascent recovery in office real estate. Vacancy rates across Canada’s major cities—after peaking between 2022 and 2024—have begun to stabilize, particularly within the premium “trophy” segment, which has seen consecutive quarters of improvement. RTO is often credited with sparking this reversal, signaling a potential turning point for a sector long mired in uncertainty. But is this recovery as robust as it appears? In this analysis, we examine the RTO narrative and assess whether the modest rebound is sustainable—or simply a pause before further structural change.
|
Figure 1.0
Source: CBRE
Figure 2.0
Source: CBRE
Signs of Life in the Office Sector in 2025
Positive indicators suggest the Canadian office market has found a tentative footing in 2025:
The Other Side: High Vacancies & Downsizing Persist
National office vacancy ~18–19% is still near a 30-year high[9], more than double pre-pandemic levels. Downtown Toronto and Vancouver vacancies may have stabilized, but large chunks of office space remain empty across Canada, especially in older buildings:
Is RTO Really the Driver, or Is That Overstated?
While corporate return-to-office (RTO) mandates are often credited for improving leasing activity, data suggests they’re only one factor among several structural and economic forces at play.
RTO as a Contributing Factor:
RTO matters, but it’s not the sole engine of recovery. Lease churn, supply contraction, and value-driven relocations are equally important. As CBRE put it, today’s leasing “reflects occupier sentiment towards higher-quality space”[18]. RTO is helping firms justify keeping their best space—not dramatically growing total office demand.
Sustainability of the Rebound: Will It Last?
Even if we credit RTO with nudging office demand in the right direction, a critical question looms: Is this recovery durable or just a temporary blip? Key factors to watch:
Moreover, most companies with RTO ambitions have already executed their mandates by early 2025.
How Much More RTO Absorption Is Left?
Based on the surveys if we assume that 70–80% of office-using employers that want to implement RTO have already done so, then RTO-driven leasing demand is likely 70–80% saturated. That implies:
Thus, we believe that RTO is not a structural growth driver. Return-to-office has already delivered the bulk of its benefits to the office market. It stopped vacancy from worsening, revived leasing in top-tier buildings, and reabsorbed some sublet space. With limited office-based employment growth, RTO alone cannot sustain absorption—and the ceiling for RTO-driven recovery is likely near. We are likely in the late stage of the RTO effect, and the next leg of demand must come from economic growth, job creation, and new workplace strategies, not just returning to old habits.
The Real Estate Institute of Canada (REIC) helps professionals navigate shifting market narratives with clarity and confidence. As return-to-office (RTO) headlines claim a rebound in office real estate, REIC promotes rigorous analysis over speculation. By fostering critical, evidence-based perspectives, REIC empowers members to lead industry conversations, challenge assumptions, and shape resilient strategies in a rapidly evolving commercial landscape.
Positive indicators suggest the Canadian office market has found a tentative footing in 2025:
- Leasing Uptick in Premium Buildings: Canada saw a modest rebound in office leasing in Q1 and Q2 2025, concentrated in Class A and “trophy” office towers (the newest, highest-quality stock). Companies are actively upgrading into better space to entice staff back – a flight-to-quality. In downtown markets, top-tier trophy buildings maintained an average vacancy around 11% over the last two years[1], far outperforming older stock. This trophy vacancy rate (~11%) has been remarkably stable even as overall vacancies soared during the pandemic. Tenants clearly favor amenity-rich, well-located offices that make the commute “worth it.”
- First Vacancy Decline Since 2020: Downtown office vacancy in Canada’s major cities collectively declined for the first time since Q1 2020, edging down 10 basis points (bps) to 19.9%. While a mere 0.1% drop, it’s a symbolic positive turn for downtown offices after years of rising emptiness. Notably, no new supply was added in 2025, in fact, 400,000+ sq. ft. of vacant obsolete offices were removed from inventory via conversions or owner-use, aiding the vacancy improvement[2].
- Selective Net Absorption Gains: Net absorption (space newly occupied minus space vacated) was essentially flat in 2025 (around –0.2 million sq. ft. nationally)[3], but with bright spots. Vancouver posted significant positive absorption in trophy downtown buildings. Several cities saw small occupancy gains – five markets had declining vacancy in Q1 (downtown Winnipeg and Vancouver led for urban cores, while Calgary and Halifax led in suburban submarkets). Importantly, 2024 marked the first full year of positive office absorption since 2019, totalling +2.6 million sq. ft. nationally[4]. This suggests the worst of the demand contraction may be past, and some tenants are cautiously expanding or backfilling space again.
- Rising Rents for Prime Offices: In top-tier buildings, landlords are regaining pricing power. For example, downtown Toronto’s average Class A net rent hit $26.25 per sq. ft. in Q1 2025 – a 7-quarter high and up ~1.7% year-over-year[5]. This rent growth, amid flat or falling rents in Class B/C stock, underscores that demand is concentrated in quality offices that facilitate hybrid work perks.
- Stricter RTO Mandates: Corporate policies are indeed shifting. Several large employers moved from permissive hybrid arrangements to mandatory office days. For instance, Royal Bank of Canada (RBC) announced that, starting fall 2025, most staff must be in office 4 days a week[6]. This follows other banks like TD, which began requiring senior managers in office 3–4 days weekly in late 2024. Such mandates by major banks, law firms, and consultancies are clearly intended to boost in-person presence – and they often involve consolidating operations into upgraded headquarter spaces. Many firms with flexible policies in 2023 are now “upping the ante” to more office days in 2024–2025, betting that a better workplace experience will improve team cohesion and productivity.
- Declining Sublet “Overhang”: During the pandemic, many firms put excess space on the sublease market. The good news: sublease availability is declining (now 2.8% of inventory, down ~20% from its 2023 peak as of Q2 2025)[7]. Some sublease listings are being withdrawn as companies reoccupy those spaces (a sign of RTO)[8].
The Other Side: High Vacancies & Downsizing Persist
National office vacancy ~18–19% is still near a 30-year high[9], more than double pre-pandemic levels. Downtown Toronto and Vancouver vacancies may have stabilized, but large chunks of office space remain empty across Canada, especially in older buildings:
- Class B/C Offices in Crisis: Older, less efficient buildings are being hit hardest. There’s now a 14.1 point spread in vacancy between Class A and B/C offices in downtown cores[10]. Vacancy in B/C buildings is 2.5× higher than trophy towers. Landlords are offering deep incentives—months of free rent, TIs—to attract interest. Yet, in most cities, Class B/C vacancy is flat or rising, while only Class A is seeing meaningful improvement[11].
- Leasing Activity ≠ Net Growth: Improved leasing volumes don’t mean companies are expanding. Much of the activity in 2025 was relocation driven: firms moving into better space while downsizing. In fact, net absorption remained slightly negative, and most markets swung within ±100,000 sq. ft. of zero[12]. Rightsizing, not growth, is the dominant theme.
- Historically High Vacancy in Key Markets: Several major cities are still grappling with near-record vacancy. Calgary’s downtown vacancy sits around 30% – a slight improvement from its peak but still extraordinarily high. Montreal and Edmonton hover near the 18–20% range overall, and even Toronto’s downtown vacancy is ~18.5% (down from ~19% but far above ~3–4% in 2019)[13]. Suburban office nodes aren’t fully spared either: suburban Toronto vacancy topped 21% in early 2025, as some employers give up far-flung satellite offices. It will take years of consistent absorption to materially cut into this vacancy, especially in secondary properties.
Is RTO Really the Driver, or Is That Overstated?
While corporate return-to-office (RTO) mandates are often credited for improving leasing activity, data suggests they’re only one factor among several structural and economic forces at play.
RTO as a Contributing Factor:
- Flight-to-Quality: Firms mandating 3–4 office days (especially in finance, law, and government) are upgrading to premium offices to attract compliance. Features like collaboration zones, wellness areas, and coffee bars make in-office work more appealing. In late 2024, 59% of occupiers surveyed by CBRE were actively considering relocation to higher-quality space[14].
- Brand Visibility: Large corporates and banks are maintaining marquee offices to reinforce identity, training culture, and status—boosting downtown Class A demand.
- Sublease Reabsorption: Many firms that sublet excess space during COVID are reclaiming it. As of Q2 2025, sublet availability declined 310 bps year-over-year, reflecting actual RTO-led re-occupancy[15].
- Lease Expiry Cycle: Many leases signed pre-COVID (2017–2019) are now expiring, prompting decisions to renew, reduce, or relocate. This creates churn regardless of RTO. Industry data shows Canada’s lease expirations will peak in 2025 at over 15 MSF[16].
- Conversions Reducing Supply: In Q1 2025, Calgary, Montreal, and Edmonton collectively saw ~600,000 sq. ft. removed for residential or mixed-use conversions[17]. These adjustments shrink inventory, easing vacancy optics without increasing demand.
- Value Resets: Office valuations have fallen 20–30% since 2019, creating new affordability. Opportunistic tenants, especially public sector agencies, are locking in premium space at discounted rates.
RTO matters, but it’s not the sole engine of recovery. Lease churn, supply contraction, and value-driven relocations are equally important. As CBRE put it, today’s leasing “reflects occupier sentiment towards higher-quality space”[18]. RTO is helping firms justify keeping their best space—not dramatically growing total office demand.
Sustainability of the Rebound: Will It Last?
Even if we credit RTO with nudging office demand in the right direction, a critical question looms: Is this recovery durable or just a temporary blip? Key factors to watch:
- Hybrid work is entrenched. Most companies now follow 2–3 day in-office models, reducing overall square footage needs. Even in finance and consulting, many firms are holding smaller footprints. A 2024 Cisco survey found 76% of Canadian employers had hybrid mandates[19], but few are expanding space. Instead, they’re consolidating and subletting unused portions. Unless hiring accelerates, future demand growth looks limited.
- Downsizing continues—strategically. Lease renewals are driving footprint reductions. For example, a 10-floor lease may now become six. Hot-desking and shared space are replacing traditional offices. Net new demand is rare, and most activity is “replacement” leasing—not expansion.
- Flight to quality defines the market. Class A/AAA buildings are absorbing demand, while B/C-class spaces languish. Rents in premium towers are holding firm; older buildings face rising vacancies and pressure to convert or redevelop. RTO has only benefited top-tier assets.
- New supply is limited. Just ~3.2M ft² of office space is under construction nationally—a 20-year low[20]. No major starts occurred for three straight quarters in 2024–25. This supply freeze will help prime assets tighten further but isn’t enough to reverse broader market slack.
- Economic uncertainty is a ceiling. With Canada’s unemployment at 7%[21], growth in office-based employment is slowing. Firms are cautious, delaying real estate moves. Without economic momentum, RTO alone can’t fuel another growth wave.
Moreover, most companies with RTO ambitions have already executed their mandates by early 2025.
- Major banks (RBC, TD, BMO) have returned to 3–4 day in-office mandates.
- Federal agencies and provincial governments have implemented partial return policies (often 2–3 days/week), with pushback from public-sector unions.
- Legal and professional services firms are largely back 3+ days/week.
- Tech and creative sectors remain hybrid by default, with many firms stabilizing at 1–2 days or fully remote.
How Much More RTO Absorption Is Left?
Based on the surveys if we assume that 70–80% of office-using employers that want to implement RTO have already done so, then RTO-driven leasing demand is likely 70–80% saturated. That implies:
- Remaining “RTO upside” in absorption is limited: perhaps another 1.5–2.5 million sq. ft. nationally (assuming ~10–13M ft²/year of gross absorption[22]) over the next 12–24 months.
- With current national vacancy at ~18.7% and gross absorption ~10–13M ft²/year, even optimistic RTO-driven moves would only reduce vacancy by 50–75 bps without broader economic expansion.
- Peak RTO absorption will likely hit by late 2026, after which demand will revert to being driven by organic headcount growth, not workspace normalization.
Thus, we believe that RTO is not a structural growth driver. Return-to-office has already delivered the bulk of its benefits to the office market. It stopped vacancy from worsening, revived leasing in top-tier buildings, and reabsorbed some sublet space. With limited office-based employment growth, RTO alone cannot sustain absorption—and the ceiling for RTO-driven recovery is likely near. We are likely in the late stage of the RTO effect, and the next leg of demand must come from economic growth, job creation, and new workplace strategies, not just returning to old habits.
The Real Estate Institute of Canada (REIC) helps professionals navigate shifting market narratives with clarity and confidence. As return-to-office (RTO) headlines claim a rebound in office real estate, REIC promotes rigorous analysis over speculation. By fostering critical, evidence-based perspectives, REIC empowers members to lead industry conversations, challenge assumptions, and shape resilient strategies in a rapidly evolving commercial landscape.
[1] cbre.ca
[2] cbre.ca
[3] cbre.ca
[4] cbre.ca
[5] mpamag.com
[6] reuters.com
[7] cbre.ca
[8] altusgroup.com
[9] storeys.com
[10] cbre.ca
[11] cbre.ca
[12] cbre.ca
[13] renx.ca
[14] cbre.ca
[15] altusgroup.com
[16] CoStar
[17] cbre.ca
[18] cbre.ca
[19] Benefitscanada.ca
[20] cbre.ca
[21]cbc.ca
[22] Altusgroup.com
[2] cbre.ca
[3] cbre.ca
[4] cbre.ca
[5] mpamag.com
[6] reuters.com
[7] cbre.ca
[8] altusgroup.com
[9] storeys.com
[10] cbre.ca
[11] cbre.ca
[12] cbre.ca
[13] renx.ca
[14] cbre.ca
[15] altusgroup.com
[16] CoStar
[17] cbre.ca
[18] cbre.ca
[19] Benefitscanada.ca
[20] cbre.ca
[21]
[22] Altusgroup.com
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected].